~1850 words
Today, the group of people I have the privilege of annoying is the free trade crowd. Their belief that free trade always produces the most beneficial outcome is one of the main causes behind our economic imbalances, the heavy hand of central banks, the unsustainable dominance of the US dollar as the world's reserve currency, and the prevailing political sentiment of populism.
I'll start where we agree: without question, within a single currency region (or culture) the unrestricted, unimpeded freedom of trade results in the most optimal outcome for not only the parties involved, but the surrounding society as a whole. The problem occurs when trade happens across currency regions between one culture and another.
The incentive structure of our corporations, which forces CEOs to prioritize profits to appease shareholders over ethics to appease their workers - combined with the unquestioned belief in free trade - has created the distorted economic imbalances of today mainly through offshoring. And while there's an evolving sentiment of corporate leaders in the media talking about "ethical capitalism," the truth is there are limits because the bottom line is the bottom line and free market decisions are often forced in order to stay competitive - or to keep your job - despite the best of intentions. Similar to the epidemic of how many baseball players felt "forced" to take steroids to compete with their peers as they witnessed their outperformance while the commissioner looked the other way because historic home run chases were profitable and fun. It's not the players' fault steroid use spiraled out of control; it's the fault of Major League Baseball for not enforcing a standard.
Likewise, I don't blame CEOs over the past three or four decades who moved their manufacturing bases offshore to reduce labor costs. The initial ones were just doing their job of maximizing profits, and the latter ones were forced to stay competitive. I'm not sure to what degree the corporate leaders and their lobbyists in the 90's - who sold the offshoring vision to our politicians (and Bill Clinton in particular) - are to blame since the prevailing philosophical sentiment even among people to this day is that unrestricted free trade creates a win-win for everyone, so the corporations got their agenda pushed through Congress, which led to NAFTA, the WTO, and the hemorrhaging of 13+ million manufacturing (and ancillary) jobs offshore. This is the single biggest cause of our economic problems today and it continues to be underappreciated, or ignored, because no one questions the notion of free trade, so justifications about how we transitioned to a "service" based economy abound, but here is the insight everyone misses: the free market is suppose to organize economies around the comparative advantages of raw materials and natural resources within each country - NOT the differences of individual rights in each culture. Creating third world slaves is not a comparative advantage - it's a cultural choice. And it has consequences.
The global supply chains of today are organized around corporations seeking the cheapest labor with the least amount of worker rights; whereas, the natural order - if all cultures treated their citizens equally - would organize around the natural resources indigenous to each land (and the transportation costs influenced by geographic terrain). There is nothing natural about our modern supply chain - it's the result of cultural choices, which were influenced by the unquestioned belief that free markets always produce the most optimal outcome, so CEOs - incentivized by profit - and politicians - funded and influenced by corporations - created laws and trade deals to exploit cheap labor overseas and poof! went our manufacturing base. All the expansionary fiscal and monetary policies of the last thirty years are desperately trying to fill the domestic economic hole left in its wake, but it only masks the problem like heroin suppressing signals of pain.
The consequences of massive and mounting trade imbalances has shaped every aspect of our economy from the opiod epidemic in our devastated blue collar towns to the widening political divide driving the prevailing sentiment of populism to the fiscal deficit spending and monetary madness attempting to ease the loss of manufacturing. The flow of dollars out of the country in the form of our trade deficit helped create the base for the global Eurodollar system of today, which amplified the world's over dependence on the US dollar and created an unsustainable "exorbitant privilege" for the US to become a superpower because it allows our fiscal and monetary profligacy to delay the consequences of runaway inflation and the rising interest rates that would naturally keep it in check.
The idea that we are benefiting from this perverse arrangement is disingenuous and blinded by ideology. Yes, corporations can exploit overseas labor and manufacture cheap gadgets for US consumers to buy, but we don't simply exchange our pieces of fiat paper for the TVs, phones, and computers foreigners produce. They take those US dollars and buy our property and our businesses, or invest in whatever they want, so essentially, if you strip away the medium of exchange, we're trading our US real estate, and businesses, for disposable devices. That's the reality of running a trade deficit. The fact that our trading partners bought our Treasury Bonds for so long is their mistake. As soon as they stop (and it seems like they are slowing down), we will have to finance our government deficits internally, which is why this entire unnatural "free trade" philosophy that infected our CEOs and politicians like a virus, and created unsustainable economic imbalances must be corrected, or the system will force it upon us. The wrong way to do it is with tariffs. So, what's the right way? I'm glad you asked.
