Posted on 10/26/2012 12:39:51 AM PDT by bruinbirdman
Unions, like governments, ruin everything that they touch.
Like Avogadro’s law, they expand to fill the available space, forcing out every other concern until there is nothing left.
Welcome to capitalism in the 21 st century. The end result of free trade and globalism is to replace high cost labor with low cost labor. Without tariffs and government imosed quotas, middle class jobs in industrialized countries will move to locations where lower wages can be realized. Workers losing jobs in higher labor cost areas will have to accept a lower standard of living and loss of employment security or become wards of the state (if the state is willing to carry them). We’ve seen this play out in the USA over the last 20 years once we made the decision to lower our tariffs and eliminate quotas. The EU is now experiencing the same decline of the middle class.
However the back drop is more complicated....
* VW is the Dominant Player with low content value cars.
* Opel, the millstone around GM's neck sucks up resources, adds useless capacity and one may ask will this be the straw to break GM's Back again.
* The European Economy only adds to the woes.
I don't see why Spain with all it's problems is the best solution to consolidate, that one will take some time to wrap my arms around or pick up the phone to speak with my auto gnomes....
Spot on, Soul of the South!
Wishful thinking. Tariffs are simply no longer possible. All the imposition of a tariff will do is cause MORE industries to move out, and more rapidly. The pool(s) of capital have gotten so large and so geographically diverse that there is simply no way they can any longer work.
Quotas "might" work, but I haven't seen any evidence of it.
So, given the above, what measures exist that can be applied without imposing an even more tyrannical and interfering government than we now have???
Easy: develop the “developing” world as fast as possible, so their wages rise to levels comparable to ours. It means short term pain here (and there - the early phases of industrialization aren’t pretty) - but in the long run everyone will be better off.
“Welcome to capitalism in the 21 st century. The end result of free trade and globalism is to replace high cost labor with low cost labor. Without tariffs and government imosed quotas, middle class jobs in industrialized countries will move to locations where lower wages can be realized.”
Your claim that this is the result of capitalism is a flat out lie. The Unions in the EU are very protectionist and this one in Belgium is especially so. Manufacturers in EU in general are forced to hire folks that are not needed and then it is very difficult to have any flexibility in the labor force.
Their wage of $40.60 EU$ is the equivelant of $51 fully fringed here. The wage portion of that would be $33 USD an hour to turn a screw. You advocate for government imposed quotas, while blaming the results of government imposed quotas on capitalism.
The reality is that this plant closure is the result of your preference for government interference in the free market. It is not the result of the free market forces.
This article on Ford relocating is an example of what you describe.
Unfortunately, I think you're right. Either that, or we become old Soviet Russia. I am by no means enamored with the idea of "free trade" per se, but I just don't see an alternative that isn't worse.
Also unfortunately, our schools are doing such a crappy job that we are rapidly losing ground vis-a-vis the absolute quality of work force.
Non union manufacturing facilities in the American South have been decimated over the past 20 years thanks to lower tariffs and quotas. Entire industries have virtually disappeared (textiles, apparel assembly, furniture, home furnishings, and consumer product assembly). These nonunion workers did not have bloated benefits packages and many began their factory work at minimum wage or slightly above.
I spent over 30 years working in management for large corporations and was involved in many decisions to outsource. It is naive and simplistic to say the decisions were related to excessive union wages and benefits. The companies I worked for had nonunion labor forces and were located primarily in right to work states. Here are the facts:
1) During the 1970’s and 1980’s financial managers, most trained as MBA’s at the nation’s leading business schools, wrested control of many US companies from the product and customer focused managers who typically worked their way up from sales, marketing, design, or manufacturing assignments. The financial executives were not connected to customers, employees, or operations. They managed “numbers”, not factories or customer relationships much less the R&D/product development required to sustain innovation and new product activity. Under management of the financial executives US industry shifted from a focus on driving sales growth to managing quarterly improvements in bottom line performance. Organizations became internally focused on cost reduction, not externally focused on driving sales. To reduce costs and increase cash flow, US companies deferred or eliminated routine capital investment associated with increasing productivity. By the early 1990’s when the US market was opened to “free trade”, US factories were filled with obsolete equipment.
