What is a Free Trade Treaty?
With the upcoming April 13, 2015 vote on The Trans-Pacific Partnership Treaty (TPP), it may be important to know what a Free Trade treaty is (which the TPP is). This article is devoted to the non-economist in all of us. But, in order to define “Free Trade”, we must first know what “Import Tax” is, because “Free Trade” basically eliminates import taxes. As I am writing this article for an American audience and will use references specifically to the USA. For the bullet points, skip to the Economics for Dummies points.
Import Tax History in the USA
Import tax is a tax on materials that comes from other countries. It has two functions: 1) to protect businesses in the United States from foreign competition; and 2) to raise money for the government, so as to finance standing armies and other functions. Our forefathers knew that American businesses needed protection from foreign competition. In the original “Constitution” called the Articles of Confederation (1776-1783), which was a loosely based agreement of governance by the individual states, there was no import tax and American businesses suffered greatly from all the numerous British imports. After the Articles of Confederation was thrown out, the U.S. Constitution was written and ratified to establish a strong central government. Alexander Hamilton, founding father and first Secretary of the Treasury, established (or re-established like in colonial times) import taxes and protected American businesses from having to survive practices such as “dumping” – where a foreign country produces so much of the same product that it artificially drops the price of that object giving the foreign nation an unfair trading position. Economics For Dummies Point: Import Tax and “Protectionism” had been an unqualified success in the United States for over two centuries.
Inventing a New Way of Thinking – Free Trade
The “New Way of Thinking” actually came from very old thinking of Adam Smith (1723-1770) and his disciple David Ricardo (1772-1823) who wrote about the theory of comparative advantage in his 1817 book On the Principles of Political Economy and Taxation, it makes a case for free trade based not on absolute advantage in production of a good, but on the relative “opportunity costs” of production. A country should specialize in whatever good it can produce at the lowest cost, trading this good to buy other goods it requires for consumption. This allows for countries to benefit from trade even when they do not have an absolute advantage in any area of production. Criticism Of Ricardo’s theory: The theory was written in 1817, before there was Industrialization or mass production; before there was dependable transportation like steamships, freeways, semi-trucks, airplanes or goliath cargo ships; and well before globalization where you communicate instantly between countries and before countries could “change their specialties” in a couple of years. None of Ricardo’s mathematical formulas even came close to addressing this. And overall, very few countries practiced Free Trade Treaties and, therefore, it was put on the shelf for many years. It does seem that this 1817 theory would have absolutely no relevance to the late 20th or 21st Century, but we would be wrong. Economics For Dummies Point: Free Trade eliminates import taxes which makes cheap crap from China even cheaper.
The Return of Free Trade
So, why would this outmoded 1817 theory that was never truly tested have a comeback? Let us look at few of the factors. America’s hubris was at its highest, in the late 1970’s. America was definitely the number one economy in the world and the world’s largest manufacturer. There wasn’t even a close second. The U.S. ruled the entire world, installing puppet governments and paying other countries to be our friends (we still pay countries to be our friends). America could do no wrong.
Then, there was the new school of economists, now called Libertarian Economists (in classic economic terms it was called Liberal Economics but it became very confusing and so it is rarely called that) lead by Milton Friedman, (financial adviser to President Ronald Reagan) and later Alan Greenspan (chairman of the Federal Reserve) who had bold “new”plans like “Trickledown” economics, an obsolete policy that did not work in the 1920’s, where it proposed that if you gave more money (decreased taxes) to the richest people, this money would gradually trickle down to the masses (which it never did), and “De-regulation” where control is done only by the businesses themselves -like in the 1700s (As well as the aforementioned revival of Free Trade).
Then, there was also the “Mega” business movement. Within this movement (economists forgot 200 years of banking tradition), it proposed to make banks not only interstate, but also international. This created too big too fail banks who possessed more assets than most countries. With this “Mega Movement” regular companies jumped in and laws were allowed to let them become mega-companies. These Mega-companies by their sheer volume were able to artificially bringing prices down and therefore eliminated most small business and middle size companies. Thus, the “Big Box Store” boom was created and the importance of small businesses became a thing of the past. Economics for Dummies Point: Factors that allowed Free Trade to prosper was unimpeded greed.
