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What's The Deal With Free Trade?

April 7, 2016

Free Trade. Fair Trade. Trade Barriers. Import Duties. Government Subsidies.

Where does it end? The discussion about trade, regardless of how you frame it, touches a nerve with anyone who conducts business. And we often use words that advance our arguments while disparaging the words that advance our opponents. The “Free Trade” people are generally opposed to a given law while the “Fair Trade” people are in favor of it, but who could be against something that is “free” or oppose something that is “fair”? Why can’t we have it both free and fair? I’ll get to it and keep away from the familiar buzz words as much as I can.

If you read my earlier post, you may remember that money has a peculiar definition:

Money: the one thing accepted in exchange for any other thing

I will give you electric cable if you give me enough money. You will give me an appliance if I give you enough money. You don’t want me to pay you in chocolate, landscaping services, or vague promises to pay you later. Just keep it in hard currency, thank you very much. Chocolate, landscaping, and promises all have value, but they are not hard means of exchange. So it’s trade, money for things.

If I want to sell my stuff to Joe, does the government really care? I mean, if I sell $1 million of electric cable to Joe who makes equipment, how does that interest my government? In prior centuries, such transactions were rarely if ever taxed. The vast majority of governments’ income around the world came from import duties or property taxes, and almost no business transactions were taxed. An early American business transaction that was taxed was the sale of whiskey. (Read more about the Whiskey Rebellion) Why would the government tax whiskey? Simple—the government needed more money than it could collect normally. As the decades rolled along and recording sales became more common, governments found new ways to raise revenue, most notably taxing business transactions. In all cases, the primary purpose was raising revenue to run government services.(I will let you decide if those services are worthwhile or not!) So, to answer the question posed above, “does the government care?”, the answer is yes - the government does care because that is how it collects money.

But there are additional reasons the government taxes, and the largest one is social priorities.(Or, more skeptically, political priorities.)My (USA) government taxes alcohol and tobacco at much higher rates than lemonade and perfume because alcohol and tobacco are viewed as “socially undesirable” products. If you want to imbibe or smoke, you are going to have to pay for the privilege—what is often called a “sin tax”. Enter the discussion of free trade vs. fair trade.

Taxes and import duties can be used for social priorities.

  1. Let’s give tax benefits to companies that use solar power, a clean energy.
  2. Let's have 0% sales tax on groceries so all citizens have a smaller tax burden on food, a necessity.
  3. Let's have higher import duties on products that are made outside our country to discourage citizens from purchasing these products from abroad.
  4. Let's apply punitive duty rates for countries who trade in ways that are unfair to trading partners, such as currency manipulation, government subsidies, or sanctioned corruption.

All of these ideas are motivated by social and political ideals, not by economic efficiency. They use taxing authority to meet social goals. The terms “free trade” and “fair trade” are really discussing what those social and political priorities should be—what they want. What do they want?

Here is what the Free Trade team thinks:

  • As long as trade is open, economic efficiency wins. Economic efficiency provides the most benefits to the largest number of people in the market.
  • Open trade rewards good products, services and ideas and punishes bad products, services, and ideas. We get to the best through open competition, not through restricted competition.
  • Open trade is a competitive advantage for open countries because openness allows for fast decision making and innovations. A constrained country moves slowly and cannot compete, thus open countries win more business. It’s just makes good business sense for an open country to open up even more.

Here is what the Fair Trade team thinks:

  • Reasonable restraints on trade curb excesses of wealthy and powerful owners. The restraints force these powerful people to act at a minimum level of social decency(wages, working conditions, environmental protection, etc.).
  • Reasonable restraints on trade protect social segments from specific market forces beyond their control(e.g., low cost competition from globalization, bad treaties, labor unions’ leverage, etc.).
  • Reasonable restraints on trade protect national markets so these markets can develop along traditional cultural lines.(Think how the Quebec government wants to keep the French language alive and flourishing in Canada. Think how national approval agencies like UL, VDE, or CCC advance national norms around product safety.)

The discussion is much deeper than simply these points above, but it is easy to see merit on both sides of the argument.

Did you notice that I substituted open trade for free trade above, and I substituted reasonable restraints for fair trade above? Again, it’s impossible to be against open and reasonable, but each adjective implicitly rejects the other side. “I’m against exploitation and unbridled trade!” or, “I’m against unreasonable restrictions that slow down trade!” Uh . . . yeah! Everyone’s against that stuff. So how do we decide what is best?

We must decide on our social and political/economic goals, and then we put in place the methods to get there. Sounds easy, doesn’t it? Just get everyone to agree that we want to be nice and open with each other.(World religions have been trying to do that for centuries!)No, it isn’t easy. This is one of the biggest arguments going on right now during the US Presidential election campaigns.

IEWC ownership and management are generally, and I am specifically, supportive of fewer restrictions on trade as time goes by(although some restrictions will always be necessary). The world economies grow closer together with products moving cheaper and faster across oceans. Engineers and business folks fly across continents. Ideas zing across CAT6 ethernet cables.(I had to mention electric communication cable!)We approach a long-term marketplace where most all goods, services, and ideas will be at our beck and call. It is simply impossible to stop the clock from turning and stop ideas from flowing across previously impossible geographic boundaries. We are in a remarkable moment of change in world history, and trade will continue to become more open and accessible.

Throwing chains on a large snowball rolling down a hill may slow down its progress for only a short moment, but the chains will surely break, and the Trade Snowball will continue to grow and move. IEWC has placed its bets on growing trade, both geographically and within the electrical industry. As a distributor IEWC is in a position to provide excellent service to a global market in need of specialized services for the requirements unique to the world’s regions and cultures.

Through trade we hope to grow with our customers, build strong demand for our supply partners’ products, and provide value to our employees and shareholders. Without trade, none of that happens.

I’ll give you cable, and you give me money. I’ll give you money, and you give me equipment. Let’s trade.

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