2) US labor was highly productive, but the equipment was not the most productive available. US companies were faced with a need to invest heavily in modern equipment and facilities if they wished to remain competitive. It is interesting that almost every financial analysis I was involved with showed US workers with modern equipment were competitive globally thanks to the higher productivity of the US worker and the creative management in US factories. The problem was getting the investment capital to give them the updated equipment.
3) At the same time Wall Street had shifted from its historical function of providing long term investment capital to US companies to a casino of speculators focused on quarterly performance, not long term value creation. In fact the Wall Street financial leaders of the 1990’s were obsessed with innovations in leveraged buyouts and private equity restructuring. Wall Street rewarded companies that stripped assets in order to free up cash and improve earnings in the short term. The speculators in charge of the US capital markets had no interest in funding the billions of dollars required to provide US workers with the current technology equipment needed to make them globally competitive.
4) Another nail in the coffin of US manufacturing came from China. While we opened our markets to the world, China maintained a mercantilist trade policy. Export industry were given zero interest loans by the state to construct modern factories with state of the art equipment. The Chinese government also gave its domestic companies rebates on the value of goods exported. The combination of free capital and export subsidies of up to 20% (15% was typical in the industries I worked with) distorted the economics to the point where the decision to offshore became simple. In addition, the China’s intentional manipulation of its currency to make its exports less costly in global markets has been well documented over the past two decades. Corporate tax rates in China are also lower than in the US giving Chinese companies another cost advantage.
5) The other nail in the coffin of US manufacturing came from the big Wall Street investment banks, and the big management consulting firms. I sat in a number of presentations where the bankers and consultants met with US public corporate management teams encouraging them to shut down US factories to free up capital to reinvest in acquisitions or stock buybacks. In other words trade hard productive assets for paper created by Wall Street. Many corporations took the bait, shedding people and plants giving modern state subsidized Chinese factories instant customers while decimating US workers and communities. I can assure you every presentation I viewed included a section on how the US company could unload the social costs of the layoffs on state, local and federal agencies.
Very few of the major offshoring initiatives with which I was associated ever realized the promised savings. Rising global petroleum costs dramatically increased freight costs. Many of the financial projections assumed the offshore workers would achieve the high productivity level of US workers. The productivity gains did not occur due to different management processes and higher labor turnover. Meeting quality standards was a major problem for Chinese factories in particular. Chinese culture does not frown on cheating and one way to reduce production costs is to produce product out of spec or use inferior raw materials. US companies incurred significant unanticipated costs to monitor production and ensure quality standards were being met in the factory. Finally, most US companies underestimated the reserve inventory they would have to carry in order to preserve service levels with longer lead times.
Today, for a variety of reasons, the economics of most manufacturing operations actually favors US labor, assuming it is supported with modern equipment and management processes. However, after 20 years of offshoring domestic raw material and component supply chains no longer exist for many industries. Even if a company is willing to invest in building an assembly operation in the US today, it faces the daunting challenging of supplying the factory with components when domestic suppliers of the components do not exist.
I take great exception to you accusing me of lying and preferring government interference in the market. I’ve spent over 30 years managing these offshoring issues and fully understand both the macro economic issues impacting the decisions as well as the nitty gritty details associated with establishing supply chains around the globe. Are you speaking from similar experience or merely spouting platitudes? There are legitimate reasons for tariffs particularly when other countries are subsidizing their competitive industries or engaging in currency manipulation to make their industries more competitive. Tariffs also allow the government recapture some of the costs the taxpayers bear to support trade (Customs Service, Coast Guard, harbor dredging by the Army Corps of Engineers for example). If tariffs and duties are not imposed to cover these costs, essentially taxes paid by domestic manufacturers are subsidizing the importers.
Union labor, as you infer, has another set of issues but politicians can easily correct the distortions unions impose on the marketplace by passing a national right to work law. Remember, union wages are the result of a voluntary agreement between management and labor. It is management’s fault if it agrees to uncompetitive labor contracts. No doubt the executives who acquiesce to the unions also give themselves compensation packages several times the compensation for equivalent management jobs at overseas competitors. If your preference is to lower the compensation of US working people to the level of workers in third world countries, I suggest you should also support the lowering of the compensation of senior executives in the 1% to equivalent competitive levels. After all, isn’t that what should happen in a perfectly free market?
