https://truthout.org/articles/when-politicians-say-free-trade-they-mean-upward-redistribution/
When Politicians Say “Free Trade,” They Mean Upward Redistribution
[links in online article]
By Dean Baker, Truthout
Published February 11, 2019
In Washington policy circles, being a supporter of free trade is pretty
much comparable to saying you believe in evolution. All reasonable
people say they accept the doctrine and agree that tariffs and other
forms of protectionism are evil and dirty.
While there are good arguments for free trade as an economic policy, in
the real world what passes for “free trade” is pretty much any policy
that redistributes income upward, even if it is directly at odds with
free trade. I have long harped on patent and copyright protection, both
because I think that these government-granted monopolies are bad policy
(at least in their current form), and because they are 180 degrees at
odds with free trade.
The rationale for patents and copyrights is they provide incentives for
innovation and creative work, but there is a rationale for every form of
protectionism. This doesn’t change the fact that patent and copyright
protection are still forms of protectionism. And, the imposition of
stronger patent and copyright protections, which has been a central
component of every trade deal for the last quarter-century, is a very
costly form of protectionism.
Needless to say, the beneficiaries of this protectionism tend to be in
the high end of income distribution. The list includes folks like Bill
Gates, the pharmaceutical industry and the entertainment industry.
But, this is hardly the only situation where the “free traders” depart
from free trade. The Export-Import Bank, which provides loans and loan
guarantees to exporters, has generally received strong support from
self-described free traders.
On its face, this is difficult to understand, since the bank is
providing an explicit subsidy to exporters by allowing them to get loans
at below-market interest rates. In the textbook, government subsidies
for exports are 180 degrees at odds with free trade.
It is also important to note that the vast majority of the bank’s loans
and guarantees benefit a very small number of companies such as Boeing,
Caterpillar and GE. In some years, Boeing alone has accounted for close
to 90 percent of its loans.
When the Export-Import Bank was last up for reauthorization in 2017, its
proponents argued that the bank was necessary because our competitors
provided similar subsidies to their major corporations. In the textbook
free trade models, foreign subsidies aren’t supposed to matter, since
this just means that foolish governments are subsidizing US consumers.
Apparently, we are supposed to think differently when the profits of
major US companies are at stake.
We actually got a chance to test the consequences of these companies
doing without the subsidies from the Export-Import Bank. As Charles Lane
pointed out in the Washington Post, the bank has been unable to issue
large loans for the last two years because Republicans in Congress have
denied it a quorum. Yet Boeing and our exports of planes seem to be
doing just fine. In other words, this was a just a subsidy to
well-connected businesses that “free traders” decided to support.
Another area where “free traders” seem to have little interest in free
trade principles is currency values. In a system of floating exchange
rates, like we currently have, large trade imbalances are supposed to be
corrected by changes in currency prices.
A country with a large trade surplus is supposed to see the value of its
currency rise relative to other currencies. This makes the goods and
services they produce less competitive in the world. By contrast, the
currency of a country with a large trade deficit is supposed to fall,
making its goods and services more competitive.
This process can be thwarted if a country buys up large amounts of
dollars or other reserve currencies to keep its currency from rising.
This is what China did in the last decade. There is now general
agreement that China acted to deliberately hold down the value of its
currency to keep its competitive advantage.
While China has stopped buying large amounts of currency, it still holds
a huge amount of reserves, which has the same effect. While some of us
have noted this point, most news accounts are dismissive of the idea
that China is holding excessive reserves and thereby keeping down the
value of its currency.
For this reason, it was surprising to see a New York Times article that
asserted as a matter of fact that “Russia has $472 billion in reserves,
more than the country’s combined public and foreign debt of $453 billion
and nearly three times what the IMF recommends.”
China’s reserve holdings, counting its sovereign wealth fund, are more
than ten times as large. While China’s economy is roughly eight times
the size of Russia’s, this means that the size of its reserves, relative
to its economy, is actually greater than Russia’s, which the NYT told us
is “nearly three times what the IMF recommends.”
This matters because it means that China is still holding down the value
of its currency to maintain a competitive advantage in the international
economy. If we had an administration that was concerned about the US
trade deficit with China, it would be pushing for the country to offload
some of its reserves and allow the value of its currency to rise.
Note, this is what is supposed to happen in the free trade story.
Governments are not supposed to be acting to prevent the price of their
currency from rising.
Instead, to the applause of the “free traders,” Trump is pressing
demands to force China to show greater respect for US patents and
copyrights. If he succeeds, this will mean US companies will have more
incentive to outsource jobs to China, since they have less reason to
fear transfers of their technology.
The long and short in this story is that “free trade,” as it appears in
Washington policy debates, is pretty much whatever the rich and powerful
want it to be. It has nothing to do with the economic concept of free
trade; it is about redistributing more money from everyone else to them.
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