The Passage of Free Trade Treaties
The first Free Trade Agreement was negotiated by the Reagan administration and signed into law by President Ronald Reagan. This treaty was between the United States and Canada. The next free trade trade was spearheaded under the George H.W. Bush administration in 1990 which was to be called the North American Free Trade Treaty (NAFTA) – an agreement between Mexico, the USA and Canada. NAFTA became famous as it was debated in the public forum (unlike all other Free Trade Treaties). In the Presidential Debates of 1992 between incumbent President Bush (R), Bill Clinton (D) and third party candidate Ross Perot, Mr. Perot correctly predicted if the U.S. passed NAFTA “we would hearing “a giant sucking sound” coming from the south, which was his colorful phrase for the future term called offshoring. Bill Clinton won the 1992 election and NAFTA passed in 1994. Within 8 years, 700,000 American jobs were sent to Mexico. Here is a classic example of NAFTA: Hershey’s Chocolates no longer make any chocolate in the United States, it is all made in Mexico. As Hershey’s offshored all of its US jobs to Mexico it has created numerous manufacturing ghost towns of cities like Oakdale, CA, Robinson, IL, Hazelton, PA, Stuart’s Draft, VA Naugatuck, CT and, Hershey’s PA.
Then, came the mother of all Free Trade agreements, with the formation on January 1, 1995 of the World Trade Organization. Talks had started in earnest under The Ronald Reagan administration in 1986 to replace the previous world agreement called The General Agreement on Tariffs and Trade (GATT) – the most successful world agreement in history running from 1/1/48 to 1/1/95 (although it had been reality been phased out in 1986). With the GATT agreement, there were many agreements with favored countries to lower import tax rates. But with the WTO – this became an agreement with 161 countries with China joining in 2001. The WTO had really forced down import tax rate on products shipped to America.
Historically, in the 1800’s the average rate on import tax was anywhere from 15% up to 50%. From 1960-1970, the import tax rate was between 6.0 – 7.3%. In 2015, the import tax rate into the United States on average is 1.5% which is one of the lowest if not the lowest in the world. And with extremely low rate, it has allowed countries like China to overproduce and drive out U.S. businesses or even worse caused U.S. companies to pack up and join the enemy – offshoring of U.S. jobs. Economics for Dummies Point: Free Trade Agreements have virtually eliminated import taxes allowing companies to offshore U.S. jobs
The Effect of the WTO
Below are two graphs. One is the loss of manufacturing jobs in the U.S. due to Free Trade and the second graph is the actual Gross Domestic Product (GDP) figures (a way to characterize economic growth) of the U.S and China. Note in 1999, China was preparing to join the WTO (which it did in 2001) by revving up its factories as it knew that this was exactly the time that the United States was eliminating quotas (The quota laws called the Multi Fibre Acts were passed in 1974 to protect U.S. companies from “dumping”). And then China continuously dumped their untaxed products onto the United States. Did David Ricardo predict this? Did Milton Friedman predict this? No, only Ross Perot did.
Besides NAFTA and the World Trade Organization which affects 160 other countries, the United States also has 13 other smaller Free Trade agreements. Really too small to even mention individually. Economics For Dummies Point: Free Trade Agreements are devastating to the U.S. economy especially the World Trade Organization.
Other Criticisms of Free Trade
There are many arguments besides economic against Free trade policies. First, Free Trade heavily favors large corporations destroying infant industries as well as the small and medium sized companies. It undermines long-run economic development – it is difficult to revive manufacturing ghost towns, and difficult to plan for growth when American jobs can be offshored at any time. Free Trade has definitely caused income inequality, and environmental degradation.
Free Trade is supportive of countries sticking to their native practices which often means supporting child labor and working in sweatshops where workers get no benefits in often poorly ventilated and dangerous work environments.
Free Trade has definitely caused the race to the bottom, wage slavery, accentuating poverty in poor countries, harming national defense, and forcing cultural change. One additional criticism is that it allows large corporations to ignore local, state and governmental rules and laws: U.S. Appeals WTO Ruling on Meat Labeling Laws – where the American Meat Institute refused to label their meats as to where the originated. The Congress has successfully repealed the Country of origin labeling law this past winter. Instead of raising global standards, free trade tries to lower standards of countries that are more advanced. All of these inequities have been created so you can buy cheap crap from China at even lower prices. Economics for Dummies Point: If You Think Free Trade is Good, Then You Are a Sociopath.
What To Do About The Trans-Pacific Partnership Treaty?
Do we really need another free trade agreement, our import tax rate is already a record low at 1.5%. We already know the economic impact of previous Free Trade policies. It has been very devastating to the U.S. economy. If you want to stop the TPP from becoming a reality, you will need to write, or e-mail or tweet your Congressman. I have a link that will get you the address or email of your Senator: Listing of U.S. Senator addresses. Write today. the job you save may be your own or at least your neighbors. Stop the TPP!
