The Bush administration seems unwilling to see the white elephant in its White House living room. Turning a blind eye on the upcoming Kyoto Protocol and continuing unilateral compromises in the Doha Free Trade agreement, Bush and Co. won't admit that the true culprit to environment degradation, as well as the regression in America's standard of living, loss in manufacturing jobs, growing national debt, and record trade deficits is due to international free trade. "Competitive protectionism is a proven idea with a lot of success. Free trade is historically a relatively new idea with a lot of failure," said Dr. Ravi Batra , international economist, in his book, The Myth of Free Trade. "Free trade has done to the us what Hitler and imperial Japan could not do during the war," he said.
Wasteful investment from intra industry trade and raw materials trade are crippling world economies in many ways. Batra claims together they represent 90 percent of global commerce, yet have no rational economic justification behind them. Since world trade has soared faster than economic activity, trade is a bigger polluter than industrialization-in spite of fuel efficiency. Trade in energy intensity industries reaches far above that of GNP of America and most nations, and continues to rise. Being green doesn't sell as pollution taxes on domestic trans nationals would further put them at a disadvantage in global markets and governments don't want to inhibit world trade, corporate profits and growth.
Destroying the world's resources unnecessarily, free trade increases pollution, and creates higher energy prices, while risking higher global rates of economic contagion (Asian Contagion, Russia and Argentina debt default), and international vulnerability to economic shocks like the OPEC crisis of 1973 or 1979. "By far international trade comes out as the worst villain in the destruction of the environment....Yet about 60 percent of international trade today is of the intra industry variety-another 30% in raw materials...The cost of transporting trade worldwide equals most countries GNPs...(indeed,) air freight fuel consumption almost tripled in just two decades from 1970-1990, emitting millions of tons of nitrogen oxides," said Batra.
According to Global Outlook 2000 every year about 3,000 million tons of crude oil or petroleum products are shipped around the globe. In the process two million tons slip into the marine environment from routine tanker operations like tanks cleaning, oil spills from tankers and platforms.* (Batra).
Indeed, the oil trade is linked to the trade in other goods. "If intra industry trade were eliminated and countries manufactured and produced from their own raw materials, global oil demand would plummet. There would be no need to transport so many goods, materials, and oil across the seas. Global energy prices would fall generating massive growth around the world. Not only would the environment benefit, production costs would also decline thanks to declining energy prices...Few people realize that international trade is the worst polluter among all economist activities," said Batra.
Batra contends that every successful country in the postwar period: Japan, Korea, Taiwan, Hong Kong, Singapore, Indonesia, Mayalasia, and Thailand, excluding Germany have become world leaders in trade thanks to competitive protectionism. In contrast, US, Australia and to some extent Canada who adopted freer trade have suffered a drop in real earnings in spite of rising productivity-- what Batra calls agrification syndrome, where Americans continue to loose manufacturing jobs and are suffering declining wages, in spite of their rising productivity.
During GATT's history, "Of the countries US, Great Britain, Australia, India, Italy, Canada, Mexico, France, Japan, Korea, Germany, and Taiwan-only Germany has pursued free trade through much of its history. All others except for India and Mexico became affluent by adopting competitive protectionism over the first two centuries of development," Batra said. Americas demise began with our commitment to free trade beginning in 1973.
Today's joint ventures and regional trade agreements represent a move towards a fairer protectionist free trade agreement, if foreign investment is reciprocal and anti-dumping is enforced. The goal is to bring manufacturing jobs back to America, and keep American foreign manufacturing connected to foreign markets, raw materials and consumers. When multinationals make more money off of hedging derivatives (i.e. currency exchange, swaps, indexing stocks, bonds, interest rates, and commodities), price transfer, cross ownership of subsidiaries or securitizing debt than on products and services, the system is faulty. In fact, cyber money laundering has become such a potential threat as to cause global stock market and international banking financial crises. Everyone is linked by globalization in today's international casino economy.
Batra argues free trade liberalization has caused real falling wages, declining living standards, and the exporting of foreign investment, manufacturing, technology, jobs and capital abroad creating domestic recessions and deflation, seriously disrupting and distorting our economy. "It is free trade, not productivity that has been the real cause of falling wages in industry," said Batra. "If your wages fall sharply while you're working harder and becoming more efficient, the system is broke...Indeed, US productivity has been reaped by foreign labor and the multinationals," he said.
America's steel, auto, electronics, to aviation industries are examples how America has suffered from foreign dumping (i.e. underselling domestic markets with "overcapacity" in the name of free trade). It's made worse where multinationals will own numerous subsidies worldwide, and adjust prices in one country to maximize profits and minimize losses (price transfer), or disguise ownership through shell corporations. Likewise, US multinationals get numerous tax breaks by the American government either to keep their headquarters or manufacturing here or to attract foreigners to set up plants in the US, often unilaterally.
