Browsing the blog archives for June, 2016.

Free Trade vs. Fair Trade

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I’m a free-trader and have generally supported most of the trade deals over the years. Lately I’m being asked if and how I can support Donald Trump when he appears to be opposed to free trade. My views are little different from Trump’s, but the differences are not that great when you go through the details.

First of all, the concept of free trade is a no-brainer and you’d be hard pressed to find an economist opposed to it. In fact, we engage in “free trade” all the time. I don’t grow my own food, manufacture my own car, or fix my own electrical problems. I specialize in a line of work I’m good at and use my earnings to trade for the goods and services of others who are better at other things than I am. Trading across borders follows the same logic. Everyone benefits, at least in theory.

In practice, however, there are other considerations. The first of these is national security. You can make the case that buying all of your munitions from China wouldn’t be a good idea even if it costs less. In war time, you must depend on a domestic industry. You can also make the case that security-sensitive products shouldn’t be sold to buyers in Iran or North Korea. These admonitions should be obvious, but they don’t affect most industries anyway.

Another consideration is enforcement, and here is a sticking point for many. Trade across borders should occur in an orderly fashion with both sides following the same rules. If one side isn’t doing so, the other side should insist on enforcement and retaliate if necessary until an agreement is reached. Wealthier nations like the U.S. often look the other way while poorer nations argue for special privileges while they “catch up.” Most like China argue that currency controls and regulatory enforcement should be relaxed while they build up their industries. I disagree, as this constitutes “managed trade” on one side, not “free trade.”

Trump is right when he says that China has been manipulating its currency as part of its “catch up” plan. By maintaining an artificially weak yuan over the years (rather than allowing it to find its own exchange rate on the global market), China has ensured that its products will be cheaper when exported to other markets, while imported good will be more expensive. This does enable us to buy cheaper goods from China, but I don’t believe the net result is positive and I have argued this for years. Kudos to Trump for having the courage to call China out on this.

Another concern is intellectual property. The U.S. has a sophisticated court system to enforce copyrights and while China has improved over the years, there’s still a big gap. Many Chinese use Word—the software I am using to write this blog—without paying Microsoft for it. Pirated copies are readily available for a few dollars on the street there, taking money of the pocket of the software developers.

Regulation is yet another concern. While we have a responsibility to reign in our own hyper-regulated industries, it’s reasonable to insist that manufacturers abroad not enjoy a cost advantage by acting irresponsibly. For example, it’s cheaper to dump waste into the river (where this is allowed) than to process it. Dumping allows a company abroad to pass the savings along to their U.S. customers. Identifying what constitutes significant pollution and other maladies isn’t always easy, it’s still important to take this into account.

Yet another concern is government subsidies. Should a government in another country be permitted to subsidize its competitors while our government does not? This gets muddled as well because our government also subsidizes certain industries, but it’s worth noting the many large Chinese manufacturers are owned—at least partially—by the state. Clearly, subsidization in China is a serious problem.

I admit that some of the issues I’ve raised don’t have simple answers; I will revisit some of these in the future. My point is that negotiating trade deals is complicated, and we should be promoting global trade to the extent that it’s reasonably fair. When it crosses the line, we need leaders who are willing to get tough and take action. Some argue that Trump will start a trade war with his strong rhetoric, but I’m not convinced. Read Art of the Deal and you’ll understand more about Trump’s approach. I don’t want heavy protectionism, but I think Trump’s end game is a middle ground. Besides, if he is elected, Congress would temper any anti-trade measures he proposes anyway. I might be wrong, but I think the net effect of a Trump presidency would be positive on this issue, although I’m sure I wouldn’t agree with him on every point.

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Protests in Venezuela

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I blog periodically on the plight of Venezuela, a once prosperous nation spiraling downward in the grip of socialism. Venezuela’s National Assembly is now controlled by the democratic opposition, but President Maduro still controls the executive and judicial branches of government, so change is difficult. The government acknowledges an inflation rate of 275% but the actual rate is certainly much higher, and the rate is climb further. Citizens wait in line for food and gas in a country with the largest oil reserves in the world. Protests are a daily occurrence.

