In recent days, President Obama and much of the Democratic establishment have doubled down in support of the Trans-Pacific Partnership (TPP), especially in light of Donald Trump’s measured speech Monday about his plan to cut taxes and renegotiate US trade deals. But it’s time to get something straight: This isn’t a partisan issue.
So-called free trade is bad for the US middle class, and it has been ever since Ronald Reagan, the Republican savior himself, declared that:
Almost all responsible economists … are unanimous. They agree that free and fair trade brings growth and opportunity and creates jobs. And they warn that high trade barriers, what is often called protectionism, undermines economic growth and destroys jobs. I don’t call it protectionism; I call it destructionism.
It’s been just over 30 years since Reagan proclaimed that, and every president since then has followed the religious belief that so-called “free trade” will save us all. And 30 years later, it’s pretty clear that Reagan was dead wrong about trade, and so are the Democrats today who are saying the same thing.
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The fact is, sweeping trade deals like the North American Free Trade Agreement (NAFTA), the TPP and the Transatlantic Trade and Investment Partnership (TTIP) only benefit the CEOs of the corporations that are at the negotiating table.
Democratic proponents of so-called free trade make it seem like the options are either antiquated tariff-based protectionism or forward-thinking globalist “free trade” deals.
But Democrats have historically been the party that opposes these sort of sweeping corporate-managed trade deals and supports the kind of tariff based — or VAT-tax based — trade that made the US the most powerful manufacturing powerhouse that the world had ever seen.
The truth is, the only way that countries can really benefit through trade is if the two countries have different resources or different specialties, what economist David Ricardo called “comparative advantage.”
For example, the soils in France are well-suited for growing grapes for wine, and the soils in Scotland are better for growing barley and wheat.
By applying human labor to fields of grapes and grains, both countries would have used their comparative advantages — their soils and climates — to produce a product to trade with that benefits citizens of both nations. Everybody in both countries can eat bread with their wine.
But what happens if France starts growing wheat in a big way, in addition to making wine? What happens if they can grow it cheaper than Scotland? In a “free trade” scenario, that would lead to Scottish farmers getting wiped out by French wheat exports, which could then lead to hungry, poor Scots fleeing Scotland for the relatively more prosperous France, producing a challenge for both nations.
And that is, by the way, virtually exactly what happened when Mexico and the US signed NAFTA and US corn growers began selling super-cheap corn into Mexico where small, subsistence-level farmers were previously the major source for that staple in the Mexican economy. Our cheaper corn put over a million Mexican farmers out of work, driving some into the slums of Mexico City, and others across the border into the US in search of work.
It seems like a deal that would advantage one country and screw another, and, interestingly, that’s exactly what “free trade” was originally designed to do.
King Henry VII’s “Tudor Plan” of 1485 did that. By placing high tariffs (taxes) on the export of raw wool and on the import of finished woolen products, he discouraged the export of wool and encouraged the manufacture of fine woolen goods in England.
South Korea is a modern example of the impacts of such tariff-based trade policies. In 1960, the country’s average annual income was under $700 a year, about that of Kenya, and South Korea’s major exports were fish and human hair for wigs.
The Korean company Samsung started out exporting fish, fruits and vegetables, but in 1961, Gen. Park Chung-hee embraced tariff-based trade to protect the fledgling Korean economy from being exploited under so-called “free trade.” With high export tariffs on raw materials and high import tariffs on manufactured goods like cars and electronics, South Korea was able to incentivize its fledgling manufacturing industries and quickly develop domestic plants to manufacture electronics, machinery and chemicals. As a result for South Korean citizens, per-capita income grew more than five times in just the seven years between 1972 and 1979.
It worked here, too, only we started it in 1793.
For essentially 180 years, from the time that Alexander Hamilton laid out his 11-point plan for “American Manufactures” that called for tariffs, until the time that Reagan began dropping our tariffs and “liberalized” US trade policies, our country led the world in manufacturing and prosperity because of our tariff-based trade system and our support for domestic industries.
While today “tariffs” have become a dirty word, our trading partners use VAT taxes (value-added taxes) instead of tariffs, with the same effect as tariffs.
The VAT tax in Germany, for example, is 19 percent, so when a US automaker wants to sell a car to a German, there is a 19 percent value -dded tax added onto its price by the German government, effectively a 19 percent import tariff. And when a German-manufactured car is sold to an American in the US, Germany drops the price of the car by that same 19 percent, essentially adding on a 19 percent export subsidy.
German consumers are encouraged to buy German-made cars, because an imported car that cost $25,000 to manufacture would be sold in Germany for $29,750, effectively acting like a “protectionist” import tariff. It also makes German cars relatively more affordable on foreign markets, effectively acting like a “protectionist” export subsidy.
Germany is not alone in this. Japan, South Korea, China, Taiwan and most European nations do the same thing. The only developed country without a VAT tax to use as an effective tariff is the US. Nothing protects our workers or manufacturers, which is just fine with the big transnational corporations making billions exporting our jobs.
Leading Democrats, including President Obama, should stop falsely claiming that globalist so-called “free trade” is the only way of the future while slurring progressives (and many conservatives) by calling them “protectionists” who want to “turn back the clock.”
So-called “free trade” isn’t the way of the future; it’s a broken model that global elites have pushed since Ronald Reagan, and it’s forced tens of thousands of US factories to close and cost millions of Americans their well-paying jobs.
If we want to grow the US middle class and create a prosperous country again, it’s time to reject the TPP and withdraw from so-called trade deals to which we are signatory, and it’s time to take a page from our trading partners and implement a VAT tax (or return to tariffs) to make US-made goods cost competitive and bring about an American manufacturing renaissance.