Non union manufacturing facilities in the American South have been decimated over the past 20 years thanks to lower tariffs and quotas. Entire industries have virtually disappeared (textiles, apparel assembly, furniture, home furnishings, and consumer product assembly). These nonunion workers did not have bloated benefits packages and many began their factory work at minimum wage or slightly above.
I spent over 30 years working in management for large corporations and was involved in many decisions to outsource. It is naive and simplistic to say the decisions were related to excessive union wages and benefits. The companies I worked for had nonunion labor forces and were located primarily in right to work states. Here are the facts:
1) During the 1970’s and 1980’s financial managers, most trained as MBA’s at the nation’s leading business schools, wrested control of many US companies from the product and customer focused managers who typically worked their way up from sales, marketing, design, or manufacturing assignments. The financial executives were not connected to customers, employees, or operations. They managed “numbers”, not factories or customer relationships much less the R&D/product development required to sustain innovation and new product activity. Under management of the financial executives US industry shifted from a focus on driving sales growth to managing quarterly improvements in bottom line performance. Organizations became internally focused on cost reduction, not externally focused on driving sales. To reduce costs and increase cash flow, US companies deferred or eliminated routine capital investment associated with increasing productivity. By the early 1990’s when the US market was opened to “free trade”, US factories were filled with obsolete equipment.
2) US labor was highly productive, but the equipment was not the most productive available. US companies were faced with a need to invest heavily in modern equipment and facilities if they wished to remain competitive. It is interesting that almost every financial analysis I was involved with showed US workers with modern equipment were competitive globally thanks to the higher productivity of the US worker and the creative management in US factories. The problem was getting the investment capital to give them the updated equipment.
3) At the same time Wall Street had shifted from its historical function of providing long term investment capital to US companies to a casino of speculators focused on quarterly performance, not long term value creation. In fact the Wall Street financial leaders of the 1990’s were obsessed with innovations in leveraged buyouts and private equity restructuring. Wall Street rewarded companies that stripped assets in order to free up cash and improve earnings in the short term. The speculators in charge of the US capital markets had no interest in funding the billions of dollars required to provide US workers with the current technology equipment needed to make them globally competitive.
4) Another nail in the coffin of US manufacturing came from China. While we opened our markets to the world, China maintained a mercantilist trade policy. Export industry were given zero interest loans by the state to construct modern factories with state of the art equipment. The Chinese government also gave its domestic companies rebates on the value of goods exported. The combination of free capital and export subsidies of up to 20% (15% was typical in the industries I worked with) distorted the economics to the point where the decision to offshore became simple. In addition, the China’s intentional manipulation of its currency to make its exports less costly in global markets has been well documented over the past two decades. Corporate tax rates in China are also lower than in the US giving Chinese companies another cost advantage.
5) The other nail in the coffin of US manufacturing came from the big Wall Street investment banks, and the big management consulting firms. I sat in a number of presentations where the bankers and consultants met with US public corporate management teams encouraging them to shut down US factories to free up capital to reinvest in acquisitions or stock buybacks. In other words trade hard productive assets for paper created by Wall Street. Many corporations took the bait, shedding people and plants giving modern state subsidized Chinese factories instant customers while decimating US workers and communities. I can assure you every presentation I viewed included a section on how the US company could unload the social costs of the layoffs on state, local and federal agencies.
Very few of the major offshoring initiatives with which I was associated ever realized the promised savings. Rising global petroleum costs dramatically increased freight costs. Many of the financial projections assumed the offshore workers would achieve the high productivity level of US workers. The productivity gains did not occur due to different management processes and higher labor turnover. Meeting quality standards was a major problem for Chinese factories in particular. Chinese culture does not frown on cheating and one way to reduce production costs is to produce product out of spec or use inferior raw materials. US companies incurred significant unanticipated costs to monitor production and ensure quality standards were being met in the factory. Finally, most US companies underestimated the reserve inventory they would have to carry in order to preserve service levels with longer lead times.
Today, for a variety of reasons, the economics of most manufacturing operations actually favors US labor, assuming it is supported with modern equipment and management processes. However, after 20 years of offshoring domestic raw material and component supply chains no longer exist for many industries. Even if a company is willing to invest in building an assembly operation in the US today, it faces the daunting challenging of supplying the factory with components when domestic suppliers of the components do not exist.
