The War on Trade

The War on Trade

Americans are sending $40 billion a month of their wealth to foreign nations. A retired GE executive argues against free trade. He says our standard of living is at stake.

This week's report on trade delves into the growing debate about outsourcing, U.S. jobs being shifted overseas and whether free trade is the right political-economic policy to pursue.

GCBR's view is unassailably pro-free trade.

Needless to say there are other views on this subject. One of them comes from a retired General Electric executive, A.M. Anderson, who sent his "white paper" on trade to GCBR with intent of engaging GCBR readers in the discussion of what the U.S. policy should be toward trade and the nation's growing trade deficit.

As you'll read, Anderson sees a future of Americans increasingly losing jobs and lowering their standard of living while less wealthy nations increase their living standards - at our expense.

The trend appears unstoppable. And with it come consequences. One is: How will Americans who lose their jobs be able to find new jobs that will allow them to maintain or improve their standard of living? Anderson believes many of them won't. If not, he asks, who is responsible for their plight - the individuals themselves or the nation at large?

Free marketers often are perceived to have a cold heart. As author, economist and philosopher Thomas Sowell wrote recently: "The plain fact that there are large differences among individuals in incomes, occupations and whole ways of life dependent upon these things has been widely seen as unfair, especially when the accident of birth has had much to do with these large economic and social differences. Life is unfair. There is no point denying it."

There is no simple answer to the dilemma that arises from displaced workers. But on this, most of us probably would agree: If we're at least educated about changing conditions, we can make decisions and choices to face them.

On pages 6 through 9, you'll find excerpts of Anderson's case for balanced trade, a primer on free trade and nationally known economist Walter Williams' commentary on who is the real enemy in America's trade war.

- Editor

By Matt Walsh

Editor

A. M. "Mickey" Anderson is a troubled, worried American.

Retired after nearly 35 years in the executive ranks of research, engineering and manufacturing at General Electric, the 81-year-old Englewood resident has spent much of his time the past two years trying to get people to care about a subject that finally has jumped to the front of the American agenda - the U.S. trade deficit.

It's about time, as Anderson sees it. "Just look at the numbers," he says. "Every month we're sending $40 billion of our wealth out of this country."

That's the United State's monthly trade deficit. On an annual basis, in 2003 Americans spent and borrowed to buy $489 billion worth of goods and services over and above what foreigners paid us for our goods and services. Think of it as sending a never-ending, increasing flow of dollars overseas into the hands and bank accounts of the Chinese, Japanese and Europeans.

As Anderson acknowledges and economists argue, many of those dollars return to the United States when foreigners buy our exports or when they invest in our assets. They develop real estate, invest capital in growing companies or fund our government's debt. But this, too, disturbs Anderson for the obvious reason: Americans increasingly own less of their nation. Indeed, according to Longboat Key-based Michael Hodges, a retired CEO of Rockwell International and author of the Grandfather Economic Report (http://mwhodges.home.att.net), foreign-based investors own more of the United States than U.S. investors own abroad - $9.4 trillion worth of our assets vs. $7.2 trillion of theirs as of 2001.

At the rate we're going, with the trade deficit increasing an average of 26% a year for the past five years - Anderson believes Americans are on a course destined to swell the ranks of the U.S. unemployed and painfully ratchet down Americans' standard of living for the next decade, if not longer. In fact, Anderson says, those trends have been under way for a long time but increasingly so since 1998, when the trade deficit jumped from $107 billion to $163 billion. In only six years, the trade deficit has increased 350%.

To help coax Americans - including Sarasota and Manatee's Main Street merchants and professionals - into thinking about, paying attention to and, perhaps, taking action to stem the trade tide, Anderson for the past two years has been writing a white paper that he hopes raises the discussion about trade from Main Street to Wall Street to Washington. His argument calls for a dramatic shift in American trade policy (see page 6). In spite of his capitalistic, free-enterprise leanings, Anderson says the United States should abandon the move toward free trade and adopt a policy of balanced trade.

The concept is simple: The United States, in the aggregate, would trade with its partners in equal dollar amounts.

But while simple in concept, Anderson knows his idea would be difficult and highly political in practice. He knows he is advocating against a tsunami-like tide.

Sitting with Anderson in the conference room of his son's Bradenton company, Cortez Heating and Air Conditioning, where Anderson helps out part time, you can't help but wonder why this soft-spoken octogenarian is bothering with an issue that's as big as the world. He's just one voice - and, with all due respect, a retiree. Yet, he has sent his white paper to his congressmen and congresswomen - to no avail so far ("They don't read something like this," he says.). He captured GCBR's attention after pitching his white paper for possible publication via a series of e-mails over the past two months and a recent meeting. Why is he so persistent and passionate about the trade deficit?

