“Free” Trade?

Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the weathiest nation on earth – its preeminent industrial power – into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It’s a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, is now approaching $11 trillion. What will happen when those assets are depleted? Today’s recession may be just a preview of what’s to come.

Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.

Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?

As detailed in Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.

This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density – rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.

One need look no further than the U.S.’s trade data for proof of this effect. Using 2009 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $122 billion with the half of nations below the median population density. With the half above the median, we had a $422 billion deficit!

Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable – sixteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. In fact, our largest per capita trade deficit in manufactured goods is with Ireland, a nation twice as densely populated as the U.S. Our per capita deficit with Ireland is twenty-five times worse than China’s. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one sixth of the world’s population.

Ricardo’s principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.

It’s absolutely imperative for our leaders to take immediate action to restore a balance of trade.  The time is long past when we could dawdle, while relying on the vague promises of our trading “partners.”  We need a return to tariffs – smart tariffs – a tariff structure indexed to the population density of our trade “partners.”  Failure to restore a balance of trade will doom this nation to an economic catastrophe. 

Pete Murphy
Author, Five Short Blasts

30 Responses to “Free” Trade?

  1. It is my understanding that historically, England was one of the first to develop modern manufacturing then, eventually, the U.S.A. became the manufacturing center of the world. Heretofore, densely populated countries supplied England, then U.S.A. with only raw materials. Japan became an exporter of quality manufactured goods only after ww2, then, decade-by-decade S. Korea, China, and other countries in the region followed suit. As this was happening, the manufacturing in the U.S. A. was declining. The simple truth is that the U.S.A. is no longer the manufacturing center of the world and therefore the standard of living here will have to diminish in order to compete in manufacturing. This is now happening as we enter another humongous economic depression.

    • Pete Murphy says:

      Thanks for stopping by George. I appreciate your thoughtful comments. I must disagree on a couple of points. Densely populated countries have never been suppliers of raw materials. They have always been consumers of raw materials, by their very nature. Consider our major oil suppliers: Canada, Venezuela, Saudi Arabia and Norway, among others. All are relatively sparsely populated countries and thus, because they have relatively few consumers, have supplies of oil in excess of what they can consume. Secondly, the manufacturing sector of our economy was vibrant until we made a 180 degree turn away from tariffs and toward a free trade policy, trusting in economists who believed that it would stimulate both imports and exports equally. It never did. Our standard of living doesn’t have to diminish. All we need to do is return to the proven trade policy that worked so well for us in the past.

  2. At the end of WW2, Japan, Korea & China each had a very low standard of living. Japan, being densly populated, had only elatively small land area therefore the standard of living rose at a relatively fast pace. China on the other hand will probably take many decades before the standard of living there rises to that of Japan. The U.S.A. will probably never rise to the world’s prominent manufactorer , but posssibly in another decade the standard of living in the U.S.A. probably will begin to rise from the depse of its economic depression. Government intervention such as import restrictions and/or printing more valueless money to bail out failed business & buid bridges will probably only extend the economic depression.

  3. “I must disagree on a couple of points. Densely populated countries have never been suppliers of raw materials.”

    In 1935, England was a prominent manufacturer of consumer goods. Yet coal was shipped to Lisbon, Athens, Montreal & Buenos Aires from London.*

    *APPENDIX 8 at http://www.econ.ucdavis.edu/faculty/amtaylor/papers/w9318.pdf

    “Secondly, the manufacturing sector of our economy was vibrant until we made a 180 degree turn away from tariffs and toward a free trade policy…”

    Sony’s first official import to the U.S.A. was the “pocketable” [transistor radio] TR-63 released in March 1957. Thus began the influx of imported consumer goods. During that period, I don’t recall any perceptual change in the U.S. government’s trade policy until NAFTA .

    “Our standard of living doesn’t have to diminish.”

    The U.S.A., being the wold’s biggest debtor, is now between a rock and a hard place because vast quantities of (1) oil and (2) consumer goods need to be imported because (1) the domestic oil supply is way less than the demand and (2) consumer goods manufacturing has been moved to other countries. To top off the bad news, the U.S.A. is in an economic recession/depression that may well exceed the economic depression of the 1930s.

    • Pete Murphy says:

      The “180 degree turn away from tariffs and toward a free trade policy” I referenced took place in 1947 with the signing of the Global Agreement on Tariffs and Trade.