This is a mixed blessing as MNCs can get corporate welfare and sweetheart deals, but use free trade to park profits in tax havens like Boca Ratan, the Cayman islands or Hong Kong. Indeed, many multinationals make more money off of currency exchanges from their foreign subsidiaries than off of business profits. Altogether, trans nationals can inflate profits for earnings reports, or acquisition, or doctor balance sheets, creating losses for tax write offs, IRS or SEC auditing, restructuring or securitization of debt.
In order to revamp America's global competitiveness, Batra's solution is to break up monopolistic corporations world wide to generate intense domestic competition and pre-empt any need for foreign competition. In addition, intra industry trade should be downsized. "MNCs should produce and sell goods in the same nation or swap production facilities in different countries." The current practice of auto manufactures who export to Europe while also importing from European facilities (intra industry trade) is wasteful, and should be eliminated. If European or Japanese set up manufacturing in America, the US should be able to do the same in their countries. If GM plants in Germany or Asia are uneconomical, the US should sell them to Germany/Asia for other types of productivity.
Likewise Batra promotes the advancement of international technology transfer, and the increase of capital transfer in addition to manufacturing, creating foreign domestic jobs, consumer markets, and advancement towards building a banking, credible stock market, and IT (information technology) infrastructure to help non-OECD countries evolve as members of the global market place.
Japan continues to skirt reciprocity rules by investing in NAFTA's manufacturing plants, not in America, but Mexico, where labor is cheap, environmental regulations are low, there are no tariffs and access to high paying consumers are just across the boarder. They have also done this with the Asian Tiger countries and ASEAN, without reciprocity. Instead of shipping goods around the world, Japan should focus on exporting technology and capital in exchange for raw materials for home production. "Investing in mineral rich countries near population centers minimizes international trade. Here the rich mineral, but poor countries should impose high tariffs on foreign developers in order to generate domestic competition. Tariffs would then encourage domestic consumption, and reduce exports," said Batra.
"Migration of factories to mineral rich areas can trim international trade by as much as 25% without reducing global living standards. We can eliminate intra industry trade altogether without much effect on planetary production. Global trade can be cut by at least 75%with out much harm to overall output-benefiting the environment tremendously. Energy use would plummet, oil prices would tumble, oceans would be safer from oil and chemical spills, the atmosphere would be safer," said Batra..
"When free trade fosters services at the expense of manufacturing, productivity growth as well as real earnings decline. Indeed, manufacturing not trade is the main source of prosperity, While trade volume has doubled since 1972, only 17% of the labor force today is employed in the industrial sector. Wages for services and agriculture have declined in real numbers by 19%. Manufacturing salaries are often 150-200% higher than service industry jobs. In retailing, real after-tax earnings now match those of the Great Depression," said Batra.
Being the largest energy consumer and polluter in the world the US had a special responsibility to clean up the environment. Raising average tariffs to 40% would reduce pollution, while promoting competitive protectionism at home and eliminating wasteful intra industry trade.
The upcoming Doha trade rounds in Cancun might consider Batra's notion of the "agrification" of America. However, where US farmers receive hundreds of billions in subsidies, the rest of the country's industries and services are suffering the same plight without the economic crutches. Like increases in farm productivity that aren't rewarded with increased profits, American manufacturing is similarly suffering real declining wages, despite improved efficiency and output. "In fact productivity growth causes their earnings to decline," said Batra.
A history of US unilateral trade concessions reach back to the beginning of GATT to keep free trade and Most Favorite Nation agreements moving forward. The objective to dismantle agricultural subsidies only when the playing field is leveled is missing the mark. . Batra argues protectionism needs another look.
"In spite of the fact that productivity since 1973 has grown by 55% in America, 140% in Germany and a staggering 360% in Japan, at least half, and as much as 80% of the population today is worse off than the 1973," said Batra. America has lost out to cheap foreign labor in manufacturing jobs.
Batra continues the hype that free trade is a myth. "Since 1973 and free trade, the link between real wages and productivity was severed, where its commitment to free trade soared faster than domestic economic activity. Real wages for 80% of the labor force have been steadily shrinking in spite of rising productivity. Free trade skews the real value of manufactured goods, through cheaper foreign labor or weaker foreign currencies in relative prices, despite increased productivity and innovation, in turn creating a shrinking consumer base."
Through tariffs, and a break up of monopolies into small competitive units, America needs to consider a new era in competitive protectionism to increase higher earning jobs at home, competition within industries at home further reducing trade deficits and avoiding foreign tariffs, while keeping consumption at home.
The Newly Industrialized Countries /Asian Tigers (Taiwan, Korea, Indonesia, Mayalasia, Singapore, Hong Kong, Thailand) grew at double digit rates for decades thanks to protectionism, capital formation, domestic rivalry among firms, and government investment. Growth was also accompanied by foreign investment by America and Japan. The Asian economies are recovering from the 1998 crisis in Southeast Asia, much to foreign reinvestment, debt restructuring. Japan, Singapore, Taiwan, and Hong Kong's resilience is also do to having large dollar and gold reserves. Like Japan these Asian tigers continue to have huge trade surpluses with the US.
