Free Trade versus Balanced Trade

Raymond Richman, Howard Richman, and Jesse Richman have put together a short piece explaining the difference between free trade and balanced trade entitled, of course, Free Trade vs. Balanced Trade over at the American Thinker. Free trade and balanced trade are often, though not always, the same thing. When countries are not deliberately putting their thumb on the scales, a practice known as mercantilism, free trade works to both parties advantage. But, when one party manipulates its currency to put the other country at a disadvantage, free trade no longer works as balanced trade. Indeed, one can look upon such manipulations as a form of warfare.  In the period from 1960 to 1990, the Japanese were practicing mercantilism against the United States.  Now, it is China.

You can read for yourself the effects that having an chronic trade deficit has had upon our economy, and as a result, on our standard of living. Hardest hit have been blue collar workers. Technology alone has hit the blue collar trades hard, but then to add the insults of an unfavorable trade balance has sucker punched them.  While costs have increased at an alarming rate, the actual income for thse people has been going backward.  And this effect is slowly creeping up into the white collar jobs as well.  Is it any wonder that Trump supporters boiling mad and that that anger is ready to boil over.  And Hillary calling them a "basket of deplorables" seems more like a badge of honor.  Well, here is the cause:

The Problem of Mercantilism

Most of the problems of international trade are related to the fact that a number of countries have been running chronic trade surpluses which cause chronic trade deficits among their trading partners. They are following the mercantilist prescription of running trade surpluses in order to grow their economies more rapidly.

Almost all economists have decried mercantilism. For example, Adam Smith, the founder of modern economics called it a policy of “beggaring all their neighbors,” because mercantilists intend to grow at their trading partners’ expense.

The problem is that mercantilism works if trading partners tolerate it, as John Maynard Keynes, the founder of modern macro-economics pointed out in the chapter about mercantilism in his 1936 magnum opus The General Theory of Employment, Interest and Money:

[A] favorable [trade] balance, provided it is not too large, will prove extremely stimulating; whilst an unfavorable balance may soon produce a state of persistent depression. (p. 338)

China and several other Asian countries have successfully grown their economies at U.S. expense by following the classic recipe for mercantilism as laid out by University of Chicago economist Jacob Viner in 1948 and Chinese economist Heng-fu Zou in 1997.

Mercantilism gives faster economic growth and increased political power to the trade surplus countries, but gives trade deficits, slower economic growth, and reduced political power to their trade-deficit victims. The correlation between trade balances and changes in political power are striking, as we demonstrated statistically in a recent conference paper.

Unfortunately, the majority of the American economic profession has completely ignored the growing research about the destructive nature of chronic trade deficits and about ways to combat them. For example, in their popular international economics textbooks, now in their tenth and eleventh editions, Paul Krugman (with his co-authors) and Dominick Salvatore never consider the causes of chronic trade deficits, and never offer remedies to those trade deficits.

What Trump has been laying out as his economic policy is a series of steps that allow the Federal Government to balance trade by imposing tariffs when a country manipulates its currency, as China is doing, to re-balance the trade deficit.

Another is Prof. Peter Morici at the Robert H. Smith School of Business of the University of Maryland and former director of the Office of Economics at the U.S. International Trade Commission. He now supports a dollar-yuan conversion tax that would be applied to Chinese imports into the United States at a rate that would be adjusted to the rate of Chinese currency market interventions.

If Trump is elected, and is successful at putting an end to massive illegal immigration, vetting immigration from Muslim countries, and curtailing unbalanced trade, we might yet save, truly save, the middle class. The middle class is the hard working, tax paying, yeomanry of America, without whom both the poor and the rich do not survive. Beyond restoring the middle class, Trump also needs to work to reform education so that the middle class has the tools to compete in the world.  we can't all be rock stars and fashion designers. Somebody has to make cloth and guitars.  Why not us?

But more important than this, we need industries to actually make stuff in America because if we have to go to war, and we have to import this stuff, we don't want too be in a position of importing it from a hostile nation.  The steel industry has largely gone overseas.  The ship building industry has gone overseas.  Only Ford remains as a private company building cars and light trucks in the US, and Ford imports a lot of parts from overseas.  General Motors has become Government Motors, and Chrysler is now the American face of Fiat.  Fiat for crying out loud!  Just imagine fighting WWII today.  I realize we probably won't have to fight a WWII, but if we are not prepared to, we surely will.  Si vis pacem, para bellum-If you want peace, prepare for war.