I take great exception to you accusing me of lying and preferring government interference in the market. I’ve spent over 30 years managing these offshoring issues and fully understand both the macro economic issues impacting the decisions as well as the nitty gritty details associated with establishing supply chains around the globe. Are you speaking from similar experience or merely spouting platitudes? There are legitimate reasons for tariffs particularly when other countries are subsidizing their competitive industries or engaging in currency manipulation to make their industries more competitive. Tariffs also allow the government recapture some of the costs the taxpayers bear to support trade (Customs Service, Coast Guard, harbor dredging by the Army Corps of Engineers for example). If tariffs and duties are not imposed to cover these costs, essentially taxes paid by domestic manufacturers are subsidizing the importers.
Union labor, as you infer, has another set of issues but politicians can easily correct the distortions unions impose on the marketplace by passing a national right to work law. Remember, union wages are the result of a voluntary agreement between management and labor. It is management’s fault if it agrees to uncompetitive labor contracts. No doubt the executives who acquiesce to the unions also give themselves compensation packages several times the compensation for equivalent management jobs at overseas competitors. If your preference is to lower the compensation of US working people to the level of workers in third world countries, I suggest you should also support the lowering of the compensation of senior executives in the 1% to equivalent competitive levels. After all, isn’t that what should happen in a perfectly free market?
Wow, you typed a lot here at the risk of it being lost in the FR troubles that have been plaguing us! Kudos to you. I will try to address some of them, but need to re-establish a couple of foundational facts.
A. This article is about a factory closure in Belgium.
B. The EU is very protective of the labor and many of the countries are especially hard on employers. Belgium is one such country.
C. You used this article as an opportunity to attack capitalism and free markets.
D. You called for more government involvement in the market, specifically you stated a desire for more quotas and higher tarriffs.
E. Belgium has very high hiring quotas and it is extremely difficult have any flexible manufacturing facility in that country.
F. The closure of the plant being discussed in the article, is a result of more government involvement. Yet you called for more.
Now, let me briefly address each of your points by their number:
1. Yes, our corporations have given way to much power to the Finance function. Why did that start to occur? My guess is that it is due to financial reporting regulation growth. I have seen it most recently with SOX and am expecting even more need for “financial controlling” with Frank-Dodd. This additional government control is forcing corporations to spend to much time trying to comply with regulations, therefore the functional area with the most influence is Finance or Controllers.
2. US labor was and is still very productive. As a result, we want it used most efficiently and productively. You complain about the textile industry leaving the US and moving overseas, yet you brag about the productivity of the US labor market. That productivity is best used for higher level manufacturing and not sewing socks or weaving rugs. In my business it is much better for the cheap overseas labor to make fasteners in bulk, and then we can use the US highly productive labor and capital to assemble a car seat.
3. Wall Street still has the long term investment function that you describe. Yes, there is also speculation, but your view of Wall Street fails to recognize that it is still the single best investment vehicle for long term growth.
4. China has not been a nail in the coffin of US manufacturing. As you pointed out earlier, the labor productivity is much lower (much less skilled) than the US labor market. Then you complain that their government subsidizes their manufacturing and your solution to make us more competitive is for our government to increase the burdens on our US manufacturers.
5. You describe crony capitalism. Yet, you claim to want more government interference, which would create more shortsighted managers asking for more government assistance, which would create a “need” for more government control, and on and on and on and on.
OK, you took offense at me calling out your lies. Maybe you weren’t purposefully lying, but you were not wise in chosing a plant closure in Belgium as an opportunity to attack capitalism and the free market. So, in essence you were blaming blaming the result of high quotas and protected labor on the free market! Either you were being purposefully obtuse or you were lying. I’ll let you clarify further or any lurking reader decide.
Then you stated, “I’ve spent over 30 years managing these offshoring issues and fully understand both the macro economic issues impacting the decisions as well as the nitty gritty details associated with establishing supply chains around the globe.”
I anticipated as much after I checked your profile page and to be honest I was rather shocked. Your comments seemed to be completely disconnected from global manufacturing and specifically from Supply Chain Management. Your approach to solving the challenges we face in manufacturing is to compound those problems.
Then you ask, “Are you speaking from similar experience or merely spouting platitudes?”
