globalization

CEA’s Annual Report: Trade is good, but we need to make sure it’s good for everyone

by Fran Smith on February 12, 2010

in Economy, International, Trade

While snowstorms were raging in the D.C. area, the White House released the Economic Report of the President and the Council of Economic Advisers’Annual Report 2010. I haven’t had a chance yet to study  the 462-page document, but did review the chapter dealing with international trade – Chapter 10, beginning on page 274.

The start of that chapter provides a strong defense of open trade, following the theories of both Adam Smith and David Ricardo regarding specialization and comparative advantage:

“Initially, trade was about introducing products (such as spices) from one market to another, providing consumers with choices they previously did not have. Still today, trade can offer consumers different goods and different varieties of products already available to them and bring new technology from other countries. By allowing countries to specialize based on skills or endowments, trade can also allow countries to improve their standards of living. Trade can also help a country increase its overall output by allowing firms or industries to take advantage of economies of scale or by encouraging the growth of more productive firms. Thus, trade has the potential to increase the overall quantity of goods and services that a given economy can produce with its resources-and hence increase the overall standard of living-making global commerce a cooperative, not a competitive venture.”

Yet the discussion soon veers off  to promote the need to make sure that everyone shares in the benefits of trade:

“In the past, however, the gains from our trade policies have not been shared sufficiently, and technological change and globalization have left many behind.”

What to do about those people who don’t benefit quickly and equally from trade?  Here’s where the true message is revealed.  The CEA report notes that the federal government already has numerous programs on “trade adjustment assistance, worker retraining, and temporary relief programs,” to help them, but much more is needed – progressive taxation, expansion of the social safety net, as well as changes in the health care and education systems.  Here’s the argument for more progressive taxes:

“A progressive tax rate combined with trade allows those who realize substantial income gains from globalization to still prosper a great deal relative to the state where there is no trade and incomes are taxed at a flat rate. And it does so while making sure that those who face lower incomes from globalization also obtain benefits-not just through the lower prices and expanded choices associated with trade, but also through lower taxation.”(Boldface added.)

Besides the illogic of the boldfaced statement, guess what is used as an example of someone who prospered a great deal from trade and globalization but may have crowded out others who were disadvantaged by that success?  J.K. Rowling!

“At the same time, it is distinctly possible that some American authors who would have captured a larger share of the “magic-oriented book” market had there been no trade in literature were crowded out by Rowling’s success . . .”

Was that a tongue-in-cheek acknowledgment that the argument makes no sense?  One can only hope.

More Money For Your Mattress

by Cord Blomquist on January 3, 2009 · 9 comments

in Features, Politics as Usual, Trade

Leggett & Platt, an American innerspring manufacturer, has been busy lobbying the Department of Commerce.  The fruit of their labor: a tariff of anywhere from 164.75% to 234.51% on innersprings from China, their biggest competition.

This tariff means that you can expect to pay double for your next mattress.  Because innersprings are the most expensive part of traditional mattresses and the tariff has effectively removed affordable, low-priced mattresses from the market.

This is the result of a petition to the International Trade Commission filed in December of 2007 by Leggett & Platt—a Fortune 500 company based in Carthage, Missouri.  The petition started an investigation into alleged “dumping” by several Chinese spring makers.

For those not familiar with the doublespeak of trade policy, “dumping” refers to the act of shipping large amounts of a product into a foreign market at well below current market prices.  This seems like a good thing for mattress makers as well as consumers who buy mattresses.  Others disagree, namely Leggett & Platt.

The folks at Leggett & Platt argue that laws like these are necessary to protect American manufacturers (namely themselves)  from unfair competition from abroad.  But, rather than protecting American businesses, this policy is killing them.

Small mattress makers—think obnoxious ads on your local televisions stations—add padding, memory foams, lovely flower print coverings and other components to innersprings to make a finished mattress.  These small to medium sized businesses are paying a steep price for Leggett’s “protection.”

