Ignoring Free Trade Principles to Reduce Imports from the U.S.

Ignoring Free Trade principles by stopping imports

In previous essays I discussed how our $500 billion plus trade deficit means the U.S. has three million fewer high paying manufacturing jobs each year. I also pointed out that both Democrats and Republicans have supported Free Trade policies since WWII, including voting for trade agreements like NAFTA that increase our deficits. This means that the U.S. does little to prevent imports from damaging our economy by eliminating manufacturing jobs. Meanwhile, other countries take advantage of our open economy by subsidizing their industries, enabling them to send out a flood of cheap export products.

In addition to maximizing their exports, almost all nations ignore Free Trade principles by creating barriers to U.S. companies selling in their markets. The most obvious barriers are tariffs (a form of sales tax) levied on U.S. products. For example, after WWII, European countries had higher tariffs than the U.S. and that imbalance continued after the creation of the European Economic Community in 1957. European nations lowered tariff barriers between each other, but the EEC put up a wall of tariffs between itself and the U.S. These barriers only came down after the Kennedy Round of tariff negotiations in 1967, by which time the Europeans had a healthy trade surplus with the U.S. Since then, other industrializing nations have followed the same strategy of resisting tariff reductions until they have secure trade surpluses.

Regulations and industrial standards are also frequently used to limit U.S. exports. For example, to limit imports of U.S. autos and auto parts, South Korean officials ignored Free Trade principles and wrote safety standards for automobiles that are more stringent than those in the U.S., allowing them to simply bar many U.S. autos. South Korea also has different standards for automobile parts, greatly limiting the type of parts that can be imported. Korea also has complex customs rules about domestic content of products coming into the country, making it hard for any nation to import into the Korean market. Combined with low barriers to the entry of Korean cars into the U.S., the result in 2017 was $23.9 billion in Korean autos and auto parts sold in the U.S. and just $2.5 billion in U.S. automobile products sold in South Korea.

Domestic content rules are used to limit imports in other fields as well. Before this year, the Korean national health system was required to only use drugs from Korean companies. At the same time, there were no barriers to Korean companies exporting drugs to the United States.

Numerous other countries use purchase rules like these to ensure public spending is used almost entirely for domestically made products. For example, the San Francisco-Oakland Bay Bridge was completely rebuilt in 2011 using steel plates and other parts built by a Chinese company. No publicly funded bridge in China, South Korea, or Japan would use a comparable amount of U.S. products. In California, complaints about use of public money to support foreign manufacturers were completely overwhelmed by the Free Trade argument that the Chinese produced high quality parts and made a lower bid than U.S. companies. It doesn’t seem to register that, over the long run, such policies are steadily decimating U.S. manufacturing employment.

Use of regulatory barriers to restrain Free Trade can lead to odd imbalances in trade relations; imbalances that reveal a particular nation’s trade strategy. In 1978, the most valuable U.S. imports from Japan were automobiles, iron and steel plates, truck chassis, radios, and mini-bikes. The largest dollar value exports to Japan were soybeans, fir logs, corn, hemlock logs, coal, and wheat. That’s right, food not produced in Japan and raw materials for industrial production. This is the essence of how other nations manage their trade with the United States.

Without tariffs, entirely through regulations and informal barriers, foreign cars are kept out of the Japanese market. For example, Japanese auto dealers don’t sell foreign made cars. If an American or German company wants to sell in Japan, they have to invest in a whole dealership network as well. In January of 2016, Ford motor company withdrew altogether from the Japanese market, claiming it is the “most closed, developed auto market in the world.”

While Japanese made cars make up almost 40% of the U.S. auto market, the percentage of cars from all other nations sold in Japan each year continues to be less that 10% of the purchases by Japanese consumers. Our trade deficit with Japan in autos and auto parts is over $50 billion each year, costing the U.S. about 300,000 auto worker jobs with good pay and benefits.

Since the 1960s, U.S. companies have responded to the pressure from foreign exports and the barriers to selling in other countries in two ways. One is by leaving manufacturing and purchasing companies in less competitive industries and the other is by moving production facilities overseas. In the next blog post, we’ll see how “off-shoring” of production facilities has become a standard U.S. business practice.

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2 thoughts on “Ignoring Free Trade Principles to Reduce Imports from the U.S.”

  1. Monte
    Your post on tariffs sounds like you support Trump’s decision to impose more tariffs.
    I find the whole thing very confusing. I understand the problem with so called free trade, but the imposition of tariffs also seems fraught with problems as well, as we are seeing in the deterioration of relations between the US and Canada and the EU.
    How do we get to Fair Trade, an economic system that doesn’t just benefit multi national corporations and the mega rich?
    Eric

    1. Good question. I think that imposing tariffs on Chinese steel and aluminum products to reduce their price advantage is a good first step. I will go into this in another post, but a good way to counteract unfair price competition is to allow the value of the dollar fall. It is a complicated process, but the first step is reducing the federal deficit so we don’t sell so many bonds to other countries. Of course, the way to do that is repeal the Trump tax cut, reduce military spending, and eliminate tax breaks for the wealthy. If the value of the dollar falls, then imports cost more and U.S. residents will buy more things made in the U.S. while exports will rise because U.S. products will become cheaper. I will talk more about this but economists I respect talk about a 20 to 30% fall in the value of the dollar reducing our trade deficit by 50% or more. This will have the added value of making it cheaper for companies to invest in the U.S. Banks/Hedge Funds don’t like a falling $$ because it means lower profits overseas and lower interest rates they can charge in the U.S.

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