I am speaking from the background of being a Global Lead Buyer for a Fortune 5 company. I am currently negotiating a $500M buy that touches manufacturing in the US, MX, Brz, Germany, Russia, India, China and Thailand. I am speaking from completing an insourcing project from 2009-11 that brought $400M back to the US in manufacturing. I am speaking from 15 years of similarly diverse experiences that are focused on Supply Chain Management.
The solution to our problems is not more government restrictions on markets, it is not protectionism, it is to get the government out of the way of our manufacturers. They will decide where the most efficient uses of all resources lie on the globe.
All of that said, I’d wager we could both agree that the single best solution to make the US a Global Leader in Manufacturing is to abolish all corporate and income taxes and institue the FairTax.
I agree with eliminating corporate taxes to make US companies more competitive. I would also like to see income taxes lower and flatter.
We disagree on tariffs. During the second half of the 19th century the US built its industrial infrastructure. Tariffs were high and used to fund most of the cost of the federal government while at the same time insulating US industry from European competitors. Had the US adopted a zero tariff/no quota free trade policy, we would not have built the industrial base that allowed the US to become an economic power in the 20th century.
From an economic perspective I support tariffs for the following reasons:
1) The US market belongs to the American people, not companies, not bankers, not foreign players. A tariff can be viewed as an economic charge for the privilege of accessing the market. If the US government is going to tax US companies at a rate of 35% for the privilege of engaging in commerce in the US market, it is reasonable to charge a similar amount to foreign factories for the same access to the market.
2) Free trade is attractive in concept but the reality is many of our trading partners protect home markets and provide advantages to their exporters. These mercantilist trade policies put US companies at a disadvantage in the US market. For example, the Chinese routinely pay Chinese apparel companies a 15% export rebate. The government also ensures factories exporting receive zero interest government loans, essentially a free cost of investment capital. Not to mention currency manipulation which serves to subsidize exports. These subsidies are in essence a form of economic warfare. Tariffs are a reasonable defense to economic warfare. Why should foreign companies be permitted to subside exports to the US and have a competitive advantage due to these subsidies? Subsidized trade is not “free” trade.
3) There is a strategic interest in the US having a robust and broad manufacturing base. Today the US is extremely vulnerable to having supply of key manufacturing goods cut off and no internal manufacturing infrastructure in place to supply substitute products. Contrast the current situation with 1941 when the diverse manufacturing infrastructure permitted the rapid expansion and mobilization of the armed forces and the supply of allies globally with war materials.
4) The US government provides services in support of imports and exports. A significant amount of the cost of the Coast Guard and Customs is related to external trade (imports and exports). The US Navy protects the sea lanes globally facilitating the free movement of cargo. The Army Corps of Engineers dredges harbors and waterways facilitating the movement of commerce. The FAA supports air traffic control and airport construction projects directly benefiting international trade. GPS satellites, launched by the US government, aid navigation globally. To the extent these costs are born by the taxpayer and not the users, the users are receiving an economic subsidy. I favor the allocation of these costs to the users via tariffs or a charge on each container entering or exiting the country.
With respect to the textile industry, I agree US labor is high cost for many apparel assembly (i.e. sewing) jobs. Textiles (yarn and knitting) are a different story as the textile industry is highly automated. However textiles go hand in hand with apparel and when the apparel factories go away from a market, the textile factories follow due to loss of customers. Recognize when an apparel manufacturer closes a large sewing facility, employing large numbers of low skill workers at close to minimum wage, the local community is saddled with significant social costs. Those costs result from the closure but are not born by the company closing the facility. The company may benefit economically from the decision but the community and workers bear the cost. When a company does not bear the economic costs of economic decisions it makes, it is essentially being subsidized.
My answer to Chinese subsidies is higher tariffs on Chinese imports. How do higher tariffs on Chinese imports hurt US factories making these products? If the subsidized Chinese products continue to be sold in the US markets, the US factories will lose market share and ultimately close. What is your answer to the subsidies? As long as other countries have free access to the US market while subsidizing their exports and applying barriers to US imports US companies will be at a disadvantage. Your answer seems to be status quo — keep the US market open and if the US factories can’t compete with subsidized imports and manipulated currencies it is just too bad for the US worker and US manufacturers. We’ve had 20 years of this grand experiment and the result has been a decline in the standard of living for the average US worker for the first time in US history.
