Next in our series discussing key issues facing the country is a consideration of foreign trade. This is not a topic usually given much coverage in political campaigns. We hear about unfair competition and out sourcing, but not much else. Nevertheless, the imports and exports from the USA in 2011 came to just under $4.8 trillion according to the Commerce Department. This is nearly one-third the size of the Gross Domestic Product of the entire country, so the impact of this trade is enormous.
To discuss international trade, one needs first to understand the supposed benefits of that trade. Free trade reduces prices for goods with resulting savings to consumers. The goods are made in the location with the lowest cost, so the production is most efficient. Cost advantages of some foreign countries are offset by increased productivity in the USA and also by the extra costs of transportation for foreign goods. Nevertheless, free trade encourages efficiency and provides goods and services at the lowest available cost.
Free trade, however, can be manipulated by governments in two ways. First, if a country keeps its currency at a low price, it artificially lowers the costs of goods manufactured in that country and it results in much higher sales of those goods. Second, if a country subsidizes its exports or avoids paying for costs incurred elsewhere, it again can produce much higher sales of its goods.
Right now, China is using both of the above methods to manipulate trade with the USA and the rest of the world. The Chinese currency has not been allowed to rise to its true value, so Chinese goods are artificially low in price. This means that American manufacturers (as well as those elsewhere) are competing on an unfair basis with China. Further, China has shielded its companies from having to pay for the intellectual property developed in the West. American patent rights are not respected, nor are American copyrights. This means that American companies pay for research and development to achieve a result and the Chinese companies simply take those results and use them despite the patents issued which are supposed to protect use of that information. In short, in trade with China, the USA is operating under a free trade model while China operates under a much different model. America is competing with China in a way that is very much slanted towards the Chinese.
The problems with trade are not just with China, but Sino-American trade is certainly the epicenter of the unfairness. Other countries present issues as well.
So the flowed nature of international trade at the moment gives rise to the question of how to proceed from here. Basically there are three approaches.
The first approach is that of president Obama. In a nutshell, this approach is to do nothing. America will not promote an expansion of free trade with other countries. Nor will we take any steps to bring the Chinese into fair competition with the USA.
The second approach is the one favored by Mitt Romney. Romney wants to take on the Chinese directly and to insist that China end its policies which tilt the field in favor of Chinese companies. Indeed, many suggest that Romney's approach will commence a trade war with China. Romney's answer is that China needs this trade much more than the USA, and it will not allow that trade to get cut off. This approach seems reasonable, but it is a very high stakes poker game.
The third approach is the one favored by Rick Santorum. Santorum speaks about confronting the Chinese, but not in the same belligerent tone as Romney proposes. Santorum, however, suggests lowering American taxes on manufacturers to zero, thereby giving those companies a big advantage in the competition with the Chinese. Reducing the tax rate on corporate profits from 35% to 0% obviously provides a big and a legal boost to the American companies. Forgetting for the moment the impact on revenue of such a move, lowering tax rates on manufacturing seems to provide a good way to level the playing field in trade.
Another issue with regard to trade arises in connection with free trade agreements with other countries (besides China). Obama spent three years delaying such agreements with Colombia, South Korea and others only to change course as election year approached. Obama's course was directed by the big labor unions that do not want to see any new competition for American markets. Both Santorum and Romney want to promote free trade so as to open up new markets for American goods. They know that more competition means better products and lower costs for Americans.
No comments:
Post a Comment