      Regarding the energy/oil issue, you’re correct. But that doesn’t mean our standard of living has to diminish in the long run. It means we need a population management policy to return our population to one that can be sustained at a high standard of living.

  4. By advocating government intervention in trade, i.e., tariffs, you are, in effect, opening the process of trade to (1) corruption, (2) dislocation of capital, and (3) higher consumer prices that government intervention brings to any business endeavor. Less government intervention leads to more innovation, more competition, and lower consumer prices.

    By advocating a “population management policy” you are, i think, overlooking the fact that, e.g., the effects of importing oil for a population of , say, 300 million as opposed to a population of, say, 10 million would have exactly the same (short term) monetary effect on each population. In fact, the 300 million might get a discount on the price per barrel. Of course, the ecological effect to the environment (given the same land mass) would differ, thereby detrimentally affecting the economy of the 300 million population more.

    BTW, as civilization becomes more urbanized, the birth rate drops. Free trade promotes worldwide urbanization by opening opportunities for people having a lower standard of living to participate in a positive economic activity, e.g., manufacturing, i.e., to create wealth by changing raw material into desired items. This activity raises the standard of living of those so involved and will, I think, lead to an eventual levelling of the standard of living worldwide, i.e., the average standard of living thoughout the world; not that there won’t be beggers and billionaires.

    • Pete Murphy says:

      Trade is already rife with corruption. I’m not sure how imposing tariffs will alter this one way or the other.

      Regarding the dislocation of capital – it’s already “dislocated” from the U.S. to foreign manufacturers. The purpose of the tariffs would be to restore the profit potential needed to justify manufacturing domestically. This would be a “relocation” of capital, not dislocation.

      Regarding higher consumer prices, everyone forgets that consumers and workers are one and the same. Yes, prices would rise but so too would wages as the demand for labor to man factories rises. The net result would be a rise, not a decline, in purchasing power.

      I’m not sure I understand your comment about the price of oil relative to the population of the U.S. I’m not suggesting that the U.S. population needs to decline to 10 million. I’m not sure what the right level is but a decline of about 60% would completely eliminate the need to import oil, at least for the time being.

      Your final paragraph gets to the heart of the theory presented in my book. The “urbanization of civilization” is just another way of saying that the world is becoming more densely populated. Once some “optimum” population density has been breached, further population growth begins to drive down per capita consumption, due simply to a lack of space to use and store products. The problem is that falling per capita consumption, in the face of rising productivity, inevitably yields rising unemployment and poverty. Consider the example of housing. In Japan, a nation ten times as densely populated as the U.S., their per capita consumption of dwelling space is only 30% of that of Americans, not because the Japanese like living in tiny homes, but because they have no room for anything larger. So per capita employment in industries involved in building, furnishing and maintaining homes is dramatically reduced. The same holds true for virtually every product, with the exception of things like clothing and food. This makes densely populated nations utterly dependent on exports to provide employment for their people. In essence, their high population densities turn them into parasitic economies, preying on the markets and jobs of less densely populated nations. They can never have the same standard of living as less densely populated nations like the U.S. without robbing those nations of their manufacturing jobs. They literally dump the consequences of their overpopulation onto their less densely populated (and unsuspecting) trade partners.

    • Pete Murphy says:

      George, one more thing: you mentioned that birth rates drop as “civilization becomes more urbanized.” Many people make the same claim and point to falling birth rates throughout the developed world. And it’s true. However, those who then prescribe economic development as a cure for soaring population growth in third world countries are making a mistake. Economic development is the cause of overpopulation, not the cure. Poor countries are characterized by both a high birth rate and high death rate, leaving a relatively stable population. But the introduction of any modern developments, even the most rudimentary – things like food aid, basic sanitation and medicine, sends the death rate plummeting. Declines in the birth rate only follow much, much more slowly as economic development takes root. This doesn’t mean that economic development shouldn’t be pursued. It just means that we need to recognize the potential for exploding populations and introduce measures to address the birth rate along with the other economic improvements.

  5. Wouldn’t the amount of tariffs necessary “to restore the profit potential needed to justify manufacturing domestically” increase the price of imported goods and services to the point where the standard of living here would be greatly reduced just as the current economic recession/depression is now beginning to do?
    So why bother with tariffs?