"This is my country," says Anderson, a World War II veteran.

"Fundamentally, the end result of what we're doing now is the standard of living in the U.S. will degrade," he says. "It already has."

At some point in the future - in a decade, perhaps two decades, maybe longer, Anderson says, "there will be balance. Everything finds a balance eventually. But the U.S. standard of living will decline at the expense of increasing others' standard of living.

"Economists say all those people here who will be displaced and out of work will find other jobs," he adds. "But I would argue the replacement jobs won't grow fast enough or be at the same wage level to replace the work that is sent out of this country."

q q q

Anderson has had first-hand experience with the effects of trade imbalances. In the early 1960s, he managed an appliance factory in Ontario for Franklin Manufacturing. The plant made refrigerators, freezers, washers and dryers under private labels for retailers, some of them in the United States. At the time, U.S. appliance manufacturers were dominating the market, largely because they could produce greater volumes of appliances faster and at lower prices than the Canadians.

Officials from the Canadian Department of Trade and Commerce came to Anderson for advice on how Canada could compete. They knew he had worked in the appliance business for General Electric. Unable to match American productivity on pure competition, the Canadian officials talked of trying to negotiate a "balanced trade" agreement with the United States, similar to one that was being negotiated for the automobile industry. Anderson says the idea went nowhere. But it remained with him.

Several years later, Anderson encountered the effects of trade again. This time he was an executive at GE's appliance manufacturing campus in Louisville. Business was booming. GE's appliance unit was running out of manufacturing capacity and space in Louisville. The company's top executives decided to look into manufacturing in Mexico.

"People told us we'd be crazy to go to Mexico because of the low labor productivity there," Anderson says. So GE officials traveled to Juarez for a first-hand look at a brassiere factory. Analysts measured the Mexican employees' productivity. Afterward, they found a similar plant in the United States and measured U.S. employees' brassiere output. The results were almost identical.

GE built the appliance factory in Juarez. Anderson says GE figured that for every job created in Juarez, the company saved $10,000 in what it would have paid for similar plant, labor and benefits in the United States.

What's more, the Juarez plant suddenly gave GE management leverage with the labor unions. Says Anderson: "They told the unions, 'Look, you can keep forcing us to increase your wages, but you're going to force us to move these jobs to Mexico.' " At its apex, GE's Louisville appliance center employed 20,000 people directly. Today the number is 9,000.

More recently, Anderson felt personally the effects of U.S. jobs moving to lower-cost, overseas labor centers. Two years ago, when Anderson called the GE subsidiary that managed his mutual fund, he spoke to representatives in Connecticut. "Two months ago," he says, "I called a center in India.

"You can't blame the ELFUN manager for using India," he says. "It's not their fault. You would expect them to do that. But the only way to deal with this is to come out with a national policy that says 'slow this down.' "

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Anderson's concept of balanced trade flies against conventional economic wisdom (see pages 8 and 9). He is advocating that the U.S. impose import duties universally until there is balance - in which the aggregate dollar amount of U.S. imports from around the world equals the dollar amount of U.S. exports being shipped around the world.

These duties would not be selective, Anderson says. "It would be unilateral on the part of the U.S. If I were going to do it, I would set a common duty on all the imports coming into the country. I would not try to segregate by trade sector or by trading partner. That gets to be a terrible negotiation. The accounting nightmare becomes immense. Right now there are 390 pages of duty schedules in the Department of Commerce. Make the duty the same for every product. That's the way I would start.

"If you force trade toward an aggregate balance for the whole country, maybe exports from Mexico would go down a little," he says. "Maybe exports from China would down a lot. Or maybe it would go the other way. Either way, it still turns out that the lowest labor rate areas in the world have the largest opportunities to export into this country."

***

Anderson doesn't expect to get much of a reception for balanced trade. "The people who run Congress - they're jobs are not threatened," he says. "The people at Wal-Mart - they're jobs are not threatened." But the small business owners, he thinks, might be more receptive to a change in trade philosophy. "I'm not trying to make a populist contest out of this," Anderson says. "I'm just trying to look at the facts."

U.S. BALANCE

OF PAYMENTS

The table shows the difference between U.S. exports and imports in the aggregate, for goods and for services. A negative dollar amount is a trade deficit. Dollars in billions.