Joint ventures don't necessarily reduce the intra industry trap. GM has joint ventures with Toyota, Suzuki, Ford and Mazda, Chrysler with Mitsubishi. Yet much foreign ownership or manufacturing is not reciprocal. Five Japanese firms Honda, Mazda, Nissan, Toyota and Europe's Subaru have independent production facilities in the US.
The expression, "when you owe so much money to the bank, they owe you," underlines the fact that Japan owns two-thirds of America's national debt. America has become the world leader in household and national debt, trade deficits, corporate and personal bankruptcies, and the growing inequality gap between rich and poor. Free trade has caused hundreds of thousands of layoffs at Kodak (now bankrupt), Xerox, GE, Chrysler, Exxon, AT&T and IBM, yet these industries are twice as productive as the early 1970s.
US-local firms producing steel, auto, machinery, cameras TVs, VCRs, textiles and shoes, and aircraft have fallen prey to imports from Japan, Taiwan, Korea, Singapore, China and Hong Kong at an alarming pace. Local business have been run out by conglomerate retailers like Wal-Mart who import cheap textiles, and hire cheap domestic labor with no benefits to work their huge retail stores.
"During the early 1930s product prices fell sharply by 24% in a matter of four years from 1929-1933. This price deflation in turn set the US unemployment rate soaring to 25 %," said Batra. Today's part time and McDonald-type jobs mask the real higher unemployment rates. Instead of using Nixon's New Economic Policy intervention in 1971 to address stagnant growth and mounting trade deficits with wage and price freezes, today's Federal Reserve works to continue reducing interest rates now at 1.5% Fed rate a historic low, while Bush promotes tax cuts for businesses and stock dividends to stimulate economic growth. Refinancing and a cheapening of consumer goods have only encouraged Americans to buy more.
In contrast Japan and the Europe continue a more protectionist trade, together with high tariffs, stronger savings and domestic investment. Where Nixon in 1971 was trying to force GATT partners like Europe with their Common Agricultural Policy (CAP) and the Japanese auto and electronics industries to make concessions, America still gets the short end of the stick making unilateral concessions at Doha and the Uruguay Round fighting agriculture, beef and services (i.e. banking, semiconductors and telecommunications equipment) compromises with Europe and tariff reductions with Japan.
"Many don't believe America's living standard has steadily declined since 1973-discounting soaring homelessness, growing urban decay , crumbling roads, and bridges, declining home ownership and shrinking middle class-instead believing that the national measure of well is the GNP," said Batra. During our last major recession in 1992, "GNP was an all time high-who could believe that a nation with the highest ever debt per person is actually at the peak of its prosperity and where American household were the world's biggest borrowers?" said Batra.
Yes some of America's economic quagmire is self-inflicted with its horrible savings rates of less than 3% of disposable income as opposed to over 14% in Germany and Japan, huge credit card debt, low investment, growing federal deficits and overall national debt that has kept interest rates higher in the US than Germany or Japan-creating higher taxes, terms for borrowing, and R&D disadvantages for companies. Yet additional reasons for the declining standard of living, "like America's rate of investment, immigration, the baby boom, or the 1980s merger mania (waves in the 1870s, 1920s, 1950s) nor the oil crisis of '73/'79 (rose sharply 1910 and 1940) fall short, as these events have happened many times before-not generating a three-decade long slide...The true culprit is free trade," said Batra.
And the facade from multilateralism to regional free trade skirts the point of competitive protectionism. NAFTA simply compounds the ills created by America's monopolistic regional free trade. While the US and Canada feel fairly insulated from asymmetric investment shocks, Mexico has suffered great disruptions as a result of opening it border, (i.e. Ross Perot's sucking sound of American jobs going south). During the Mexico crisis of the 1980s foreign MNCs were so big as to outsize or create a stock market crisis thanks to foreign capital flight. The Asian Contagion in '98 similarly created a cul-de-sac of capital flight in Mexico (Japanese and Asian Tiger investments). Likewise, the former East Germany following the 1990 unification was abruptly exposed to intense competition from West Germany and other countries. Both suffered from backward technology, inefficient bloated state monopolies, and the exploitation of cheap labor without benefits.
Batra argues that free trade can cripple an economy if manufacturing erodes. Japan's investment in NAFTA's Maquiladora programs set up manufacturing in Mexico capitalizing on cheaper labor, no unions, closer distribution access to America and tariff free benefits.
Instead of breaking up the Fortune 500 firms to enhance domestic rivalry increasing competitive protectionism within America, deregulation of the 1990s (banking, telecoms, utilities) have created an era of further consolidation and mergers and acquisitions where MNCs haven't been this big since trust busting era of the Carneges, Rockefellers and Melons after the turn of the 1900s.
The old axiom, "what's good for GM is good for America," no longer seems appropriate. Yet, multinationals fear if they don't continue playing the game of the casino economy in the foreign exchange markets, and through unilateral concessions with foreign trans nationals, America's interest to remain the hegemony in the new world order will be in jeopardy.
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