[Audio] Commentary: Understanding Free Trade and Targeted Tariffs
Whoever wins the presidency in 2016, one of the central issues they'll face is the concern of many voters that American jobs are falling victim to free trade while wages stagnate. Murray State University Professor Emeritus of History and Commentator Dr. Bill Schell breaks down this concern and offers a way the next White House occupant could address it.
Note: The views expressed in this commentary are solely those by the commentator and don't necessarily reflect the views of WKMS.
Free Trade and Targeted Tariffs
by William Schell
As the election nears, the only thing Clinton and Trump agree on—at least in their campaign rhetoric—is that free trade is bad for America. While this has always been Trump’s public position, Clinton is a recent, expedient convert to neo-protectionism. Indeed, until pressured by Bernie Sanders, Clinton had praised the 12 nation Trans-Pacific Partnership as the “gold standard” of trade treaties. Of course, Trump delights in pointing this out, notwithstanding that most of his name brand products—shirts, eye glasses, fragrances etc.—are manufactured abroad where labor is cheap and regulation lax. Trump even built his towers with Chinese steel, as Clinton delights in pointing out. Meanwhile Wall Street financial analysts, alarmed by the candidates’ neo-protectionism, have written a flood of editorials warning that China is ready to step into America’s shoes should America abandon free trade.
One of the main arguments made by American entrepreneurs in support of free trade is that it will open new markets to American products, producing an economic expansion at home which will then trigger a rise in wages. Simultaneously outsourcing manufacture will spur modernization in less developed countries (LDCs). Yet the benefits of competitive advantage, that proponents of free trade say come with outsourcing manufacture to countries where wages are low and safety and environmental regulations few, are clearly antithetical the claim that free trade will also raise wages. In Mexico, for example, real wages plummeted with the implementation NAFTA which sent millions of migrants to the US helping to depress wages there. But the search for cheap labor by the international corporations is relentless. Why pay Mexicans a dollar an hour, ask the CEOs, when we can move our operations to Bangladesh and pay workers 80 cents a day? And so it goes.
The consequences of the search for cheap labor associated with economic globalization has been pernicious for workers everywhere. From about1970 to the present, real wages in America (wage adjusted for inflation) have been stagnant at best. Although women’s wages have increased their increases were offset by a 19% fall in men’s wages. In the era of leave-them-alone-and-they’ll-come-home Reaganomics however, nothing was done. Rather, following the 1999 repeal of the Glass–Steagall Act, the real economy (agriculture, industry, service etc) was increasingly dominated by the deregulated financial sector. Subsequently when subprime mortgage speculation by Lehman Brothers, Bear Stearns, Citi Bank and other financial institutions triggered the Great Recession of 2007, suddenly free markets proponents were calling for government assistance to bailout the corrupt financial institutions whose criminality caused the crisis.
When the 700 billion dollars originally budgeted for this proved insufficient, Secretary of the Treasury Henry Paulson created the Troubled Asset Relief Program (TARP) which eventually pumped 4.6 trillion dollars in the financial sector. Meanwhile government offered the real economy only a miserly 787 billion-dollar fiscal stimulus package. Paul Krugman and other Nobel laureate economists criticized this as being far too little, even as congress whined that it was too much. In addition the stimulus programs were so poorly administered that seven million workers lost their homes while wages remained flat along with the consumer confidence and spending necessary for a full recovery.
The growing dominance of the financial economy has caused politicians to lose sight of one of Adam Smith’s basic insights—that the real economy is driven by consumer spending. Left unchecked the Malthusian Iron Law of wages, made real by outsourcing, will increase impoverishment by destroying the consumer base upon which global prosperity depends. Only by deepening the global consumer base and spending can a global recovery be realized. But what can America do to deepen the global consumer base, when it is the search for cheap labor that sent American manufacturing overseas?
Perhaps ironically, neo-protectionism, properly articulated, may provide a solution. This might be done as follows: The US would give a choice to corporations that a judged to pay their workers too little to be consumers. To gain unrestricted access to the all-important US marketplace, importers must pay their workers a living wage by local standards, thus turning them into consumers whose purchases would drive their national economies, making them less dependent on access to American markets while simultaneously providing markets for American exporters. Foreign companies that do not pay their workers a living wage by local standards would have to pay an equivalent tariff on their imports.
The rational choice for importers would be to pay workers more. This strategy of targeted social tariffs would end the race to the bottom in wages that now restricts global economic growth (which is consumer driven). Paying higher wages would deepen the national markets of LDCs, making them less dependent upon the export of goods and people to the US. The result of a strategy of targeted social tariffs would be a win-win situation for the US and for the rest of the world.