For years I believed in free trade. I was involved in lobbying the government to lower tariffs and eliminate quotas. I was involved in closing down US factories and moving production to Asia. The companies I managed benefited economically (for a time) from the decisions to outsource production. By moving production to third world countries the company benefited from lower wages. Some of the other benefits from using overseas contractors included lower costs from child labor, lower labor costs realized by working employees overtime without pay, the ability to have employees work with hazardous materials without expensive protective clothing, the cost benefit of being able to dump hazardous materials into rivers or noxious gases into the air without expensive treatment to eliminate the toxicity. One of the reasons US and European labor costs are higher than third world labor costs is government regulation that prevent companies from abusing workers and polluting without incurring the costs.
Theft of intellectual property developed in the US is also a major issue in many countries. Why should the US allow open access to its markets to countries allowing companies to steal intellectual property?
In a perfect world we would have free trade and factories would compete on a level playing field. This is not a perfect world. While many US companies may benefit economically from subsidized imports and doing business with companies that steal intellectual property, others do not. When in the name of some abstract notion of fair trade the US government allows subsidized imports free access to US markets it penalizes US factories and US labor. If capitalism means I compete with one hand behind my back while my foreign competitor is subsidized by his government, I want no part of it. Been there, done that. The end result is the destruction of the middle class of the US and the lowering of the standard of living for US labor to that of a third world hell hole.
OK, I’ll do one more resonse, but I fear that we are in a fruitless conversation.
I am glad that you started your response in agreement that we should eliminate corporate income taxes and that you agree that it would make US corporations more competitive. It is nice to set a foundation that we both agree that less government is better for our manufacturers. Just as a point of clarification, the FairTax that I mentioned would also eliminate personal income taxes and much of the withholding taxes, but that is a discussion for a different thread.
So, then you immediately follow that with support for tarrifs as a methodology to be used for protectionism. It is rather confusing...If we have NO corporate income taxes, as we agreed above, then we will not need to have Tarrifs. We will become attractive to Manufacturers simply due to the tax advantage. I prefer to attract, rather than protect.
Now, on to your specifically numbered points:
1) The “US Market” does not belong to anyone or any government. It is nothing more than a million different transactions between individuals, all added up to some GDP number. The government, or “American people” do not own my transactional freedom to spend or not spend my earnings in any way I chose (well, leaving Obamacare aside.) The government doesn’t “allow the privelege of participating in this market.” The government only hinders the freedom within that market and therefore distorts the ability of individuals to make choices in their own best interest.
2. I believe wholeheartedly in Free Trade, however, I would also only make the ability of trading with us to mirror the abillity of trading with a trade partner. I would default to zero tarrifs, zero governmental influence and then if someone wanted to trade with us then I would simply mirror their tarrif structure. I’d wager that eventually they would reduce their governmental influence or would cease to be a viable trade partner for the American public.
3. I agree that we should want to have a very robust manufacturing economy. However, we should also globally allocate the capital and labor resources to the most efficient regions. Low skilled labor should be utilized for labor intensive manufacturing and high skilled labor should be used for more capital intensive manufacturing. I am certain that we would eventually balance globally and would again reach full employment.
3B. Think of things this way, as we have increased our government interference in all private business ventures, we have also seen a decline in our manufacturing footprint. I do not support or advocate a solution to this as being more government intrusion. Instead, I would rather reverse the actions that are causing the decline to begin with....
I don’t have time to address the rest of your points about China, many of them I agree with, however none of those points are related to why a plant in Belgium closed. (Ha, I had to make the attempt to get back to the article.)
Let me ask you one final question, since you are so supportive of Tarrifs and not offering a limiting principle behind that support, then at what point would you limit tarrifs? If your intention for tarrifs is to “protect the American market” or American labor, then what tarrif structure would be to heavy?
For example, if we are using tarrifs to protect labor, then do we increase tarrifs if UE is 10+%, have a tiered tarrif structure as UE decreases to what could be considered full employment? At full employment do we remove tarrifs? I see many dangers in protecting labor with tarrifs, but am wondering if you would consider any limit.