I just returned from a conference where I spoke with several Venezuela professionals. I won’t discuss their individual experiences and observations, but they underscore several points:

  1. The Chavez-Maduro regime has lasted 17 years, during which time it has institutionalized socialism. Reversing it will not happen overnight.
  2. Markets still work in Venezuela. Price controls, current exchange restrictions, and other regulations have choked off much of the formal economy, but a black market functions to sell goods and services people cannot get elsewhere. Prices are high and goods are scarce. While the official exchange rate for the Venezuelan currency (the bolivar) is about 6 per US dollar, the black market rate is about 1000.
  3. There is a sense that the end of the current socialist regime is near—perhaps a year or two away—but it is unclear how it will end and what the replacement will look like. Socialists often enter through elections, but they rarely exit in the same manner.

Venezuela is a modern socialist experiment conducted in one of Latin America’s most prosperous and resource-wealthy nations. It teaches us about collectivism’s serious and long-term consequences. The black market has ramped up to address needs where official markets will not, but supply is low and costs are high. Its no longer about redistribution of income, but about getting food and other necessities of daily life.

The case of Venezuela also underscores a key reality about socialism. In less than a generation, its leaders can impart a system of cronyism and dependence that now requires more than a simple election to reverse. Let’s hope force is not required to reverse the trend in Venezuela. The protest videos we currently see make me wonder.

What is happening in Venezuela is not in our near future, but Americans must understand the dangers of playing with fire. Socialism has been creeping in the US for some time. It always creates a dependency class. Calls from the left to expand government programs—free college, single payer healthcare, and so on—would only expand this realm of dependence, and those receiving government support rarely give it up without a fight. The national debt has already surpassed $19 trillion. The deeper we slide, the more difficult the turnaround.

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Sizing up a presidential candidate

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During election years we hear a lot about the type of experience appropriate for the presidency. The topic is usually pushed by the camp of one candidate who has [fill in the blank] experience that other candidates lack. In elections past, military experience has often been touted as a necessity for service as “Commander in Chief.” Political experience is often an assumed qualifier, although it worked against most of the Republican presidential hopefuls this year. Clinton supporters claim that “foreign policy experience” is a must. Business experience is a hot button issue for Trump supporters because “you can’t create jobs if you haven’t met a payroll.” It’s tempting to jump on these bandwagons when they align with your favored candidate, but some intellectual honesty is in order.

The truth is—and history supports the fact—that that none of these requirements are absolutely essential to be a good president. Those with military experience might have firsthand experience on the realities of war, but veterans can be trigger-happy when it comes to overcommitting to military intervention. Hefty political experience means that you’ve probably learned to survive in a politically correct world, but I would argue that clarity—not PC—is more important. The world is full of dictators and thugs with a lot of “foreign policy experience,” none of whom would make a good president. Business experience might be the most attractive on the list, but there are plenty of executives who don’t respect the free market. You can be sure that the big banks didn’t overpay Hillary just to hear a speech.

So what should we look for in a prospective president)? Some of the above factors might be pluses, but I would sum it up this way:

  1. Integrity. A good president will have a track record of honesty and believes in governmental transparency.
  2. The right philosophy of the role of government. A good president understands what the government can and must do well, and what it should leave alone. A solid understanding of the Constitution and economics is a must. At the federal level, the government should provide for a strong defense and do what is necessary to protect individual liberty, but it should resist social engineering through its monopoly on force in areas such as the tax code, onerous regulations, and spending programs that are not constitutionally-mandated.
  3. Leadership ability. A good president knows how to identify experts at various levels to oversee the major functions of government. The presidential function is executive, which means that you need to understand how all of the pieces fit together, but you don’t need to understand all of the details. It’s impossible for one person to understand everything anyway, which is why demanding that the president have experience in X, Y or Z is overly simplistic.

A big weakness in only one of these categories can be deadly. But while there seems to be a shortage in all three areas, the greatest is probably in the leadership arena. If an executive lacks leadership acumen, the vacuum will be filled by the usual suspects and political hacks from administrations past. In this respect, Trump’s executive experience gives him a distinct advantage. He has thrived in a world where profit and loss demand accountability, and ineffective programs get reworked or eliminated, not budget increases. While you can’t be involved in a large complex business without making some mistakes—or having those in the organization make some mistakes—you have to have a good winning percentage to survive. Whatever your concerns about the first two on the list, you have to respect his accomplishments.

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