Forget "Free Trade" - It's All About Capital Flows

Authored by Charles Hugh Smith via OfTwoMinds blog,

In a world dominated by mobile capital, mobile capital is the comparative advantage.

Defenders and critics of "free trade" and globalization tend to present the issue as either/or: it's inherently good or bad. In the real world, it's not that simple. The confusion starts with defining free trade (and by extension, globalization).

In the classical definition of free trade espoused by 18th century British economist David Ricardo, trade is generally thought of as goods being shipped from one nation to another to take advantage of what Ricardo termed comparative advantage: nations would benefit by exporting whatever they produced efficiently and importing what they did not produce efficiently. While Ricardo’s concept of free trade is intuitively appealing because it is win-win for importer and exporter, it doesn’t describe the consequences of the mobility of capital. Capital--cash, credit, tools and the intangible capital of expertise--moves freely around the globe seeking the highest possible return, pursuing the prime directive of capital: expand or die.

Capital that fails to expand will stagnate or shrink. If the contraction continues unchecked, the capital eventually vanishes.

The mobility of capital radically alters the simplistic 18th century view of free trade. In today's world, trade can not be coherently measured as goods moving between nations, because capital from the importing nation owns the productive assets in the exporting nation. If Apple owns a factory (or joint venture) in China and collects virtually all the profits from the iGadgets produced there, this reality cannot be captured by the models of simple trade described by Ricardo.

In today's globalized version of "free trade," mobile capital can arbitrage labor, currencies, interest rates, regulatory burdens and political favors by shifting between nations and assets. Trying to account for trade in the 18th century manner of goods shipped between nations is nonsensical when components come from a number of nations and profits flow not to the nation of origin but to the owners of capital.

This was recently described in a Foreign Affairs article, (Mis)leading Indicators:

If trade numbers more accurately accounted for how products are made, it is possible that the United States would not have any trade deficit at all with China. The problem, in short, is that trade figures are currently calculated based on the assumption that each product has a single country of origin and that the declared value of that product goes to that country.

Thus, every time an iPhone or an iPad rolls off the factory floors of Foxconn (Apple's main contractor in China) and travels to the port of Long Beach, California, it is counted as an import from China, since that is where it undergoes its final "substantial transformation," which is the criterion the WTO uses to determine which goods to assign to which countries.

Every iPhone that Apple sells in the United States adds roughly $200 to the U.S.-Chinese trade deficit, according to the calculations of three economists who looked at the issue in 2010. That means that by 2013, Apple's U.S. iPhone sales alone were adding $6-$8 billion to the trade deficit with China every year, if not more.

A more reasonable standard, of course, would recognize that iPhones and iPads do not have a single country of origin. More than a dozen companies from at least five countries supply parts for them. Infineon Technologies, in Germany, makes the wireless chip; Toshiba, in Japan, manufactures the touchscreen; and Broadcom, in the United States, makes the Bluetooth chips that let the devices connect to wireless headsets or keyboards.

Analysts differ over how much of the final price of an iPhone or an iPad should be assigned to what country, but no one disputes that the largest slice should go not to China but to the United States. That intellectual property, along with the marketing, is the largest source of the iPhone's value.

Taking these facts into account would leave China, the supposed country of origin, with a paltry piece of the pie. Analysts estimate that as little as $10 of the value of every iPhone or iPad actually ends up in the Chinese economy, in the form of income paid directly to Foxconn or other contractors.

In a world dominated by mobile capital, mobile capital is the comparative advantage. Mobile capital can borrow billions of dollars (or equivalent) in one nation at low rates of interest and then use that money to outbid domestic capital for assets in another nation with few sources of credit.

Mobile capital can overwhelm the local political system, buying favors and cutting deals, all with cash borrowed at near-zero interest rates. Mobile capital can buy up and exploit resources and cheap labor until the resource is depleted or competition cuts profit margins. At that point, mobile capital closes the factories, fires the employees and moves on.

Where is the "free trade" in a world in which the comparative advantage is held by mobile capital? And what gives mobile capital its essentially unlimited leverage? Central banks issuing trillions of dollars in nearly-free money to banks and other financial institutions that funnel the free cash to corporations and financiers, who can then roam the world snapping up assets and arbitraging global imbalances with nearly-free money.

There's nothing remotely "free" about trade based not on Ricardo's simple concept of comparative advantage but on capital flows unleashed by central bank liquidity.

The gains reaped by mobile capital flow to those who control mobile capital: global corporations, financiers and banks. No wonder labor's share of the economy is stagnating across the globe while corporate profits reach unprecedented heights.


