“Free Trade” & Protectionism

March 28, 2016

By: Bobby Casey, Managing Director GWP

What makes the truth so irrefutable is that there is observable evidence to verify its existence. One need simply point out that X is true and then present the evidence, and the case is generally closed. Economics is one of those disciplines that are based on observation of cause and effect. Jack up the price of one thing, it has a ripple effect through the rest of the economy ultimately jacking up the prices of goods and services in general.  This is 100% observable over a relatively short period of time.

This isn’t some new discovery. This is one of the reasons why the “fight for $15 minimum wage” is such a disastrous proposition. If you jack up the minimum floor for the cost of labor, then of course you have to up the salaries of everyone else proportionately. So the cost of labor goes up considerably. What happens to the cost of your goods or services then? It has to go up to make up the difference.

Even if people are not fired, the rate at which people are HIRED slows down immensely. Such has been the case in Seattle. And a certain sector if people in particular suffer the most by this particular policy: low and unskilled workers. Those low and unskilled workers happen to disproportionately fall into two major categories: minorities and/or young people.

This is a similar case to sales tax. If you have $100 to spend on clothes, and you see a sweater for $25, pants for $25, and shoes for $50, you can buy all three with no problem. If you slap an 8% sales tax on there, something has to give. If you only have $100 budgeted, the $8 in sales tax has to come from somewhere, right? I guess we have to put back one of the items, or I need to find a way to increase my budget. This becomes even MORE true on the larger ticket items like cars and motorcycles. “Oh, I can afford $10,000 out the door!” Nope. Tax, title, and license are another $2,600… title being the smallest among them. “I don’t have another $2,600!”

The expectation is that people will finance it – i.e. take out a line of credit.

This has not even touched a political nerve yet. This is a reality without political affiliation.

We covered this before when corporations inverted out of the US to merge with other corporations NOT in the United States to save on taxes. When it becomes more cost effective to keep their corporations here, they will. Until then, the capital flight continues.

But the capital flight doesn’t stop at taxation. YES, US corporate taxes are among the highest in the world… and yet several corporations stay. But then the US had to tamper with the cost of raw materials, and that pushed a LOT of businesses to their limits.

Textile industries have moved offshore. Now even our junk food industries are moving offshore! If America can’t even manufacture its own crappy doses of diabetic delight, what’s left?! Not much, that’s for sure.

So far, corporations are dealing with the contrived high cost of unskilled labor (i.e. the minimum wage), the high cost of doing business and being profitable (i.e. taxes), and the every growing regulatory regime. When people like Donald Trump and Bernie Sanders complain about jobs leaving the US, they don’t even bother scratching the surface to answer the obvious question of WHY.

US protectionism. Sounds so patriotic right? Favoring that which is made here over that which is made elsewhere.

Let’s assume for just a moment that was a noble thing to do. The way it actually plays out is that the US makes it nearly prohibitive to buy something as simple as cotton or sugar offshore, so American manufacturers are forced to buy American. Buying American, however, means paying a hefty premium.

Corporations can absorb only so much in costs. At some point they need to make their profits.

Here are some key findings from the International Trade Administration regarding just the sugar industry:

• Employment in sugar containing products (SCPs) industries decreased by more than 10,000 jobs between 1997 and 2002 according to the Bureau of Labor Statistics.

• For each one sugar growing and harvesting job saved through high U.S. sugar prices, nearly three confectionery manufacturing jobs are lost.

• For the confectionery industry in particular, evidence suggests that sugar costs are a major factor in relocation decisions because high U.S. sugar prices represent a larger share of total production costs than labor. In 2004, the price of U.S refined sugar was 23.5 cents per pound compared to the world price at 10.9 cents.

• Many U.S. SCP manufacturers have closed or relocated to Canada where sugar prices are less than half of U.S. prices and to Mexico where sugar prices are about two-thirds of U.S. prices.

• Imports of SCPs have grown rapidly from $6.7 billion in 1990, to $10.2 billion in 1997, up to $18.7 billion in 2004.

So when you have such corporations as Hershey’s, Life Savers, Brach’s, and now Oreo taking hundreds if not thousands of jobs combined to Canada and Mexico, you can clearly understand why!

The next WHY in this obnoxious economic equation is: Why do we still have these arcane legal relics corroding our economy? The sugar lobby of course. Their return on their approximate $50 MILLION in campaign donations is well worth the investment. American “protectionism” is to cronyism what taxation is to theft: synonymous.

This isn’t just with sugar either. As I mentioned earlier, textiles has a similar rigging. We’ve discussed the crony aspects of the TPP along with other myths surrounding the FREE aspect of supposed “free trade agreements” before; well, here you go:

“TPP is less about freeing trade and more about governments negotiating contracts and carving up markets on behalf of their chosen industries. Rather than compete on quality and price with the world’s few textile producers for the business of the world’s multitude of apparel producers, the U.S. textile industry has convinced the U.S. government to do its bidding. Accordingly, under the ‘yarn forward’ rule, the gains from clothing trade accrue to textile producers, not to clothing consumers.” (Source: Forbes)

Bernie Sanders and Donald Trump would like us to believe that economic refugees who go offshore are somehow “un-American”. That stigma has people on both sides of the isle getting agitated with those “evil” rich folk and corporations. Both sides of the isle have collaborated to create this common enemy. They also collaborated in exiling them with crony “protectionist” policies.  Truly FREE trade is exactly that: free.  Free from interference, regulation, exception, or gerrymandering.  It is open and voluntary commerce on mutually agreeable terms for both parties.

These government trade agreements only create more tension and animosity.  It boils down to powerful people picking who wins, who loses, and by how much.  This sort of manipulation has done more damage to economies and chased away more jobs than even taxes.

Are you feeling that same pang? Like some people presume your wealth is undeserved but nonetheless limitless? Has the economic environment gotten so hostile toward you and your wealth, that you’re about ready to claim refugee status in another jurisdiction? It’s time for us to talk. Click here to schedule a consultation.