Tuesday, July 14, 2009

International Trade and Protectionism, part 3

Policy Implications

Americans spent 200 years of industrialization building up a high quality of life and standard of living, only to watch it petered away in the last generation through out-sourcing of industries and in-sourcing of cheap replacement labor. It shouldn’t be surprising that our average wage and quality of life have been deteriorating for the last 30 years.

The American wage supports an entire way of life, including a minimum wage, safety standards, environmental protections, health care costs, affirmative action set asides, and a retirement system.

Allowing jobs to be out-sourced to low wage countries destroys those aspects of the American dream. Obviously, foreign workers who have none of those advantages can work by the hour for cheaper, but the true cost is borne by American society as a whole.

A rational economic policy for America would safeguard the foundations of our industrial and productive strength. Trade should be open and free when based on true comparative advantage and fair competition, in other words, when it truly benefits both countries.

Imports from countries that do not support an equivalent standard of living should be penalized with a tariff, with the tariff revenue being used to support the American way of life that is undermined by the import.

Corporations that export American professional jobs should face penalties such as a higher corporate tax rate based on what proportion of their workforce has been off-shored.

Tariffs should be levied across the board on countries who engage in any currency manipulation for trade advantage or provide any export subsidies.

American economic policy should support domestic employment by focusing on a stable and profitable productive base, allowing imports and outsourcing only when it would provide a demonstrable benefit to the American standard of living.

Promoting off-shoring based solely on wage arbitrage is actually economically backwards, resulting in production that is less efficient and more costly when viewed in resource terms. Resource terms are real terms, an absolute measure, as opposed to money terms, which are relative and illusory. If off-shoring destroys a naturally evolved network of comparative advantage, it is economically backwards, even if it appears to "save money" in dollar terms. In other words, it is bad for the whole world's economy overall, not just the American economy.

Economic regions are defined by geography, common currency, free labor movement, and transportation integration. Economic regions should be encouraged to become as independent as possible, based on natural comparative advantages, which save resources and produce goods more cheaply on an absolute scale.

Trade which is based on those comparative advantages between regions should be encouraged. However, wholesale relocation of productive industry from one region to another should be discouraged. Rather, domestic industries in each region should be nourished, with the goal of uplifting standards of living in each region without lowing standards of living in another, while maximizing the efficient use of scarce resources everywhere.

Only in this way can a long-term sustainable global economy, with rising standards of living for all, be established.

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