With the upcoming April 13, 2015 vote on The Trans-Pacific Partnership Treaty (TPP), it may be important to know what a Free Trade treaty is (which the TPP is). This article is devoted to the non-economist in all of us. But, in order to define “Free Trade”, we must first know what “Import Tax” is, because “Free Trade” basically eliminates import taxes. As I am writing this article for an American audience and will use references specifically to the USA. For the bullet points, skip to the Economics for Dummies points.
Import Tax History in the USA
Import tax is a tax on materials that comes from other countries. It has two functions: 1) to protect businesses in the United States from foreign competition; and 2) to raise money for the government, so as to finance standing armies and other functions. Our forefathers knew that American businesses needed protection from foreign competition. In the original “Constitution” called the Articles of Confederation (1776-1783), which was a loosely based agreement of governance by the individual states, there was no import tax and American businesses suffered greatly from all the numerous British imports. After the Articles of Confederation was thrown out, the U.S. Constitution was written and ratified to establish a strong central government. Alexander Hamilton, founding father and first Secretary of the Treasury, established (or re-established like in colonial times) import taxes and protected American businesses from having to survive practices such as “dumping” – where a foreign country produces so much of the same product that it artificially drops the price of that object giving the foreign nation an unfair trading position. Economics For Dummies Point: Import Tax and “Protectionism” had been an unqualified success in the United States for over two centuries.
Inventing a New Way of Thinking – Free Trade
The “New Way of Thinking” actually came from very old thinking of Adam Smith (1723-1770) and his disciple David Ricardo (1772-1823) who wrote about the theory of comparative advantage in his 1817 book On the Principles of Political Economy and Taxation, it makes a case for free trade based not on absolute advantage in production of a good, but on the relative “opportunity costs” of production. A country should specialize in whatever good it can produce at the lowest cost, trading this good to buy other goods it requires for consumption. This allows for countries to benefit from trade even when they do not have an absolute advantage in any area of production. Criticism Of Ricardo’s theory: The theory was written in 1817, before there was Industrialization or mass production; before there was dependable transportation like steamships, freeways, semi-trucks, airplanes or goliath cargo ships; and well before globalization where you communicate instantly between countries and before countries could “change their specialties” in a couple of years. None of Ricardo’s mathematical formulas even came close to addressing this. And overall, very few countries practiced Free Trade Treaties and, therefore, it was put on the shelf for many years. It does seem that this 1817 theory would have absolutely no relevance to the late 20th or 21st Century, but we would be wrong. Economics For Dummies Point: Free Trade eliminates import taxes which makes cheap crap from China even cheaper.
The Return of Free Trade
So, why would this outmoded 1817 theory that was never truly tested have a comeback? Let us look at few of the factors. America’s hubris was at its highest, in the late 1970’s. America was definitely the number one economy in the world and the world’s largest manufacturer. There wasn’t even a close second. The U.S. ruled the entire world, installing puppet governments and paying other countries to be our friends (we still pay countries to be our friends). America could do no wrong.
Then, there was the new school of economists, now called Libertarian Economists (in classic economic terms it was called Liberal Economics but it became very confusing and so it is rarely called that) lead by Milton Friedman, (financial adviser to President Ronald Reagan) and later Alan Greenspan (chairman of the Federal Reserve) who had bold “new”plans like “Trickledown” economics, an obsolete policy that did not work in the 1920’s, where it proposed that if you gave more money (decreased taxes) to the richest people, this money would gradually trickle down to the masses (which it never did), and “De-regulation” where control is done only by the businesses themselves -like in the 1700s (As well as the aforementioned revival of Free Trade).
Then, there was also the “Mega” business movement. Within this movement (economists forgot 200 years of banking tradition), it proposed to make banks not only interstate, but also international. This created too big too fail banks who possessed more assets than most countries. With this “Mega Movement” regular companies jumped in and laws were allowed to let them become mega-companies. These Mega-companies by their sheer volume were able to artificially bringing prices down and therefore eliminated most small business and middle size companies. Thus, the “Big Box Store” boom was created and the importance of small businesses became a thing of the past. Economics for Dummies Point: Factors that allowed Free Trade to prosper was unimpeded greed.
