Free Trade Isn’t Free
When Scott McCandless, a principal at Price Waterhouse Coopers in Washington DC and leader of their U.S. trade policy practice told Forbes magazine that Joe Biden was China’s best chance for trade with the US, Forbes responded that Biden was “China’s only chance.” It was Joe Biden who championed the North American Free Trade Agreement (NAFTA), it was Joe Biden who pushed to normalize trade with China, and Joe Biden who supported China’s entry into the World Trade Organization (WTO).
Now, as the election looms near, Joe Biden has changed his tone, claiming that he wants to get tough on China but President Trump seems way ahead of him. The President has already imposed 25% tariffs on a broad range of Chinese imports. He has issued executive orders to increase “Buy America” requirements and employed the Defense Production Act to promote domestic supply chains.
Apart from saying that he wants to get tough on China, Biden does not say how he plans to do so. In fact, he opposes all of the actions, the tariffs, and restrictions on Chinese imports imposed by President Trump. Ostensibly, part of his “getting tough” would be to eliminate those tariffs and restrictions and then do something even tougher, which most economists have been unable to imagine and which plan Biden has yet to disclose.
The democratic camp makes accusations that the US has alienated its Asian allies and that these relationships need repair. The reality, however, is that the US, under President Trump, is closer now to Australia, Vietnam, and India than ever before. A combination of China’s coronavirus lies and China bullying has driven Australia to stand up as one of the staunchest supporters of an anti-China alliance of countries.
India, who always had a very ill-defined relationship with the US, is quickly becoming a powerful ally in the fight against China. And Vietnam, the country where the US fought a protracted, unpopular and destructive war, now finds its interests in trade and defense aligned with the US largely due to Chinese aggression in the South China Sea. Meanwhile, long-term allies such as Taiwan, are moving closer to the US as they oppose the dual threats of a Communist crackdown on democracy in Hong Kong and Chinese military aggression, which threatens the island nation’s continued existence.
Joe Said China’s Not the Problem
When he was part of the Obama White House, Joe Biden famously said “China is not the problem.” He was instrumental in helping China ascend to the World Trade Organization (WTO) and, since then, the US trade deficit with China has increased exponentially. In 2001, the US trade deficit with China was $83 billion. In 2018, it stood at $418.95 billion. If Joe Biden believes that China is not the problem, which country does he blame for the US-China trade deficit? He was against the imposition of tariffs, but in 2019 after one year of the US China trade war and Donald Trump tariffs, the US trade deficit with China had dropped by roughly $73 billion.
Since the People’s Republic of China (PRC) joined the WTO, the US has lost 3.7 million jobs to China. This number, however, does not tell the whole story. Between 2001 and 2017 the US Department of Labor estimates that nearly 1 million US jobs were lost to Mexico. Additionally, since NAFTA was formed, Bureau of Labor Statistics estimates that a total of 4.5 million US manufacturing jobs were lost. Much of the manufacturing that was outsourced to Mexico was done to compete with cheaper products from China. In short, if the US had not been allowing China to export their cheap products to the US, those jobs would still be done by Americans.
Each worker who lost their job spent less money. The average American saves just under 8% of their salary, meaning they spend 92%. Had these workers remained employed, spending most of their salary, new jobs would have been created. Every two workers who lost their job also accounted for one new job not being created. And keep in mind that manufacturing jobs, on average, pay double that of service and retails jobs.
Although only a fraction of the 4.5 million manufacturing workers who lost their jobs remained unemployed, many found jobs in retail or restaurants earning half of what they had earned before. And even those jobs would be paying more if not for legal and illegal immigration and the loss of manufacturing jobs to off-shoring, all of which increase the supply of workers chasing after those low-end jobs, driving wages down.
The Dual Whammy NAFTA and China
Those who support free trade often claim that the jobs that are being lost are jobs that Americans do not want to do. In a recent survey, sewage cleaner was determined to be one of the filthiest jobs in America and, yet, Americans do that job. There is actually no such thing as a job Americans do not want to do. There are, however, jobs that Americans will only do for a certain level of pay. If fruit picking paid $100 an hour, would we still “need” illegal aliens to pick it? Biden wants to offer citizenship to illegal aliens. This will further increase the legal labor pool, driving wages down even more.
The laws of supply and demand say that as supply increases, price goes down. The ability to outsource or to offshore jobs or to have legal or illegal aliens do a job, dramatically increases the supply of workers, driving down wages. One in four displaced manufacturing workers experienced at least a 20% wage reduction when they found a new job. Since Joe Biden’s NAFTA, the average non-college-graduate in America saw their wages decreased by 12%.
Prominent economists, such as Milton Friedman support Joe Biden’s push for free trade and open labor migration. Friedman also argues that a trade deficit, such as the US-China trade deficit is not a problem. Economic theory says that by importing those products that another country can make more cheaply, we can lower prices domestically and US citizens can buy more products. Additionally, by expanding the labor pool from just US workers to workers all over the world, by outsourcing to China or Mexico, or by allowing legal and illegal immigration, we decrease manufacturing costs and the price of goods. And this is all true. Of course, those reductions in cost are caused by a reduction in American wages and the loss of American jobs.
Hardworking People Deserve a Decent Wage
Both Biden and Friedman agree that tariffs and other artificial barriers to trade cause economic inefficiency. In economics, we call this deadweight loss, and it happens any time a government gets involved in trade, whether by offering subsidies to local manufacturers or by imposing tariffs or quotas on imports. However, the United States is not a hypothetical economics class. It is a real country of hardworking people who deserve a decent wage for their labor.
The goal in a society is not to achieve economic efficiency, but rather to find some balance between economic efficiency and societal good. Trade with China raised 100 million Chinese out of poverty, but made millions of Americans unemployed. Jobs lost to Mexico and China, helped a lot of people in those countries, while driving down wages in the US. From a theoretical economic standpoint, this free trade had a net positive effect on the world. But, from an American standpoint, it cost us our jobs and our wages. Americans need to ask themselves, should the president’s slogan be “America first? Or “China and Mexico first”?
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