    • Pete Murphy says:

      Yes, the tariffs would raise prices but the soaring demand for labor to man factories would raise wages even faster. Our standard of living would improve, not decline. Decades ago, when virtually everything was manufactured in the U.S., our standard of living was just as high and everyone was much better off financially. In 1969, median family income was about $42,000. In 2004, it was about the same. (All figures expressed in 2001 dollars.) In 1976, median family net worth peaked at $91,000, but by 2004 it had fallen to $88,000. During the same time frame, per capita consumer credit (debt) almost tripled! We have used debt to maintain an illusion of prosperity.

      Yes, the recession is beginning to reduce the trade deficit, but destroying the purchasing power, incomes and net worth of our citizens is no way to do it. If it was done with tariffs, the results would be just the opposite – an economic boom.

      • Donald Bly says:

        If tarrifs caused prices to rise too much… I’d just go into the smuggling business. Never discount the American entereprenurial spirit.

  6. “Yes, the recession is beginning to reduce the trade deficit, but destroying the purchasing power, incomes and net worth of our citizens is no way to do it. If it was done with tariffs, the results would be just the opposite – an economic boom.”

    There is no choice between (1) an economic resession/depression and (2) doing it with tariffs. Lets face it, we’re in for a very long and deep recession/depression!

    • Pete Murphy says:

      Yes, we are in a very long and deep recession. So there’s no better time than now to start rectifying the issue that caused it in the first place – the trade deficit.

  7. “Yes, we are in a very long and deep recession. So there’s no better time than now to start rectifying the issue that caused it in the first place – the trade deficit.”

    Let’s say that your proposed tariffs are now imposed. The immediate effect would be higher prices for consumer goods. Entrepreneurs would want to manufacture those tariffed items here, but they would not be able to get financing due to the present condition of the financial sector; and even if they could, the effect would still be higher prices for consumer goods. In either case, the exporters, finding their products facing tariffs here, would impose tariffs on our exports to them, The consumers here, already being in the throes of an economic recession, would be hit hard by the price rise of the tariffed items, thus deepening the recession.

    It seems to me that any type of taxation can be equated with stealing. Basically, it is taking from Peter to pay Paul. In the case of tariffs, it is taking from consumers to benefit uncompetitive manufacturers.

    • Pete Murphy says:

      George, the series of events you describe that would follow the imposition of tariffs is probably pretty accurate. It would be crucial that companies wanting to build factories in the U.S. are able to get financing. If the private sector wouldn’t or couldn’t do it, due to the current economic climate, then the government would have to provide it.

      I think equating taxation with stealing is going a bit too far. As long as there are going to be more than a few small tribes of people on earth, government is essential and there has to be some means of collecting revenue to pay for it. Until 1917, we had no federal income tax because tariffs and some excise taxes provided all federal revenue. Without the government we’d have no roads, no public schools, no national defense, etc.

  8. In essence, you are advocating that the government should interfere in the economy by (1) imposing trade barriers (i.e., tariffs) and by (2) financing domestic manufacturing thereby raising prices of consumer goods during a recession in order to try to alleviate said recession.

    • Pete Murphy says:

      Yes, you seem to have grasped it pretty well. And the net result would be a $700 billion jump in GDP and the return of over six million manufacturing jobs. Once again, you’ve mentioned rising prices while ignoring the fact that incomes would rise even faster.

      What would be your plan?

    • petrock says:

      “financing domestic manufacturing thereby raising prices of consumer goods”…

      Are you referring to subsidies? My understanding is that subsidies are protectionist measures that don’t actually raise the price of consumer goods. Tariffs and quotas do, but not subsidies. This is why economists sometimes argue that subsidies are the least harmful of protectionist measures.

  9. Please reconsider your plan by keeping in mind that this country is in an humongous recession with (1) the financial sector inoperative and (2) the government bankrupt, therefore there is no reason to think that domestic manufacturing will supplant imported consumer goods in the foreseeable future. Imposing tariffs would only raise prices because (1) for tariffs to be effective, they would reflect the difference between the import price and the domestic price of the item to be manufactured here (which I guess to be about 100% of the import price) therefore wiping out the exporter’s profit and thereby, in effect, cutting off the tariffed imports (2) if the government printed the money (and I see no other choice) to finance domestic manufacturing, then runaway inflation would ensue, thereby creating “another” Zimbabwe.