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Comments

gdpetti cstu7011 Sat, 03/10/2018 - 12:51 Permalink

True,  it's all fiat, not real in any sense of the word.... as "jewish" if you mean Satanists.... as most Jews are like most Christians, and 'know not what they do'... social pressure to conform, tithe, support in some way, give lip service etc.... most of them never read the Torah, don't understand the Satanic nature of its basic tenets etc... most so-called religious people are nothing but sheeple getting played... all part of the school of life... no pain,  no gain.

In reply to by cstu7011

devo Fri, 03/09/2018 - 17:05 Permalink

Lol at ZHers voting for Trump under the guise of free markets. A tariff is a labor union/dem idea. Told you from day 1 he was a dem in sheep's clothing. Such a confused group.

Koba the Dread devo Fri, 03/09/2018 - 18:20 Permalink

Wow! Your comment is pretty dumb. The Republican party's foundational platform in 1956 was to raise existing high tariffs even higher. Tariffs were dropped under Woodrow Wilson (Democrat) and Franklin Roosevelt (Democrat) and John Kennedy (Democrat).

Wherever you get your information from, it must be a very tight orifice. Why don't you pull your head out of it and smell the air for a change.

Dolt~

In reply to by devo

Sudden Debt devo Fri, 03/09/2018 - 18:54 Permalink

I've been checking real estate lately and when you go through all the adds, the number of houses that are online for over 6 to 9 months is rising fast and price discounts up to 25% from the highs are been displayed allover Europe.

We're all nearing a real estate crash that will soon be announced

In reply to by devo

Crazy Or Not Fri, 03/09/2018 - 17:06 Permalink

We were at Mobile World Congress in Barcelona this last week, and it's sister show "4 years from now".  For data capture and user profiling (at - 4 Years from now) read "spine chilling" - ain't seen nothing yet. (burn your smart phone)

shortonoil Fri, 03/09/2018 - 18:52 Permalink

The capital of the entire planet can be moved all the way around it...in about... 20 millisecond. This author needs a better model? Mobility of capital at the speed of light becomes undefinable. Dah!

 

MEFOBILLS Fri, 03/09/2018 - 18:56 Permalink

I'm going to keep beating my drum, even though nobody is listening.

All foreign trade is only barter.  The best system ever designed to allow nations to trade externally is the Bancor.

Bancor is not money, but an accounting device to manage external trade flows.

With a Bancor system it would be impossible for Capital to game economies by taking arbitrage and rents.  

A bancor would work in the now to mark existing trade flows; however a form of credit is required to stimulate the future so trading nations may work together.

To stimulate the future, trading banks can be used.  This would be similar to what Hjalmar Schacht used in Nazi Germany, to avoid sanctions "international" banking community had put on Germany.

If Germany wanted Tin from Burma, then Burmese would be paid in their money unit.  When Burmese wanted German manufactured goods, the equivalent purchasing power would pass to German's in the form of Reichsmarks. The goods passed through to respective nations, and national currencies passed to citizens in their own countries. In other words, national money stayed within its borders, which is good monetary science. The trading banks were a hidden reason why Germany was attacked by the "international."  It may have been the main reason, as historians are economically illiterate.

Trading Banks of this type can be used to credit economies to trade with each other and work together to each others future benefit.

There is no need for "international" jewish style corporate bank "credit" as capital.  The parasite must be removed from internal economies with Sovereign money, and external to national economies with a Bancor/Trading Bank system.

Capital, especially banker capital is not above labor, and capital flows should not be the tail wagging nations. We live in an era of tremendous deceit, especially in the monetary sector.  If humanity doesn't deal with this "international" capital problem, expect bad outcomes, because lies always lead to bad outputs.

MEFOBILLS laodan Sat, 03/10/2018 - 00:05 Permalink

Hjalmar Schacht's book, the "Magic of Money." 

He doesn't go into a lot of detail though.  It will probably be up to me, as everybody is scared to investigate the Nazi economy.

We need dates and amounts and things like that.

The bottom line is that the trading banks were how Germany got around the "AngloZionist" international trading system.  

Each nation would create a bank in each other's country.  They would post purchasing power equivalents in each bank.  

When the goods transferred, say Tin from Burma transfers to Germany, THEN purchasing power would go toward Burmese workers.

Conversely, when Burmese demanded goods from Germany they had purchasing power available.  Germans would be paid in Reichsmarks.

Exchange rates would be negotiated, and debts canceled if necessary.  Debt instruments basically were isolated to the trading banks, and hence could be jubileed easily due to their legal nature, and their being lodged in the trading bank.

Economists don't learn economic history, so for the most part they are useless for finding solutions to today's problems.

