Free trade is a great concept, as are free markets and freedom. The problem is none of these things exist in practice because they don’t provide sufficient advantages to the ruling class. The Fed and HFT systems now dominate global markets, western nations systematically overthrow any (freely elected) foreign government that doesn’t bow down to them and free trade agreements are put in place to ensure investors maximize profits no matter what the costs to society. Let’s focus on this last one.
You see rarely do nations turn away capital investment inflows. And so trade agreements are not created to allow for the free flow of capital as is generally touted. That is perhaps the biggest fallacy in the public’s perception of ‘free’ trade agreements. If a US company wants to build a factory in Vietnam and employ 200 workers there they will be welcomed with open arms. So then if these trade agreements are not meant to allow the free flow of capital what is their purpose?
It’s very simple. In microeconomic terms, it boils down to risk/reward. That is, all investments will generate some expected cash flow but will face some risks of realizing those cash flows. One way to improve return on investment is to lower costs, everything else equal. So if I can reduce my costs yet maintain my revenue and risk structures then I am better off. Corporations realized that one very easy way to reduce costs is to move labour to undeveloped nations where labour costs are only 5% to 10% of those in developed nations. That means I can greatly improve my returns to investors if I go ahead and move my operations overseas.
The caveat in the plan remember though is I have to be able to keep my revenue and risk structures the same. And this is where corporations realized they need a trade agreement. You see moving hundreds of millions in borrowed capital to a nation that has poor contract law and unstable governments adds a tremendous amount of risk to the investment model. And so the added risk (which significantly lowers the probability and thus value of future cash flows) creates new costs that essentially negate the reduction in costs obtained through cheaper labour. This means ROI doesn’t improve, which was the point of moving operations overseas.
Additionally I have a risk here at home that if a trade deficit becomes too wide with any particular nation, Congress (via its trade agencies) will impose tariffs to balance out that deficit. Now while corporations are very keen on employing workers at $5 a day they are acutely aware those wages will not support the purchase of the items being manufactured. This means that corporations still want to sell their products into the developed world where consumers can sustain higher priced items and thus maintain revenue structure.
And so again, we see a need for trade agreements to ensure tariffs will not get in the way of revenues here at home. Have a look at our trade deficit post NAFTA and Uruguay Round of GATT (which added services and IP) around 1994.
And as long as I’m drafting a trade agreement anyway I might as well mitigate one more risk. Now that I’m a big multinational player, I’d like to ensure that my revenue structure across all my global markets doesn’t move against me. Specifically, I don’t like having the risk that any government can legislate domestic policies that could interfere with my revenue or risk structures. And so I’d like to include a caveat that makes foreign governments’ legislative powers subordinate to my profits. Enter the International Center for Settlement of Investment Disputes (Icsid), a World Bank-affiliated institution based in Washington D.C.. The Icsid is a private court system affiliated with the western banking cabal used to punish governments who refuse to accept that the trade agreements they signed onto do in fact legally put government autonomy subordinate to profits. Or in other words, the Icsid protects the capital investments funded by western banks thereby negating much of the sovereign risk taken on by chasing cheap labour. Sweet!
Now I don’t want to suggest that trade agreements serve no good purpose because they can and they do. But my point here is that the main beneficiary of existing trade agreements are corporations. Second to finish are the undeveloped nations who receive employment and rising wages which translate into higher living standards. At the shit end of the stick, as per usual, is your American middle class. Let’s have a look.
The above chart depicts growth in corporate manufacturing profits vs manufacturing wages both indexed to 100 in base year, 2000. So while those who generate investors’ profits through labour and consumption haven’t seen a real wage increase in more than 15 years, the investors have seen an almost 400% increase in real profits. That means they are not passing the cost savings onto the consumer through lower prices, they are pocketing the savings!
And not only have these workers/consumers not seen any benefit but there are far fewer of them actually working. In fact, we’ve lost 3 million of these jobs since 2000 as shown in the following BLS chart.
And trust me this is not only impacting the manufacturing sector. Most banks are currently in process of transferring many middle and back office jobs to India or Eastern Europe. In fact, here in Chicago (and NY) I personally listened to several old colleagues tell me they are spending their days at work training their Bangladeshi replacements. To ensure no one gets cute and leaves before the training of their replacements is complete they have been threatened with losing their severance package, an egregious act of moral decay. And this is a large investment bank that was heavily bailed out with taxpayer money via the TARP program. Without the trade agreements these moves to India and Eastern Europe would be too risky.
Now for the rest of you still with a job don’t get too excited. Let me show you how you’re paying for this transfer of labour to profit. The corporations taking advantage of these agreements still need to sell their products back here to US consumers. But without jobs or wage growth the consumption has to come from somewhere….
So it’s a good thing we can print money out of thin air to drop from helicopters and make banks whole when their lending standards fail, all on the back of public debt (now 110% of GDP).
And to get back on point, none of this would be happening if we allowed the higher risks to match the lower costs of these undeveloped nations. But we don’t. We give corporations their cake and we allow them to eat it too and we do it through these so called ‘free’ trade agreements. Nothing free about them for the American middle class but they do provide pure arbitrage (i.e. free) profits to corporations. That is, corporations receive all the labour cost benefits while avoiding all of the risk costs associated with undeveloped economies. And so what Trump is proposing is to allocate back those risk costs.
The result is that those firms who seek to lower costs by way of cheap foreign labour can still do so but they will not be able to increase ROI as a result because the risk costs naturally attached to the cheap labour (negated via the trade agreements) will simply be allocated back against profits when they try to sell product back into the US. With no improvement to ROI there is no incentive to leave the US in the first place. You see the American consumer is something every corporation wants and so there is negotiating power there. The result will be that jobs remain with the American middle class.
Now to those who suggest that slightly lower prices are worth destroying a few million American households you’re an idiot. If you want lower prices why not end a monetary system based on 2% annual price increases that has raised prices by some 2500% over the past 100 years. Or have trade agreements that promote free trade but don’t transfer wealth from the American middle class to investors.
It is entirely possible, it just isn’t the objective. Have one more look at the real objective (and thus result) of our existing trade agreements and ask yourself again if Trump isn’t onto something…..