California Almonds and Free Trade

Totally "free trade" exists only in economic theory. We have a long list of tariffs we currently impose on a variety of imports ranging from shoes to agricultural products, as well as tariffs imposed on American exports by various other countries. So, in large measure, "free trade" is a relative term - relative to where we've been, where we are and where we're going. [I would suggest most ideological constructs are similar; not absolutes in themselves, but relative to particular points in history. "Truth" has always been more the purview of faith than science.]

The United States was initially a net importer at the beginning of our history and as we built our manufacturing base we generally utilized tariffs to protect our start-up industries. WWI changed that and between WWI and the late 1960s we were net exporters. For the following thirty years (1960s - 1990s), we more or less stabilized the trade deficit at around $100B/year. In the late nineties, we began a sharp decline to our present status, which is approaching $1.0 T/year. A lot of things were occuring in the late nineties while we were focused on "I did not have sex with that woman" and the Clinton impeachment. Another notable change was the deregulation of banks and the end of the safeguards imposed after the Great Depression.

Today, there are specific sectors of trade where we still run actual surpluses: aircraft (thanks to Boeing, Cessna, et al), agriculture, chemicals and machine tools. In all other areas of manufacturing we import more than we export (I would assume the entertainment industry is also a net exporter, but not of significance). Since most of the annual imbalances are based on the inflow of consumer goods, historically, our trade balance gets better in recessions - i.e. we buy less.

Supply-side economists (the free trade/free market people) tell us that a negative trade imbalance is not necessarily a bad thing in a global economy. Many of our traditional American manufacturers are still here in name, but from the perspective of an American manufacturing worker, have become no more than distributors of products made in American owned plants abroad (owned wholly or partially). The products these "American" plants produce are counted against us in the balance of goods and services, but strengthen the U.S. economy through taxes and dividends paid in the U.S. Ah...the House of Cards. American investors get rich off Indonesian workers in American plants, who sell their products to U.S. workers who live on credit, granted to them by U.S. investors....hmmm? Nice, but what happens when the credit runs out? Investors are now finding out. [Note: From one perspective, the subprime mortgage disaster was simply the "tipping point" facet of the broader credit problem.]

I would point out that this is very similar thinking to a reliance on foreign energy imports (oil). I believe the political party line went something like: "We need energy independence because we now depend on those who may not have our best interests in mind." Perhaps we need to ask why this same logic does not apply to manufacturing?

The Smoot-Hawley Tariff of 1932 is probably the most frequently quoted event of supply-siders as "proof" that tariffs don't work. They're right; but for the wrong reason. Ravi Batra (an economist from, of all places, Southern Methodist University, home of the Bush library and not particularly known as a "liberal institution," pointed out in a 1993 book, "The Myth of Free Trade," that the Smoot-Hawley tariffs were reversed in two years and unemployment continued to rise. Further, he points out that the key reason they didn't work was that we had become a "creditor nation," exporting more than we imported and by resorting to tariffs, which encouraged retaliation, we were cutting our own throats. This seems to me, a reasonable explanation: the best time to be a free trader is when you are exporting more than you are importing to protect your exports from tariffs in your export market and not the reverse.

Today, among Democrats as well as Republicans, the most common retort to the suggestion that a tariff or two might not hurt is: "No, because any tariff we imposed on others would be met with retaliation." That thought took me to a little research on just what that retaliation might be, which took me to our leading export of agricultural products and a revisit to the Batra book. And, from there, we get to California almonds.

As I was passing by the TV, from my library shelf, there was someone talking about California almonds and his new book. California almonds are apparently the most intensive "bee pollination" fruit on earth. Each year, a healthy percentage of the nation's bee keepers descend on the almond growing valley in California for several weeks. It's a like a giant bee rock concert or, as he put it, the first days of kindergarten, where bees from all over the country are "rented" to the almond growers for pollination services. And, the bees mix and mingle, they catch and carry their various "bee diseases" home with them.

In other words, by bringing the bees to the almonds, instead of the almonds to the bees we may have inadvertently endangered the bee communities, which are in fact dying off in the jillions. Without bees, much of our agricultural surpluses (and exports) disappear.

So, California almonds may be another reason to begin thinking about tariffs and bringing home some of that manufacturing capability we so easily and carelessly gave away.

OK, Boeing and the aircraft sector might be hurt, but anymore than they are being hurt today? And, agriculture? If we can solve the bee problem (probably one of those stupid government research grants the Republicans tossed out of the stimulus package), what's basically more important, consumer goods or food?