TotalGoodsServices

1970$2.3$2.6$-.3

1971-1.3-2.31.0

1972-5.4-6.41.0

19731.9.91.0

1974-4.3-5.51.2

197512.48.93.5

1976-6.1-9.53.4

1977-27.2-31.13.8

1978-29.8-33.94.2

1979-24.6-27.63.0

1980-19.4-25.56.1

1981-16.2-28.011.9

1982-24.2-36.512.3

1983-57.8-67.19.3

1984-109.2-112.53.3

1985-122.1-122.2.1

1986-140.6-145.14.5

1987-153.3-159.66.2

1988-115.9-127.011.1

1989-92.2-115.223.0

1990-81.1-109.027.9

1991-30.7-73.843.1

1992-38.2-96.958.7

1993-69.2-132.563.3

1994-97.2-165.868.6

1995-95.1-174.279.1

1996-102.9-191.088.1

1997-107.0-198.191.1

1998-163.2-246.783.5

1999-261.2-346.084.8

2000-375.4-452.477.0

2001-357.8-427.269.4

2002-418.0-482.964.8

2003-489.4-549.460.0

Source: U.S. Department of Commerce

Case for Balanced Trade

(The following are excerpts of Mickey Anderson's white paper on balanced trade. For a full version, go to www.review.net.)

By A.M. Anderson

Why do we need a policy of balanced trade? The current trade imbalance has been running about $40 billion a month, and there is little indication this will swing to a balanced condition in our lifetime under the current policies.

These dollar outflows represent a gift of our wealth to our trading partners. The ownership of the dollars is transferred from U.S. ownership to foreign ownership.

If the current trade imbalance represented products with a sales value of $100,000 to $200,000 per year per employee if produced in the United States, the current imbalance rate is equivalent to transferring the jobs of 2.5 million to 5 million U.S. employees to offshore locations.

If the lost jobs had earned about $30,000 per year, the loss of input to the Social Security system alone could range from $12 billion to $24 billion per year. The loss of income taxes is another large chunk, and the loss of wage and salary income that would be produced by cycling the wage dollars through the local economy is another large piece.

These numbers are not intended to be exact, but a well-executed balanced trade policy would reduce or eliminate the detrimental effects of job and wealth loss.

Most of our trade policy actions should focus on using import duties to modulate U.S. imports downward because increased exports are unlikely to make a significant near-term change in the balance.

The notion of trade balance means that the aggregate outflow of dollars for offshore purchases equals the aggregate inflow of dollars paid for items exported from the United States. If the offshore price of a product is below the domestic price, then domestic purchases will decrease and imports will increase.

The purpose of import duties is to adjust the acquisition cost of imports upward and thus reduce the attractiveness of imports to U.S. purchasers. If the trade balance is negative, properly designed tariffs have the objective of modulating import flows downward toward a balanced position. Although the duties are part of the government revenue, the primary purpose is to modulate trade flows, not produce government revenue.

With balanced trade via import duties, many undesirable effects of the current trade policy would be reduced significantly. Such tariffs, of course, would have a blatantly protectionist purpose. The measurement target would aim for aggregate balance in the trade flows into and out of the United States. The simplistic "free trade" mantra would go to the scrap heap.

A feasible import duty schedule does not aim for balance in each individual economic sector or product. The national requirement is aggregate balance for all sectors; total exports equal total imports.

Having said that, however, there are some sectors for which imports should exceed exports, and for these sectors there should be no attempt to reduce the imports by imposing a tariff. For instance, if an exporting country has an intrinsic advantage in the production of a product, the principle of economic advantage implies that the output from that country should increase and provide an increasing share of the product consumed by other countries.

Likewise, imports that would not be subject to tariffs would occur if the country that is the source of a potential import to the United States has an intrinsic competitive advantage because of work force skills or other factors germane to the production of the product. In these circumstances, there is no reason to apply an import duty.

But if the only competitive advantage is lower cost created primarily by the lower standard of living in the producing country, if we allow unrestricted imports the net effect is that we help increase their living standards at the expense of our living standards. It is appropriate to inhibit these imports. But it is probably best to avoid becoming enmeshed in issues of balance by sector or by trading partner.

Is balanced trade possible? The current "free trade" dogma has powerful support. Converting to a more rational "balanced trade" basis will have to come from those segments of the economy that have been hurt the most and from intellectually competent citizens who recognize the damage from the current policies. There is little or no incentive for the entrenched interests to change.

A.M. Anderson was an engineer, nuclear research scientist and manufacturing plant manager for GE for 35 years.