A Post-Election Shift Against Free Trade?
In his Tract on Monetary Reform, John Maynard Keynes made the essential point that when money is debased, enterprise is discredited, and trade barriers soon reveal themselves. Having witnessed the worldwide monetary errors of the ‘20s that led to economic isolationism in the ‘30s, Keynes knew well the importance of the 1944 Bretton Woods monetary standard, of which he was a chief architect.
And with the world on a dollar standard in the ‘50s and ‘60s alongside a dollar defined in gold, trade flourished. As Stanford professor Ronald McKinnon has frequently pointed out, the Bretton Woods years fostered a great deal of economic harmony among countries, not to mention impressive rates of economic growth.
All of this is relevant to the present considering the “mood shift” against free trade in Washington. As a Wall Street Journal article from last week noted, Tuesday's “election could put trade-liberalization on ice for a while.”
While the potential shift described above is a major mistake that will surely harm economic growth, it’s also one that shouldn’t surprise us. As McKinnon wrote in his 1996 book, The Rules of the Game, “for each cycle of currency appreciation and depreciation, there will be a tendency for worldwide trade barriers to rise.”
And when we wonder who might be the main miscreant when it comes to monetary depreciation this decade, we need only look inward, or better yet to the U.S. Treasury department. Though Secretaries O’Neill, Snow and Paulson all paid lip service to the importance of a strong dollar, they spoke with a forked tongue.
U.S. dollar policy this decade was decidedly in favor of a weak greenback, and markets complied. Worse, as is frequently the case, foreign central banks followed our lead. This might seem untrue at first glance given the strength of foreign currencies versus the dollar since 2001, but it’s always a mistake to compare currencies that lack any market definition.
So while the dollar was crushed by the euro, Pound and Canadian “looney” (to name a few) in recent years, the strength of all three was illusory; their rise against the dollar simple evidence of how much our currency had fallen. Measured in gold, all three foreign currencies showed impressive weakness, and with inflation batting 1.000 when it comes to economic sluggishness, free trade will be the likely victim of our irresponsibility on the currency front. As the Journal article stated, a “slumping economy, years of stagnating wages for many workers and unease about China” are “fueling popular skepticism toward free trade.”
If we acknowledge that a shift against trade will only make us worse off, it should also be said that the trade skeptics have a point; albeit an incorrect one. Currency debasement always brings about economic slumps because it drives investment away from the metaphysical or entrepreneurial economy, and into the real. This of course explains the pain with regard to wages.
Inflation works against wages first for making essentials such as gasoline more expensive, and then it cuts again for investment moving into hard assets rather than businesses eager to hire and grow. Inflation eviscerates real wages while redistributing wealth, and in periods such as these, workers look for a scapegoat.
It appears China will be our scapegoat, when in truth, China’s rise can only have increased our economic vitality. For one, cheap goods coming from China effectively give all Americans a raise every time they go shopping. For two, when Chinese factories take on low-value work, this frees up limited capital of both the human and investment variety to find higher-value opportunities.
For those who doubt the above, stop and think how poor we would all be if we still had to allocate some of our precious labor to the creation of our clothes, food and appliances. The quality of all three would plummet, plus we would have less time to pursue the work specialties that more likely enrich us, and which enable us to consume that which isn’t in our interest to make.
Many politicians in the trade-skeptic camp claim that as opposed to the imposition of steep tariffs, they’re only looking to make trade “fair” in terms of environmental and safety standards. Don’t be fooled though, because the distinction they’re making is one surely lacking a difference.
Whether it’s tariffs on foreign goods or a requirement that foreign factories resemble ours, the latter will be much the same as the former for making the goods we import far more expensive. To impose workplace rules on developing countries as though they’re developed is the equivalent of England forcing all Americans to drive Rolls-Royces in order for us to sell them our software. Most Americans couldn’t afford a Rolls-Royce, and just the same, foreign factories in developing countries can’t yet afford our workplace standards.
In the end, whatever the rules placed on trade, the rules will constitute an infringement on our liberty as individuals to offer up our surplus in exchange for that of others. Put simply, we get up for work each day to exchange our labor for goods we need. We trade products for products, and when governments set up rules restricting beneficial exchange, they are surely taxing the work we do, which is by definition an economic retardant.
So rather than tax our work, it should be hoped that our minders in Washington recognize the real problem in our midst. Trade cannot be hurtful because when free, it involves two consenting individuals. On the other hand, floating currencies are hurtful for necessarily destabilizing the process by which we produce in order to consume.