Like the universal unit of account, what the world needs is a mutually agreed upon global standard. Anything less is a haphazard tit-for-tat trade war that solves nothing, and while I do understand that a global standard seems politically impossible, the current imbalances will end in such a devastating crisis that it will force open the minds of everyone involved to real solutions, so one day miracles will indeed become possible.
I call this global standard to correct our current system the Border Neutralization Adjustment (or BNA), which is designed to neutralize the cultural differences in worker rights, so the global supply chain can once again organize around natural resources. As opposed to tariffs that target specific products and countries, the BNA would be based on a computer algorithm that calculates a wide range of inputs from each culture (like wages, benefits, entitlements, shipping, regulatory costs...) to determine how much the same product would cost to manufacture in each country and then use the differences as an automatic "tariff" that's added in trade across those regions (also factoring in currency differentials). For example, if it costs $30 to make a certain motherboard for a laptop in China, but it would cost $55 to make it in the US (due to our wages, benefits, and regulatory costs...) then the Border Neutralization Adjustment would add $25 to import that product from China. If the BNA between Brazil and China is only $5, then the adjustment would reflect that, so each country would have a BNA calculation in relation to every other country for every component of every product, which a well designed computer program could figure out in real-time. And if you think China would not be interested, wait until their manufacturing base flees to Africa or some other 3rd world country and they realize they made the same mistake we did.
I understand not only the profound change this would cause in supply chains, which is why it would have to be phased in over a long time, but also the enormous resistance this idea would meet, but that doesn't make the result any less true: a Border Neutralization Adjustment would incentivize local manufacturing across the globe, which would dramatically reduce our fossil fuel usage, and it would encourage raising worker rights to a higher standard in areas where humans are exploited for profit by corporations. The result would be supply chains as close to the end consumer as possible and organized around the natural resources that are the real comparative advantages of each country.
Yes, this would mean the prices of our gadgets (and all our imports) would go up significantly, but it would also mean a return of the higher paying, stable jobs that fled offshore under the false idea that free trade always leads to the most optimal outcome. Yes, it would mean our fiscal and monetary profligacy would have more immediate consequences since we would no longer be exporting our dollars (and therefore inflation) overseas. Yes, it would create a shortage of overseas dollars that would need to be converted or written off the books of offshore shadow banks (and likely bailed out by the Fed). Yes, companies like Fedex, UPS, and other global shippers could lose a lot of business. Yes, it would force a global military cooperation because the US could no longer afford to run an empire. Every change creates winners and losers, but the point is our current system is culturally created around the idea that free trade always leads to the most optimal result when clearly it does not, and the imbalances it created over the last four decades are reflective of that, and destined to fail.
If supply chains flee China due to unilateral tariffs in a haphazard trade deal, corporations will simply seek out other countries with low wage workers to exploit. The only real solution is a global standard like a Border Neutralization Adjustment to reverse the trend in offshoring that evolved over the last 40 years (which happens to coincide with falling interest rates). Whether our current system needs to end in a crisis that opens people's minds to real solutions, or whether we continue to patch together band-aid individualistic ideas fueled by division and populism is yet another choice we face that will dramatically shape our future.
Here's the calculus in a nutshell: profit seeking corporations funded politicians to create trade deals to exploit cheap labor overseas. Millions of stable jobs fled offshore from First World countries to Third World countries in the name of free trade. Inflation got exported in massive trade deficits, which contributed to 40 years of falling interest rates and made expansionary fiscal and monetary policies impotent to inflate anything but asset bubbles. US consumers got cheap gadgets. China got US dollars, which they recycled into Treasury bonds, funding profligate politicians. Central bankers misdiagnosed the problem and scratched their heads about the lack of inflation. Politicians cranked up the deficit machine. The wealth gap widened, voters got mad and elected a showman promising to bring back jobs because trade wars are easy to win. But jobs didn't come back because unilateral tariffs don't work. Central bankers pour over data and shrug their shoulders: full employment and no inflation, so they cut rates and resum QE. Politicians spend like lotto winners... Rinse, wash, repeat: wealth gap widens, voters get angry, lunatic politicians emerge. Nothing gets solved. No one questions free trade. Bubbles get bigger, pressures the currency. The currency pops.
OR...
We realize our mistakes and make proactive choices to fix them - before it's too late.