Leggett was already responsible for 70 to 80 percent of the domestic innersprings market.  Without foreign competition, they now have a virtual monopoly on the market.  In short, mattress makers are now forced to buy from Leggett at any price they set.

This means many mattress makers have discontinued discount mattress lines.   Almost all have had to raise their prices in order to pay for Leggett’s high-priced product.

Many small mattress makers relied on foreign sources of innersprings in order to compete with their larger competitors. This new tariff means that’s no longer an option, so  many small mattress makers maybe forced to close their doors.

Those with a dark sense of humor may chuckle at the regulatory underpinnings of this tariff.  The DOC has the authority to investigate dumping and enact such anti-dumping tariffs under Title VII of the Tariff Act of 1930, otherwise known as the Smoot-Hawley Tariff Act.  Under Smoot-Hawley, exports and imports plunged by over 50 percent, from their high in 1929 to the depressed levels of 1932.  Most economists agree that this policy was one of the major catalysts that led to the start of the Great Depression.

Smoot-Hawley has, thankfully, been reformed several times in the decades since those dark days.  But, thanks to companies like Leggett & Platt, who manipulate trade policy to avoid competition, Smott-Hawley is being put back together piece by piece.

But don’t lose any sleep over it; after all, you paid so much for that mattress.

Full disclosure: The author worked for Leggett & Platt as a shipping clerk for a summer in college .  It was a great job.

U.S. and Latin America need closer ties

by Fran Smith on December 12, 2008 · 1 comment

in International, Trade

Four former presidents of Latin American countries and the former president of Spain joined in an ardent plea for the U.S. to strengthen its ties with those countries that share the values of freedom, democracy, and economic progress. In their editorial today in the Wall Street Journal, José Maria Aznar (Spain), Vicente Fox (Mexico), Andrés Pastrana (Colombia), Julio Maria Sanguinetti (Uruguay), and Franciso Flores (El Salvador) also pointed out that “Free trade is one way to help prevent the resurgence of autocracy in the region.”

Poverty is a painful reality in many countries. Millions of people do not have access to health care or education. This is unacceptable. We strongly believe that the benefits of globalization should be available to everybody. We have found in our own countries that strengthening democratic institutions, providing good governance, and opening up our borders to trade is the best way to improve social conditions and economic welfare.

Latin America has much to gain from free trade. Successfully negotiating free-trade agreements will help bring progress and prosperity to Latin American countries, as well as around the globe.

The former leaders called on President-elect Obama to support their efforts in realizing a common dream based on democratic values and principles. That plea is especially apt when these few Latin American countries are surrounded by or adjacent to leftist governments increasingly hostile to the U.S.

FT says “nay” to Hillary choice for State

by Fran Smith on November 24, 2008 · 1 comment

in International, Politics as Usual, Trade

As pundits bet that Sen. Hillary Clinton is a done deal for Secretary of State, today’s editorial in the Financial Times calls it a poor choice for a variety of reasons. In the piece extolling President-ele

ct Barack Obama’s picks for his economic team, the FT says that’s not the case for Hillary and hits her lack of experience, her ambitions, and her personality.

Economics aside, the biggest surprise among Mr Obama’s rumoured appointments is Hillary Clinton, whose selection as secretary of state is said to be “on track”. This is a far more questionable choice, since Mrs Clinton is so lacking in foreign policy experience. The appointment gives rise to unhelpful speculation about the new president’s motives. Is he attempting to bind his party’s wounds? His victory already did that, and governing well would assure a full recovery. Is he attempting to neutralise her as a rival for the presidency in 2012? If things go badly for him, it will take more than this to quell another Clinton bid.

Could Mrs Clinton subordinate herself to Mr Obama, and devote herself to making his presidency a success? That is doubtful and, with many far better qualified candidates available, is a risk there is no need to take.

CEI has criticized that choice for different reasons — Sen. Clinton, who has strong anti-trade, anti-globalization positions, would not temper the in-coming president’s lack of support for trade, which could cause not only more economic problems for the U.S. and the developing world but also geopolitical ones.