If it is to protect the “American Market,” then at what point does that protection become harmful to the market? Remember Russia protected the hell out of their ag industry, but the customer couldn’t find many products to buy. The East Germans protected the hell out of their auto industry, but their breakthrough product was the Trabant!
It has been proven time and again that tarrifs in the name of protection is a very dangerous game that ultimatly brngs great harm to those being “protected.” I am fine with using tarrifs to answer tarrifs, however I am using that as a carrot and not as a stick.
OK, here’s to hoping this posts....
Thank God you have come into the light. All you can do now is try to fight the good fight. Your post was beyond good. It is inspirational. You should write a book. Each paragraph should be a chapter. Call it "unFree Trade for dummies".
You speak of decline that is actually revision toward the mean. Capital flows toward profitability. Expensive labor promotes movement to lower labor costs.
For Ford, operating in Belgium was not a good use of capital.
Massachusetts lost the textile industry to the Carolinas for the same reason. Similarly but from competition, the auto industry is growing in the south and taking sales from the union rust belt. GM and Chrysler are marginal companies that will fail unless labor surrenders the stranglehold
Good points. I appreciate the constructive dialogue. At first I thought about responding to each of your points individually but decided to answer your specific question about tariffs.
Before speaking to tariffs I would like to address your remark about ownership of the “market”. Article 1, Section 8 of the US Constitution clearly gives the Congress of the United States the power to regulate Commerce (i.e. the market) and is very explicit in giving Congress the power to levy taxes, duties, mint coinage, and regulate commerce with foreign nations and between the states. While the Constitution may not explicitly state Congress “owns” the market, it does give Congress the control over Commerce one would normally associate with the “owner” of an enterprise. Now on to tariffs.
Tariffs or user fees should be levied to allocate costs incurred by the taxpayers to the importers and exporters who use the services. This is the most efficient way to keep the taxpayers from subsidizing economic players. One approach would be to add up the dollars spent by the US government to facilitate trade and allocate those costs as a fee on every container of goods entering or leaving the country. The dairy farmer in Iowa who sells his milk locally should not be subsidizing the dredging of a harbor to facilitate Toyota bringing cars into this country. You might say the importer should not subsidize the cost of agricultural services provided by the government to the farmer and I would agree. My response would be to eliminate the Department of Agriculture and all of its services.
If the US government taxes domestic producers and does not tax foreign imports of identical goods and services, it creates an economic advantage for the importer. Tariffs therefore make sense from an economic perspective when they are used to apply the same government applied costs to the same goods. In the case of applying tariffs to equalize taxation penalties, some work is required as taxes are typically levied on income and the government does not have access to the “income” earned by the foreign company on its exports. Due to different competitive conditions, some products earn large margins and other small margins. For this reason I would be reluctant to set the same flat tariff rate for all products. Economists could study product categories and propose tariff levels that take into account imputed profits. When the choice is disadvantaging domestic producers by taxes them and not their foreign competitors, a tariff established based on estimated income is fairer to all players than penalizing the domestic producer. Obviously, if the US government moves to a zero income tax on business, the “tax equity” justification for a tariff would go away.
There are also strategic and self defense issues that come into play. The survival of the nation could be at stake in time of war if domestic sources are not available. For example, it would be suicidal for the Unites States to outsource all of its production of military aircraft and spare parts. There are instances when it makes sense to protect a US industry by applying tariffs to ensure the manufacturing capacity is in place during time of war when foreign supply may be cut off. This is a public policy issue which the Constitution gives Congress the power to decide.
I believe you and I also agree on tariff reciprocity. It is economically harmful to domestic industry if the US applies zero tariff to a product category and its trading partners levy tariffs or non tariff barriers on the same products. In a perfect world there would be such reciprocity. However, it has been my experience that importers cheer the elimination of tariffs but then fight any imposition of penalties when the trading partner penalizes US exports or sells products below manufacturing cost in the US market in a deliberate attempt to put US industry out of business.
I would apply punitive tariffs to countries engaging in currency manipulation to drive down the cost of their exports in the US market and therefore create an unfair price advantage. I would also apply tariffs to offset export subsides given by countries in certain industry. The amount of the tariff would be equal to the subsidy. likewise I would assess tariffs to offset the benefit of currency manipulation by exporters. Finally, I would apply non tariff barriers and quotas in a reciprocal way. If country X requires every single unit in a container imported from the US to be physically inspected upon entry, I would apply that same rule to every unit imported into the US from the other country.
