Is Free Trade Harming the Economy?

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I generally get inspiration from the mindless crap (aka opinion) the media pumps out pretending it is news. The media has turned from being mostly biased towards (and non-objective about) the Obama Administration - and mostly biased against (and non-objective about) the Trump Administration. Could it be people are not objective when it comes to those they like or hate?

Most of my posts are aimed at cherry picked points perpetrated by the media or pundits that are misleading and not objective.

The focus of this post is again on free trade.

I continue to witness a significant media slant advocating unrestricted free trade is the only way the USA should go (likely because Trump wants to go the other way). I personally believe that monitored and optimized free trade is in the best interests of the USA. I also believe President Trump has not properly framed the problems with free trade (or for that matter, proposed solutions that will work).

You will note that literally all posts on free trade have little data to support their position. That is because there is little data to support any trade position except through extrapolation, coincidence, and smoke and mirror correlations. Economists like to point out that the USA (and the rest of the world) imposing duties exasperated the depth of the Great Depression. From Wikipedia:

Henry Ford and Edward A. Filene were among prominent businessmen who were concerned with overproduction and underconsumption. Ford doubled wages of his workers in 1914. The over-production problem was also discussed in Congress, with Senator Reed Smoot proposing an import tariff, which became the Smoot Hawley Tariff Act. The Smoot Hawley Tariff was enacted in June, 1930. The tariff was misguided because the U.S. had been running a trade account surplus during the 1920s ....... Governments around the world took various steps into spending less money on foreign goods such as: imposing tariffs, import quotas, and exchange controls (Eichengreen, B.). These restrictions formed a lot of tension between trade nations, causing a major deduction during the depression. Not all countries enforced the same measures of protectionism. Some countries raised tariffs drastically and enforced severe restrictions on foreign exchange transactions, while other countries condensed trade and exchange restrictions only marginally.

The problem with associating trade duties and the depth of the Great Depression is two fold:

  • The world was on a gold standard. Literally a negative trade balance could wreck havoc on a country using a gold standard currency. [Note that this is what is happening in the Eurozone as the Euro is not a sovereign currency- which technically is the same noose of a gold standard currency.]

  • Trade declines naturally in global recessions. You can integrate and differentiate until your face falls off - but there is no way to scientifically prove which portion (if any) of a trade decline in a recession would be due to tariffs. [Logically tariffs do reduce trade volumes and increase prices to consumers.]

Trade is affected by overproduction - and this is one of the major causes of the Great Depression. No one needs to import when you already have too much within the country.

Trade is good and necessary when optimized - but thinking that unrestricted trade is always great, and import duties are always bad is not logical.

The problem with trade and agreements is like every other thing the government does - they pass the law and / or enter into an agreement, then forget about it until something goes terribly wrong. All laws and all agreements must sunset. Trade continues to change, and the economic dynamics associated with trade also change.

Composition of world exports by product type (1962 to 2014)

Further, there is not a one-size fits all solution. Every trading relationship needs to be examined and continuously optimized trying for a win-win between parties.

There is a place for duties in trade relationships - but a shot gun approach with blanket duties on all things does indiscriminate harm to consumers and business.

Other Economic News this Week:

The Econintersect Economic Index for February 2017 again improved but the value remains in the territory of weak growth. The index remains well below the median levels seen since the end of the Great Recession. But there are several indications in the data we view of better dynamics in the future. Six-month employment growth forecast indicates little change in the rate of growth.

Bankruptcies this Week from none


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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