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How “Free” Trade is Improverishing Americans And Destroying America

Marian Spiral Fractal by Bryan Evans

Marian Spiral Fractal by Bryan Evans

If you want things from another country you have to pay for them. This is what people mean when they say that as a matter of accounting there may be trade surpluses or debts, but the books are always even. But how you pay for them is important. You can:

  • Pay for them with trade. If you sell goods worth at least equal to what you buy then you come out even. But if you have a trade deficit, then you have to make up the difference. In which case you can:
  • Pay for the goods with ownership stakes in your country. You can sell land. You can sell ownership in your companies. Or you can:
  • Sell your future. Sell bonds and debentures. Sell government debt. Sell mortgage backed bonds or consumer debt. Sell money streams in the future. 

That’s it. That’s all. Sell goods, sell your country or sell your future.

Now, it doesn’t have to be a crisis – by no means. Britain owns a huge percentage of the US (more than Japan), but no one worries much about it. Nonetheless if you have a self-reinforcing spiral of selling and debt, it is a problem. When Britain and the Netherlands were investing in the US – they were creating productive capacity in the New World. They were, in fact, outsourcing production to the US. As Britain did this it entered a decline. By 1880 the US had more industrial capacity than Britain – and by 1910 the British working class was impoverished and the middle class sickly. Because these sorts of investments may produce a financial stream – but that stream goes primarily to the rich, not to society as a whole (and yes, there is a difference.) Arbitrage is when it costs less to buy something in Location A (say China) than it does in location B (say America) and the cost of transporting it from A to B is less than the difference. Arbitrage is as close to free money as it’s possible to get in this world; it’s the sort of profit that you’d have to be brain-dead not to take. And right now what is happening is arbitrage – labor arbitrage (cheaper wages overseas), taxation arbitrage (less taxes), land arbitrage (far cheaper land), currency arbitrage (the yuan is cheaper than it should be due to massive intervention) and regulatory arbitrage (even after Bush gutted enforcement agencies many 3rd world nations are still much more lax about regulation than the US).

It just costs more to do business in the US. So why, rationally speaking, would you do any type of business in the US that you can do somewhere cheaper? You would be a fool, and failing your fiduciary responsibility as a corporate officer, not to move as much production overseas as it is profitable to do. And if you’re already overseas because you’re Chinese, or Indian, well, you’ve already got those benefits over US firms. You’d be a fool not to use them, and you have a competitive advantage over US firms. What was the last consumer good you bought that had been made in the US?

One result has been a prolonged decline in the dollar’s value, because there simply isn’t much worth buying from the US except future revenue streams, and now even those are admitted to be mostly worthless. That decline in currency puts inflationary pressure on consumers, as the price of goods and commodities goes up. The price of oil doesn’t look nearly as bad in euros as it does in dollars.

What the US has done is financialize. It is selling itself – and its future – for oil and cheap goods while sending productive capacity, good jobs and future domestic revenue streams to other countries. This wouldn’t be a problem if it was replacing those jobs with better jobs, replacing those industries with better industries – but that’s not what happened. What happened, and is happening, instead, are very simply, transactions of decline – the draw down of Empire.

It’s not inevitable – few things in human affairs are. It can be reversed, or made to benefit everyone – the new new world of the East as well as the US. But doing so requires admitting, first, that there is a problem, and not pretending that the current system is actually free trade and that everyone is actually winning. Because everyone isn’t winning – and the US will lose if it continues pretending that what has been practiced is in any meaningful fashion free trade; that it has been a net benefit to average Americans or that it has done anything but weaken the US.

In a future post I’ll talk about how trade can be fixed.

Additional Reading

How Trade and Currency Interact

Why and When Comparative Advantage Breaks Down

How Healthy Trade Makes Economies Grow

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Ian Welsh

Ian Welsh

Ian Welsh was the Managing Editor of FireDogLake and the Agonist. His work has also appeared at Huffington Post, Alternet, and Truthout, as well as the now defunct Blogging of the President (BOPNews). In Canada his work has appeared in and BlogsCanada. He is also a social media strategy consultant and currently lives in Toronto.

His homeblog is at