    • Pete Murphy says:

      Actually, manufacturing could ramp up pretty quickly. We have sufficient auto manufacturing capacity right now to manufacture every vehicle sold in the U.S. All that would be needed is to add shifts and restart idled plants. We also have steel capacity. Your estimate of the tariff level that would be required is far too high. Tariffs in the range of 5% to 50%, depending on the nation in question, would be sufficient. Prior to WWII, we maintained a surplus of trade with tariffs that averaged 38% under the Fordney-McCumber Tariff Act of 1922. Regarding the printing of money and runaway inflation, these would be loans, no different than loans that would be made by the private sector, assuming that we still had private sector lending institutions that hadn’t bee wiped out by global economic collapse. The loans would be repaid with interest, reducing the national debt in the long run, not increasing it.

    • Pete Murphy says:

      I thought you were being facetious with those five steps, but now I see that you were serious. Those five steps were: “(1.) to drastically cut government expenses (including the elimination of some departments) and (2.) to eliminate all types of economic interference in the economy such as taxes and regulations and (3.) to return to a gold monetary standard and (4.) to repudiate the national debt and (5.) to realize that a lower standard of living is the result of the loss of U.S. manufacturing and is the price for recovering a strong economy.”

      You want to eliminate all federal revenues and laws? Default on the national debt? Reduce our standard of living? This isn’t a plan for economic recovery. It’s lunacy.

  10. Debbie Abuhelewa says:

    A couple of decades ago I was living in Japan and commenting to a Japanese older man – probably around 60 – how the Japanese seemed so peaceful but hardly had anything. He told me: “Western people all want things to fill them up, but such external things will never fill nor fulfil you. There will come a time when you have so much stuff and not enough land, so your solution, to build ever bigger houses to accommodate your things, will not work. Then only, when you live in houses so cluttered you cannot move freely, will you learn the value of space.”

    I do believe, here in the UK, especially in England, one of the most densely populated countries on earth, that this moment has arrived. We are no longer seeking out bigger houses. Rather, we are looking to reclaim the space in our current houses. And that has played havoc with our economy over here. Space isn’t just a physical reality, but an abstract concept as well. Suddenly we are making space on our credit cards, freeing up our credit lines, not because we want to buy anything else, but just to “make space”. Recently a development on brown fields land (so land realesed, well in theory at least, to be built on) didn’t go ahead. Why? Because the council felt, with so little space, it was important to preserve some. Meanwhile, our population grows in leaps and bounds, by 408,000 in 2008 alone, which might not sound much in a 300 mill country, but in a 60 mill country it’s huge. There is no way on earth that the population expansion pressure is going to ease up any time soon over here. The politicians reckon more people means more jobs, because of bigger demand. Sure, this “sounds” logical, but is it? Sometimes adding 1,000 people to an economy results in no new jobs at all, because the current capacity of the population is greatly underutilised. And that can be just as true of adding 500,000 people a year.

    Can we, as a densely populated place, pass our domestic economy output onto other countries if we don’t consume it ourselves? Well, we could, except for one thing – we are not producing what other countries want to buy. Hell, we’re not even producing stuff that the locals want to buy! And therein lies the problem for both the UK and the States. It isn’t that we couldn’t export enough to keep us fully employed. Of course we could. Look at Germany. They have a labour market far more overpaid and cosseted than the USA or the UK will ever have, – not much comparative advantage there on the cost front – yet they are producing plenty of very nice but expensive cars, trains, trams and all the rest of it to keep their employees in clover. The real truth of the matter is that we don’t produce what the rest of the world want to buy. We’re so busy mouthing off about how we need cheap clothes, shoes, food, oil – you name it we want it – that we forgot to find out what the other countries wanted to buy from us.

    What does one sell to a country like Japan, where the most prized commodity of all is space?

    • Pete Murphy says:

      Thanks for that UK perspective, Debbie. Very interesting. The problem is not that the UK and US don’t make things that other nations want. The problem is that they (Japan, China, Korea, Germany, etc.) don’t want anything from us, regardless what we might make, because they’re already too densely populated to even gainfully employ their own labor force. Yet, we import their excess capacity and kill off our own manufacturing in the process. The only solution for the U.S. is to restore a balance of trade by imposing tariffs. The UK would be smart to do the same. The only long-term solution for the world as a whole is to stabilize its population, then gradually reduce it to the point where people have enough room to spread out and consume more. That means a far smaller world population, but it would be a world where everyone would be able to enjoy a high standard of living.

