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Clear Thoughts
Free Trade is not free anymore
Originally Published Friday, January 14, 2005
| There are strong arguments for and against free trade. What impact does free trade have on business in the U.S. and on the consumer? |
Deep in the American collective consciousness rests the idea that competition among firms will lead businesses to provide consumers with the best products at the lowest prices. In a truly competitive environment, efficiencies are automatic. The weak will fall by the wayside, the strongest companies and best products will prevail. Businesses and nations will thrive by finding their "Competitive Differentiation." That is both the way and why free trade works.
In a simplified example, you could have the French selling only what they are really good at: cheese, wine and, perhaps, escargot. The Italians: Chianti, leather goods, fashion, pasta. And so on. Each country or region would maximize its own skills, interests and resources. We might sell movies, popular music, and computer technology. Somebody, somewhere, would make what everybody, everywhere would need. All the pieces would fit, hand in glove.
One of the problems is with the concept. The "Invisible Hand," a term coined by economist Adam Smith for the guidance given to businesspeople by a free market, now often seems not to be benign - or even invisible. Sometimes it appears in the guise of subsidies. Sometimes it appears in the form of protective tariffs and quotas, which by definition are in restraint of Free Trade. Yet these shape the movements of businesspeople.
Some say, tariffs protect our local industries from foreign competitors dumping goods on the cheap. These competitors can do this because they have an "unfair advantage," in that they do not have high labor costs or, perhaps, they have unfair labor practices. From this, the debates begin.
As you read this, the quotas on all textile items from China are being dropped. Clothing from China is coming in tariff-free. Free Trade is on the march. This is good, is it not?
Well, to give a very real world example, China is supplying Wal-Mart with 35% of everything Wal-Mart sells. This percentage could go up in the immediate future. If Wal-Mart chooses to share the drop in the cost of goods with its customers, this would mean even lower prices for a lot of goods, which is good. Is it not? After all, inexpensive goods make the hard-earned dollar go farther.
But then what about the poor worker with a foot-powered sewing machine in Nigeria, Lagos, the Caribbean, or Guatemala, who cannot compete with the power of the Chinese? They may go out of business. What will they specialize in then?
And what about the small - and large - factories in North Carolina and Kentucky who cannot afford to compete with the comparatively tiny wages the Chinese workers are paid? Prices for the t-shirts, hats, banners, and yes, even high fashion clothes will soon be low-low, but will all this come at an immense domestic social and economic cost? The operating phrase of the times seems to be "Bought in America," not "Made in America."
Presently, we import twice as much as we export. Lower tariffs suggest this ratio might spiral in an even more unbalanced manner. What can be done? What should be done? Nothing? Put back tariffs & quotas until we get a handle on the situation? Ask the foreign competition to hold up and take a breather for our sake? Do you side with the Free Traders and believe the Americans will prevail by dint of good honest inventive effort? Will we come up with a new "Killer Application," perhaps a new innovative product which will replace the need for oil, or something equivalently clever, and everybody will have to have one? Perhaps something like that will come along and put everybody back to work at a decent wage? Perhaps.
It is estimated that 96% of all apparel is already imported. Ralph Lauren and Tommy Hilfiger are American, but most of their goods are made outside the U.S. Eight hundred thousand textile jobs left the U.S. as a consequence of this trend, and 300,000 more are scheduled to depart. Those are significant numbers.
In yet another potentially alarming development, the Chinese are yet again knocking on one of our biggest industry's door. They have a new car called The Chery. It is a little bitsy thing and gets 28 miles to the gallon. When The Chery gets here, she will cost only $6,000, delivered. If tariffs & quotas on cars go the way the textile industry has - there go a whole lot more jobs!
NAFTA was born of the spirit of Free Trade. Has it worked for us and for the Mexicans? If so, why is one in ten Mexicans living in the U.S.? And then why are we dropping trade restrictions to open up even greater competition? The debates rage.
We are not here to answer these questions at this time. Rather, we want to point out that there are many views with valid rationales on Free Trade beyond its theoretical benefits. We are here to "Appreciate the Situation."
These are concerns and it is necessary to be aware of them, but there are always solutions. New, previously unforeseen, positive developments tend to occur in difficult situations. Perhaps it is a result of our national DNA of innovation and enterprise. Some of our companies will succeed and thrive in this new and changing environment. This is where our computers and all of Clear Asset Management's programming come in. We are on the constant search, looking to appreciate the situation. Looking to find the companies which in fact are strong and which will prevail. Knowing the true numbers gives us investing power, and implicit in that knowledge is the opportunity to position ourselves profitably ahead of the times.
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