Let's think this through. We decide that we're going to reestablish the TV industry in the United States (I believe, today, we manufacture exactly zero TVs). To help that industry start-up, we place a high tariff on TVs from Japan (who probably get most of their subcomponents from China). The Japanese cry "foul" and retaliate by shifting some of their U.S. grain purchases to Russia and Chinese rice and telling us they won't buy as much of our debt as they have in the past.

Although this is not the way we'd all like the global economy to work, it is doubtful that such a move would instigate an all-out trade war. The Japanese sell a lot more here than TVs. Plus, with or without tariffs, U.S. unemployment and a failing economy will probably have more negative impact on total Japanese imports than a TV tariff. Positively, we begin to build back our own manufacturing capability, reestablishing our middle class, take more in in taxation and spread the tax burden more equitably.

Here's why we might think about running the risk of a tariff or two: just like individuals in this economy, the country can stand only so many trillion dollar bailouts before our credit runs out. The primary reason the rest of the world was willing to buy U.S. debt was because of our consumer market and their ability to import more product to us (in oil and Wal-Mart goods) than we sold to them. If that market goes away with a return to sane credit standards, their willingness to purchase our debt will go with it.

In short, as the post WWII era developed and the global economy recovered, and with the end of communism, the only way we could remain at the center of the global economic stage was through the lie of cheap money and over-valued assets.

The longer we postpone this return to a sound economy and a strong middle class, via bringing some of the old jobs home, creating new ones and enforcing New Economy value through cross-border intellectual property rights, the worse the shock to the "global economy."

This is a new economic approach begging for an author, not yet to be found in either political party.

Finally, for this post, there is another non-economic reason for the U.S. to remain a "Superpower," which is our military. Bush did neither us or the rest of the world a favor in largely squandering that power in Iraq. Obama must beware that he does not do the same in Afghanistan. Without our "superpower" status, will the Chinese stay out of Taiwan...or Japan? Will Russia forsake a return to imperial ambitions? To a degree, our influence through military force has been replaced by the influence of a debtor. The last thing the people who hold that debt want is to have to foreclose. Although largely exposed militarily and economically as a Paper Tiger by the ill-advised policies of over-reachers within the Bush administration, I do believe that because of our diversity, our rule of law (which has been a bit tarnished as of late) and our relative stability, we serve as an important factor in global stability. In this sense, a modest retrenchment of our manufacturing capability for the sake of our economy, and a general "cleaning up of our act," (politically, economically and socially) coupled with a restoration of our military capability would be welcomed abroad, as well as at home. And, of course, as we lose "debtor status" the international environment may change. It pays to be nice to people who owe you money as well as vice a versa.

Globalization is for the most part already here, but we have reached it practically, without much of the structure that may be necessary to sustain it. Stepping back from it for the national good is, in my opinion, in the long run better for the end product of globalization, which is some form of world government. If we are more successful as a nation now in rebuilding a sound economy and curing some the inequities of our own society, then when (and if) the time for world government comes, it will more closely mirror our own. In other words, "recalling" some of manufacturing base is more a matter of emphasis than new direction or isolationism; we stay in the U.N.; we stay in the WTO and IMF, etc. We don't re neg on present international commitments, but temporarily postpone making new ones. I believe we are genuinely at a critical point in our history in that much of the world is beginning to feel they've been scammed by the United States in the current economic crisis. True, many of the "scammed" willingly went along with us for profits they didn't think they could make elsewhere, but it started here. We were the financial geniuses, the people whose system was so flawless we didn't need regulation or oversight, etc., etc.

Given this environment, systemic reform must be, this time, more than whitewash...more than prosecuting a company or two or showing we're "serious" by putting a Martha Stewart in jail for a while. More on this in my next post.

[Note: I see no conflict between being a patriotic American and the understanding that global social, material and technological progress will probably eventually lead to some form of world government focused, hopefully, on human rights and ecological survival. Initially, I would see this something along the lines of "states rights" at an earlier point in our own history. Eventually, that too would pass into a sort of Star Trek environment, a culture based on science, knowledge and exploration, wherein individual beliefs are respected (religious or otherwise), but do not conflict with the overall goal of preservation of the species. I believe that to a large degree that latter stage may also involve further human evolution, so we might be looking at thousands of years from the present, assuming we can survive without it until then, and that human evolution is for the most part positive. In the meantime, I believe the U.S. should at least strive to be the "model" and see no Constitutional issues that would prevent it. Admittedly, current trends are not encouraging to this outcome. If all of that seems a bit far fetched, imagine Thomas Jefferson anticipating laptops and a global Internet and the fact that once I click the "publish" button on the screen, the above becomes virtually accessible to some 2 billion people.]