      • Actually “they” do want U.S. agricultural products! But it takes imported oil to supply transportation, fertilizer, farming opperations, etc. With the long-term rise in the price of oil and the gathering expectation in the collapse of the dollar, continued large-scale agriculture methods in the U.S. don’t appear to be fesible (unless Paul Pantone saves the day! ;-).

  11. justinalbertsamson says:

    I have found over the years that when I debate with people who promote tariffs, meaning sales taxes on imported goods that are enforced by people with badges and guns, they always adopt arguments that apply only to America’s side of the border. They refuse to adopt those very same arguments for people on the other side of the border.

    Why is it that an argument that sounds utterly logical and utterly ethical from the point of view of an American who defends American tariffs on imported goods should not feel equally logical and equally ethical from the point of view of the Japanese or Chinese on the other side of the border?

    The difference between the defender of tariffs and the defender of market liberty is this: the defender of tariffs does not believe, nor does he go public, with a systematic defense of the legitimacy of tariffs on the other side of the border. What he wants is a no-tariff situation on the other side of the border, and a tariff law on this side of the border. He wants Americans to be able to sell whatever they want at the best possible price to people on the other side of the border. But he does not want to have people on the other side of the border to be legally allowed to sell at the best possible price for people on this side of the border.

    This is different strokes for different folks, and it is a denial of a fundamental principle of both ethics and economics. It denies the equal applicability of the legitimacy of justice on both sides of an invisible line, namely, a national border. People who favor tariffs are willing to admit that people should have a legal right to trade without state interference with people across the state line, but then they think the state should revoke this right at the national border. The logic of free trade supposedly stops at the national border. So does the logic of ethics.

    The economic effects of a tariff on this side of the border are the same as the economic effects of a tariff on the other side of the border. Pro-tariff advocates do not understand this.

    If the government of the United States restricts trade with somebody across the border, the foreign exporter cannot get his hands on American dollars. He would otherwise have been able to get his hands on American dollars, because he would have been able to sell goods to an American. He could then have taken those dollars and deposited them in an American bank. This is what exporters do all the time. They have bank accounts in the countries they export to. The foreign exporter could then have spent those dollars on American goods and services. Or he could have invested in American businesses. (Sad to say, he could also have bought US Treasury bills, thereby funding the federal government.)

    When the US government restricts foreign sellers of goods and services from selling in the United States, this action reduces the number of dollars available to foreigners to buy American products. This means that a tariff against imports has exactly the same effects as an American tax on American exports. The person on the other side of the border is kept from buying American products.

    In the case of an export tax, he is kept from buying American products by a man with a badge and a gun who sticks the barrel of the gun into the belly of an American exporter and tells him, “you cannot legally sell to that foreigner until you pay the tax.” In the case of a tariff, the government sticks a gun in the belly of an American importer, and tells him “you are not allowed to import goods from that foreigner until you pay the tax.” In both cases, the foreigner is not given the right to spend his money on American products.

    Once you see it this way, I hope you will see that the losers in this arrangement are on both sides of the border. American exporters are not able to sell as many goods and services to foreigners as they would have been able to sell, had the government of the United States not sent out men with badges and guns to prohibit trade. The American importer of foreign goods cannot buy as many foreign goods, so the foreigner does not get his hands on American dollars, and he does not spend the money on American goods and services. Also, he does not invest in American companies.

  12. There is precisely zero reason to worry about a ‘trade deficit’. This mercantilist shibboleth just doesn’t want to die it seems. ‘Nations’ don’t trade with each other, individuals do. They wouldn’t engage in trade if it were not to their mutual advantage. National borders possess no economic significance.

    • Pete Murphy says:

      Our trade deficit has little to do with mercantilism, aside from the fact that, in some cases, we’re the victim of it. Individuals may trade with each other, but there had better be balance or one of those individuals will soon be bankrupt. Trade between nations is no different. America’s huge trade deficit, now a cumulative $12 trillion since our last trade surplus in 1975, is directly responsible for the growth in our national debt over the same period. (It’s no mere coincidence that the two numbers closely match.)

      I encourage you to do some more reading on this web site to understand how differences in population density from one nation to the next are the driving force behind the global imbalances that nearly collapsed the global economy a few years ago, a collapse now held at bay only by massive deficit spending by governments and money-printing by central banks.

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