Speaking of intellectual property I would ban all trade with nations who do not respect intellectual property rights. Period.
With respect to tariffs for the purpose of protecting US labor, that is a policy decision for Congress. I don’t have a specific number in mind. I do know that in the 35 years after the Civil War, the US had high tariffs and experienced one of the greatest periods of industrial expansion in the history of the world. Tariffs were much higher in the 1950’s and 1960’s than they are today yet the US economy created an unprecedented amount of new consumer and industrial products, and became the world’s leading economy. The Japanese experienced rapid economic growth in the 1950’s, 1960’s, 1970’s despite high tariff and nontariff barriers. They also became a powerful exporting country despite having a protectionist trade policy with respect to their own country. You indicate history demonstrates the harm of tariffs. There are as many examples of countries thriving with mercantilist or protectionist trade policies. I remain unconvinced some level of tariffs is not actually beneficial to the domestic economy.
OK, it looks like we have reached a couple of points of agreement and that overall we’ll have to agree to disagree.
One thing that I would like to point out is, in my understanding, the regulation of commerce powers granted to
Congress was to be intended to ensure that all states freely traded with each other. It was not a blanket permission slip to regulate ALL commerce.
That said, I’d also disagree with your defining the market as commerce. I don’t consider them as equals...Commerce is economic activity, however it is not the whole of the market. The market, as I described before, is a compilation of millions of individual transactions, so in that sense I do understand your attempt to equate the two. However, if we do accept that premise, and if we accept that congress has the power to “regulate ALL commerce,” then we must accept that our federal government is empowered to regulate all aspects of our lives.
I don’t believe that would have been the founders’ intent and I don’t accept that premise. However, I am no supreme court justice, so what do I know! ;-) Given Obamacare your premise is more applicable in reality right now, I grant you that! However, my unwillingness to accept it is what will drive me to fight such tyrannical intrusions!
Have a great week FRiend.
Thanks for the wrap-up. I’ll add that we are likely both in agreement as to the desired outcome on Tuesday!
The founders had differing views of trade policy. Jefferson and his agrarian Republicans favored the modern definition of free trade — no government regulation of commerce, no duties, and no trade agreements with foreign countries. “Our interest [is] to throw open the doors of commerce and to knock off all its shackles, giving perfect freedom to all persons for the vent of whatever they may choose to bring into our ports, and asking the same in theirs.” —Thomas Jefferson: Notes on Virginia Q.XXII, 1782. ME 2:240.
Jefferson also believed in imposing tariffs, duties, and restrictions on trade with nations who did not embrace free trade. “Should any nation, contrary to our wishes, suppose it may better find its advantage by continuing its system of prohibitions, duties and regulations, it behooves us to protect our citizens, their commerce and navigation, by counter prohibitions, duties and regulations also. Free commerce and navigation are not to be given in exchange for restrictions and vexations, nor are they likely to produce a relaxation of them... Principles... founded in reciprocity appear perfectly just and... offer no cause of complaint to any nation.” —Thomas Jefferson: Report on Foreign Commerce, 1793. ME 3:276.
Alexander Hamilton favored protectionist tariffs to offset the subsidies of exports by other nations. George Washington philosophically in favor of free trade, but he signed the first tariff bill in 1789 to protect US industry and raise revenue for the new indebted US government. From Washington’s time to the passage of the 16th Amendment in 1913 (income tax), the federal government was almost completely funded through the imposition of tariffs and duties on imports.
As interpreted by the Supreme Court today, the commerce clause has virtually no limits. Personally I favor a more narrow interpretation of the commerce clause as I too perceive it was primarily intended to deal with regulation of commerce between the states and to allow the federal government to intervene if a state’s unilateral action threatened commerce with foreign countries. However, until we have an amendment to the Constitution restricting the scope of the Commerce Clause, it is likely the Supreme Court will continue to uphold the right of Congress to regulate almost any aspect of business under a very loose interpretation of the clause.
I too wish you a good weekend FRiend. I hope we can both celebrate the election of a president who at least understands the free enterprise system and commerce, whether or not he believes in regulation of commerce.
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