In reply to by laodan

Kernighan Fri, 03/09/2018 - 18:58 Permalink

There are TWO Calcs which constitute the entire CURRENT ACCOUNT CALC:

1: Balance of Trade (the more well known of the two, which purports to show Net Import or Export)
2: Financial Balance (this must directly offset the other, resulting in ZERO). 

When a BoT runs a Surplus, then Financial will be OUTFLOW of investment. When the BoT runs a Deficit, then the Financial will be an INFLOW of investment.  This makes sense when you think about the strong increases in domestic investment of foreign funds over the last couple of decades.  This flow has resulted in several TRILLIONS of foreign investment in USA. 

Too many people seem to only have heard about Balance of Trade.  And some seem to think it's a sort of National Income Statement (it's not, it attempts to show net trade). As Milton Friedman appears to have said: "I have a net deficit with my grocery store".  All this gnashing of teeth seems to ignore whether VALUE is received for net IMPORT.  It would be a concern if I tried to buy a decent German Lathe, and got a piece of crap, but so far I only see goods like this resulting in obtaining a really, really good piece of equipment, that I can then use for any work of a lathe.

RELATED NEWS:
Also poorly understood is fact that USA already has many, many tariffs in place on wide varieties of goods.  All this does not seem to be quite a panacea.  

DaBard51 Fri, 03/09/2018 - 19:28 Permalink

An underlying assumption is profit motive.  You don't make something that you can't sell at a profit.

State-owned enterprises, however, do not have a profit motive.

Discuss.

 

When nine hundred years old you become, look this good you will not.

Xena fobe Sat, 03/10/2018 - 01:21 Permalink

An interesting perspective.  I see it more as corporate and banking tyranny on a global scale.  Criminals above all laws and regulations.  And that was the whole point. It was never about trade. 

 

DaveClark5 Sat, 03/10/2018 - 01:24 Permalink

Debt based inflatable fiat money makes it all possible.   If nothing else support your local organic food growers even if it cost a bit more.   They might keep you alive during a currency implosion.   

radbug Sat, 03/10/2018 - 01:35 Permalink

Yes, Charles, and that is why China today, and Japan in its day, strove to capture the intellectual property contained in the products it was producing for export, and that is why Donald Trump is so upset over China's actions regarding US IP and that is why Bill Clinton should never have accorded China MFN status.

Econogeek Sat, 03/10/2018 - 09:39 Permalink

CHS is exactly right.  Great to see it in laypersons’ terms.  Problem is, you need a way to measure trade flows, and currencies are it.  “Five tons of iGadgets” is meaningless. 

Allocating costs – value added – among countries for each item is impossible to do accurately, plus no government allocates enough money to its statisticians to even make a stab at it.  I used to do the balance-of-payments statistical thing for a living.

The risk Trump is taking in pushing for current account balances to equalize is the threat that poses to the dollar.  Our reserve status depends in part on us running chunky current account deficits.

This is why Greenspan was worried about the shrinking budget deficit under Clinton – reduced issuance of Tsys would weaken the $’s reserve status.

Keeping production and jobs in the US, plus maintaining the $’s reserve status, aren’t mutually exclusive, but it’s a very difficult balancing act, esp since the $’s reserve status is weakening (in my view).

The Big Money types (Wall St, DC, the media) want King Dollar, meaning some net capital($) exports.  Joe Sixpack wants jobs, meaning smaller net capital exports, or even capital imports.  Wonder who wins. 

Bless Pres.Trump for trying.

Econogeek Sat, 03/10/2018 - 09:39 Permalink

CHS is exactly right.  Great to see it in laypersons’ terms.  Problem is, you need a way to measure trade flows, and currencies are it.  “Five tons of iGadgets” is meaningless. 

Allocating costs – value added – among countries for each item is impossible to do accurately, plus no government allocates enough money to its statisticians to even make a stab at it.  I used to do the balance-of-payments statistical thing for a living.

The risk Trump is taking in pushing for current account balances to equalize is the threat that poses to the dollar.  Our reserve status depends in part on us running chunky current account deficits.

This is why Greenspan was worried about the shrinking budget deficit under Clinton – reduced issuance of Tsys would weaken the $’s reserve status.

Keeping production and jobs in the US, plus maintaining the $’s reserve status, aren’t mutually exclusive, but it’s a very difficult balancing act, esp since the $’s reserve status is weakening (in my view).

The Big Money types (Wall St, DC, the media) want King Dollar, meaning some net capital($) exports.  Joe Sixpack wants jobs, meaning smaller net capital exports, or even capital imports.  Wonder who wins. 

Bless Pres.Trump for trying.