The Passage of Free Trade Treaties
The first Free Trade Agreement was negotiated by the Reagan administration and signed into law by President Ronald Reagan. This treaty was between the United States and Canada. The next free trade trade was spearheaded under the George H.W. Bush administration in 1990 which was to be called the North American Free Trade Treaty (NAFTA) – an agreement between Mexico, the USA and Canada. NAFTA became famous as it was debated in the public forum (unlike all other Free Trade Treaties). In the Presidential Debates of 1992 between incumbent President Bush (R), Bill Clinton (D) and third party candidate Ross Perot, Mr. Perot correctly predicted if the U.S. passed NAFTA “we would hearing “a giant sucking sound” coming from the south, which was his colorful phrase for the future term called offshoring. Bill Clinton won the 1992 election and NAFTA passed in 1994. Within 8 years, 700,000 American jobs were sent to Mexico. Here is a classic example of NAFTA: Hershey’s Chocolates no longer make any chocolate in the United States, it is all made in Mexico. As Hershey’s offshored all of its US jobs to Mexico it has created numerous manufacturing ghost towns of cities like Oakdale, CA, Robinson, IL, Hazelton, PA, Stuart’s Draft, VA Naugatuck, CT and, Hershey’s PA.
Then, came the mother of all Free Trade agreements, with the formation on January 1, 1995 of the World Trade Organization. Talks had started in earnest under The Ronald Reagan administration in 1986 to replace the previous world agreement called The General Agreement on Tariffs and Trade (GATT) – the most successful world agreement in history running from 1/1/48 to 1/1/95 (although it had been reality been phased out in 1986). With the GATT agreement, there were many agreements with favored countries to lower import tax rates. But with the WTO – this became an agreement with 161 countries with China joining in 2001. The WTO had really forced down import tax rate on products shipped to America.
Historically, in the 1800’s the average rate on import tax was anywhere from 15% up to 50%. From 1960-1970, the import tax rate was between 6.0 – 7.3%. In 2015, the import tax rate into the United States on average is 1.5% which is one of the lowest if not the lowest in the world. And with extremely low rate, it has allowed countries like China to overproduce and drive out U.S. businesses or even worse caused U.S. companies to pack up and join the enemy – offshoring of U.S. jobs. Economics for Dummies Point: Free Trade Agreements have virtually eliminated import taxes allowing companies to offshore U.S. jobs
The Effect of the WTO
Below are two graphs. One is the loss of manufacturing jobs in the U.S. due to Free Trade and the second graph is the actual Gross Domestic Product (GDP) figures (a way to characterize economic growth) of the U.S and China. Note in 1999, China was preparing to join the WTO (which it did in 2001) by revving up its factories as it knew that this was exactly the time that the United States was eliminating quotas (The quota laws called the Multi Fibre Acts were passed in 1974 to protect U.S. companies from “dumping”). And then China continuously dumped their untaxed products onto the United States. Did David Ricardo predict this? Did Milton Friedman predict this? No, only Ross Perot did.
Besides NAFTA and the World Trade Organization which affects 160 other countries, the United States also has 13 other smaller Free Trade agreements. Really too small to even mention individually. Economics For Dummies Point: Free Trade Agreements are devastating to the U.S. economy especially the World Trade Organization.
Other Criticisms of Free Trade
There are many arguments besides economic against Free trade policies. First, Free Trade heavily favors large corporations destroying infant industries as well as the small and medium sized companies. It undermines long-run economic development – it is difficult to revive manufacturing ghost towns, and difficult to plan for growth when American jobs can be offshored at any time. Free Trade has definitely caused income inequality, and environmental degradation.
Free Trade is supportive of countries sticking to their native practices which often means supporting child labor and working in sweatshops where workers get no benefits in often poorly ventilated and dangerous work environments.
Free Trade has definitely caused the race to the bottom, wage slavery, accentuating poverty in poor countries, harming national defense, and forcing cultural change. One additional criticism is that it allows large corporations to ignore local, state and governmental rules and laws: U.S. Appeals WTO Ruling on Meat Labeling Laws – where the American Meat Institute refused to label their meats as to where the originated. The Congress has successfully repealed the Country of origin labeling law this past winter. Instead of raising global standards, free trade tries to lower standards of countries that are more advanced. All of these inequities have been created so you can buy cheap crap from China at even lower prices. Economics for Dummies Point: If You Think Free Trade is Good, Then You Are a Sociopath.
What To Do About The Trans-Pacific Partnership Treaty?
Do we really need another free trade agreement, our import tax rate is already a record low at 1.5%. We already know the economic impact of previous Free Trade policies. It has been very devastating to the U.S. economy. If you want to stop the TPP from becoming a reality, you will need to write, or e-mail or tweet your Congressman. I have a link that will get you the address or email of your Senator: Listing of U.S. Senator addresses. Write today. the job you save may be your own or at least your neighbors. Stop the TPP!
