Free trade is a 2-way street

| by atm Atom
Free trade is a 2-way street

photo istock

by Daryl Cornell, CEO, Triton Systems

Free trade is a good thing. Two-way free trade, that is.

Economics 101 and the law of comparative advantage tell us that each country and economy has a unique set of resources and skills that should determine what gets produced. Through two-way, free trade, countries are better off producing things at lower opportunity costs and trading fairly for other goods.

While this is unquestionably disruptive to disadvantaged industry segments globally, a world where people focus on what they can most efficiently produce and cooperate willingly with others of a similar mindset is a happier, wealthier and more productive planet.

Unfortunately, it is when sound theory meets the real world that things usually get messy.

While not perfect by any stretch, the U.S. has generally led the world in negotiating regional and bilateral free trade agreements. These agreements have historically opened up new markets to American products and services in exchange for providing other countries with access to more than 300 million affluent (by global standards) customers.

However, like all things complicated, the status of trade between countries constantly ebbs and flows. As a result, these trade programs inexorably evolve and must be actively managed in order to keep trade free.

Unfortunately, this simply has not happened in the U.S., where politicians normally take a victory lap after trade agreements are inked and then proceed to place them on the proverbial shelf.

The result, unfortunately, has been trade that is now far from free. A near total lack of oversight of U.S. trade agreements has yielded several predictable results.

Firstly, large segments of the U.S. economy have been savaged as trading partners flood the U.S. with imports, often bankrupting U.S. manufacturers. Secondly, these "trading partners" implicitly or explicitly restrict the import of American-made products while the architects of these so-called free trade agreements are nowhere to be found.

The result has been a steady stream of U.S. trade deficits for the last 40 years. The lessons from our trade quagmire, which should have been obvious from the start, are as follows:

Closed markets are not free trade

There are many ways for a country to close its markets to the importation of U.S. goods.

One method is to declare the domestic production of a product as "strategic." By insisting that these goods must be sourced locally in order to protect national interests, governments effectively shut out the U.S.

A second, equally effective, means of closing markets is for buyers to insist on purchasing domestically made products. The collapse of quality in the U.S. auto market in the 1970's began conditioning Americans to demand the highest quality goods at the lowest possible price — in essence, free trade.

While we assume that other countries operate in a similar manner, the stark reality is that they don't. Favoring domestic products and the jobs they support remains the highest priority in most countries, price be damned.

The result has been a flood of imports into the U.S. while many export markets remain effectively closed to U.S. industries and manufacturers.

Dumping is not free trade

Another method countries use to increase domestic production and exports to the U.S. is by "dumping" large quantities of products into the U.S. at low prices.

This allows foreign competitors to buy market share while running domestic producers out of business.

Most people assume that the definition of dumping is selling products at a loss, which is nearly impossible to prove. That definition is incorrect. Dumping is selling goods in foreign markets at prices cheaper than those charged domestically.

This allegation is far easier to substantiate and it's here where U.S. trade agreements have proven to be the most vulnerable. Unless dumping charges are brought by American companies against foreign competitors, the dumping continues unabated.

Given that it can take many years and very deep pockets to pursue dumping claims, many companies fold or simply give up before their claims can be heard. As a result, the parade of dumped imports continues unchecked while the U.S. government remains asleep at the wheel.

Long-term trade imbalances are not free trade

The last time the U.S. had a trade surplus was in 1975. In 2016, the deficit was more than $500 billion — two-thirds of which was our trade deficit with China — despite of the fact that oil imports are at recent historical lows.

Now, to be clear, a surplus of imports does tend to raise the American standard of living, while keeping a lid on inflation. However, as the U.S. has steadily outsourced the production of goods over the last 40 years, hundreds of thousands of factories have closed, taking jobs with them.

While creative economic disruption and the culling of inefficient companies is a positive hallmark of capitalism, not all of these companies were deserving of death. Many have been swept away by the brutal combination of effectively closed export markets and a torrent of cheap imports.

Making trade free will require the U.S. to get serious about leveling the playing field in all industries, not just raw materials. The paradox is that elected officials and their trade appointees are focused on the companies and industries that spend millions to get them elected, leaving the forgotten American manufacturing economy to rot.

Topics: Manufacturers, Trends / Statistics

Companies: Triton

atm Atom
Posts for the atmAToM blog are contributed by a collective of writers from Triton Systems and ATMGurus — seasoned ATM pros who thought they might like to share a few things they've learned during the last 30 years in the ATM industry. wwwView atm Atom's profile on LinkedIn

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