Today, the BBC reported that the G-7 powers had voted
to avoid protectionism. The U.S. Treasury Secretary declared
that the “Buy American” provisions in the Stimulus Bill would not
be placed into practice and that the U.S. would not practice
The fear of “protectionism” seems to be world-wide.
What is “protectionism?”
Anything that impedes “free trade” is “protectionism.”
Tarriffs, quotas, subsidies– anything that helps domestic
firms and harms exporters in foreign countries is “protectionism.”
The people harmed most by protectionism are exporters,
and, especially their owners and investors. If you have invested
billions in China where labor is cheap, you do not want your
products made more expensive by tarrifs or quotas. As an owner
or investor in a country with cheap labor you want to be able to
beat any competition in the importing countryÃ¢â‚¬”not by qualityÃ¢â‚¬”but
ARGUMENTS AGAINST PROTECTIONISM
The most prevalent and most powerful argument against
protectionism is the “FREE TRADE” argument.
Using the glamorous title “Free Trade” Money Managers
argue that by opening all countries to the exports of other countries
more people will be put to work and products will be cheaper
Each country will sell what that country can make
best and every country will become a specialist in making
products that no one else can make and these products will
not compete with the products of the importing country. Therefore,
the exporting country will employ more workers and the importing
country will not lose workers.
IS THIS ARGUMENT VALID?
Not in the real world. Why not?
Humans are humans across rthe world. We all need the
same things and producers must produce the same things. There
is no way any country can specialize in the manufacture of
a product that another country cannot imitate.
All humans require food, clothing, house hold materials
and vehicles for transportation. Any large country can
produce any of these items. There may be slight differences
in quality but the determing factor for the buyer will be price.
Price is constructed of two simple ingredients: 1. Cost
of materials, and, 2. Cost of labor.
Of the two ingredients, Cost of Labor is almost always
the greatest cost.
In the U.S. and Europe and Japan the cost of labor
is extremely high, and workers in these areas have high
living standards. The workers in the U.S. and Europe have
fancy homes, fancy cars and eat costly food.
In Asia, the cost of labor is low. The living standards
are also low. Workers have small living quartersÃ¢â‚¬”in China,
many workers live together in dormitoriesÃ¢â‚¬”and their
food is simple and not costly. A meal in China or India
may be had for one tenth the cost of a Western meal
because the labor and ingredients of the meal are cheap.
The Chinese and Indians rarely have vehicles for transportation
while Americans and Europeans may have several.
Sixty years ago Americans and Europeans used
expensive capital machinery in their factories, thereby
increasing exponentially their productive capacity. One
Western worker could make 50 times more products than
an Asian worker who had primitive tools. At that period
of time no protectionism was best for the West.
Today, Asia has the same machinery as the West.
No longer does machinery hold the key to price. Labor
costs are the key to price.
The Money Managers who argue for “Free Trade”
make the argument that Western countries can specialize
in making high- cost products that the Asian nations cannot
make. They point to autos and airplanes. Yet, we see the
manufacture of autos spreading across Asia. First, it was
the Japanese, who are now the world’s leaders. Then came
the South Koreans. At the present the Indians and Chinese
are opening their own factories.
In terms of airplanes, both Japan and China are now
building their own aircraft. They will soon knock Boeing
and Airbus into second or third place with their low cost labor.
We can see easily that the argument for specialization
is totally specious.
We can also see that “Free Trade” leads to unemployment
of high cost labor.
GETTING AROUND UNEMPLOYMENT
The Money Managers, knowing that high paid
American and European labor could not compete against
low cost Asian labor, intituted two new tactics:
1. Buy now and pay later.
2. Start a “Service Industry.”
By using the equity in the homes of Western workers
the Money Managers began a process of buying on credit.
The credit was obtained from the value of homes or from
future income. Workers were convinced through advertising
and governmental propaganda to buy and not save. The
saving rates in the west plummeted and workers went
deeper and deeper into debt.
Instead of working in factories, workers were given
jobs in the so called “Service Industry” which sprung
up as the factories were shipped to China and other
parts of Asia. Since there still were assets in the West
the population could spend them.
COLLAPSE OF THE “SERVICE INDUSTRY”
The “Service Industry” was based on a Ponzi Scheme:
Buy Now! Pay Later! Borrow!
Like all Ponzi Schemes failure was inevitable. Eventually,
the loaners of money would have no money left to loan!
This is precisely what we see today. Loaners of
money, Banks and other financial institutions, are failing
by the hundreds. The so called “Credit Crunch” is upon us.
WHAT WILL GOVERNMENTS DO?
Governments, whose existence is based on taxes,
see their revenues plummeting as taxes stop from unemployed
workers They have no money to pay their employees and
friends. What do countries do when they have no money?
Across the globe, governments are printing money and
giving it to their friends, the bankers and the wealthy.
“Printing money” is an unacceptable phrase for the
general population, since it implies the type of inflation
seen in Third World countries such as Zimbabwe, where
people are using multi-million dollar bank notes to buy bread.
Western governments maintain that they are not
printing money, that, instead, they are issuing “Government
Bonds!” Anyone physically holding those bonds will notice instantly
that they are made of paper. Selling a bond turns one form
of paper into money, another form of paper. People understand
this mechanism readily and dislike it. What can governments do?
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