What Cost Free Trade?

Free Trade is based upon the single issue of costs. Frequently those who represent the ideal of Free Trade, and it is an ideal, make no mistake about that, assert that barriers to free trade drive up costs in an unnatural manner. That is, if US automakers use steel made by American foundries and the output is higher in terms of labor costs per unit then the American public is being cheated, made to buy those automobiles at a higher price than would occur if there were no tariffs on cheaper imported steel. Thus, the American consuming public would be required to subsidize the jobs of union steel workers. There is some merit in this argument. But that argument lacks the realization that there are other factors at work that would drive up the cost of locally or nationally provided goods and services. It is a very simplistic argument at best.

A country that has the natural resources needed to produce some product or service, such as steel, should be able to produce that product or service as cheaply as any other country with similar resources. That is, all else being equal, there is no reason why steel produced in the US should be any more expensive that steel produced in China, Japan, or Korea. And of the three, Japan and Korea have the least natural resources by which they could compete on a world market in steel making. We must ask why, during the seventies and eighties and into the nineties was Japan in particular able to produce steel below the price levels found in the United States? And how has Korea taken over the steel market when its own resources are far from plentiful?

Steel production is a dirty and dangerous business. Most iron ore is mined in open pits operations which produces both the iron and unwanted by-products. That waste, for it possesses little commercial value, must be stored somewhere and may be harmful by virtue of its concentration. The same is true of coal and it’s manner of mining may pose future threats to both miners and the local populations. Every economic activity produces costs. Providing an accounting service has the cost of health upon the provider. After all, sitting at a desk does affect the human body in a negative manner. Some products and services produce environmental costs. Pollution of water resources, air quality, concentration of waste that displaces forests and meadows, all these effects incur costs. The problem is that many of the costs remain unaccounted in the final price per unit. On top of that are the labor costs per unit of production. Labor unions are a source of restraint upon businesses. That is, they may use monopolistic powers in the labor market that drive up the costs per unit of production. Hence an enterprise with no monopolistic labor practices can and does produce a product or service at a lower cost than one that is restricted by such labor practices.

There are transportation costs to be considered. Brazil has great natural resources but those resources are located on high plateaus that cannot be easily accessed from the Atlantic Ocean ports. The transportation of such resources is south towards Argentina and Uruguay, a far greater distance than the coast line directly east. And the type of transportation available makes a great difference. The iron ore from Michigan had to be loaded onto trains and moved to ports where ore carriers traveled on the Great lakes. Then trains carried the ore to the Pittsburgh area. The train transportation consisted of short distances. Since the energy content of train transportation is considerably higher that the energy content of waterway, the train travel cost was a minor part of the transportation cost. Now contrast that with Russia where the ores and coal must be transported by rail and sometimes over long distances.

One cost so many Free Traders overlook is that of government. The assumption is that the US operates a free market economy. But this is untrue. If one wanted to construct a new steel plant, consider the time such planning would cost, the various government bodies who would impose rules, regulations, and taxes upon such an activity. I remember reading books on business management and reading the HBR studies on starting from scratch new manufacturing facilities. I am going back the the sixties here. Simple decisions such as sharing a rail spur required computing the cost of freight car handling if that spur or siding was a single tract and your facility was in the middle or at the end of other facilities. The road system can be a problem since one may be forced to divert shipping traffic around local neighborhoods. Then there are noise ordinances, pollutions controls, waste control, local taxes of every stripe, county taxes and regulations, state taxes and regulations, and finally federal government taxes and regulations. Oh, and we must not forget that we need employees who can deal with these issues.

The problem with the Free Traders is that they never see all the associated costs of production. Perhaps worse yet is to believe that when other countries foul their own nests there are no associated costs for us. One may talk about reducing carbon emissions here and the fact that outsourcing manufacturing to other countries reduces our greenhouse emissions. But if those countries we out source to do little or nothing to control their emissions then what have we gained? We will pay indirectly those pollution costs and all we have gained is a loss of jobs and cheaper prices for our consumption. The illusion that lower prices on imported goods and services are good for the economy ignores the realities of our economy. The outsourcing of manufacturing has been made possible by the outsourcing of credit, not capital. Our savings are at an all time low and our debt on every level are at an all time high. Now you tell me how free trade will cure that condition.

Finally, when it comes to employment, individuals mush have work. They must be paid to produce so that they can consume. To put it bluntly, the poor are a great tax upon an economy. Why? Welfare! Non productive expenditures of income paid in the form of taxes and worse yet, the deficit spending by various governments to support all manner of welfare. That includes the “corporate welfare” that exists in this country on a scale that if it were stopped tomorrow might assure those on welfare an annual income of $50,000. Meanwhile free trade has not reduced the cost of an iPhone or iPad, it has only increased the profits Apple makes at the expense of the citizens of this country who purchase such products.

The one last point we should note is that when we enter free trade agreements that interfere with the sovereignty of those who sing such agreements is another great obstacle, the cost of which is very difficult to calculate. This is a moral point worth considering for to dictate to others through non elected bodies of government is to sow the seeds of dissatisfaction and possibly war.

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