Tariffs vs Free Trade

International Business

the economic impact of
free trade in the United States

Heather Biller
march 24, 2014

Introduction

Are the American policies supportive of her ability to return to the former days of glory following this most recent global economic crisis? This paper will study the U.S. economic history and assert that the current policies will prevent America from rebounding from the economic collapse, as it did from the American Revolution, the Civil War, WWI, the Great Depression, and WWII.
The United States (U.S.) has abandoned the former protectionist international trade policies which established it as a strong industrial nation and world leader, by using tariffs to fund government expenses to support a strong domestic manufacturing industry. It has adopted globalisation and free trade, while adding the yoke of income taxes, payroll taxes, and foreign financing. The critical failures arise from loss of jobs to emerging markets, high unemployment, and expensive health and social programs which are relying on internal taxation and excessive borrowing. Wealth cannot be recreated from the critical building block of industrialization as it has been drastically reduced, so stagnation will persist until new inventions are realized or policy amendments are endorsed.
This nation was formed by a few brave men and woman who desired to establish a nation based on liberty for all, and this notion was carved out in the Constitution of the United States of America. The founding fathers wanted a strong independent government apart from the sovereign rule of Great Britain. To establish this system, they sought to change the colonies from agrarian to a highly industrialized nation with a strong government and banking system that utilized tariffs to cover the costs. This was not a new concept for obtaining world leadership for it was Great Britain’s same model, and these governmental policies were just as effective in establishing America as the new world leader.

American Revolution (1765 – 1783)

The Age of Enlightenment during the 1700 and 1800s spread rapidly across Europe and it even spread to the shores of the North American colonies which caused the American Revolution. Europe awoke out of the dark ages, following the fall of the Holy Roman Empire, from the rise of Christianity and the Protestant Reformation which lead to the Age of Enlightenment. The supreme power of the divinely lead Roman Church was weakened by the monotheistic Christian faith, and the Enlightenment settled in between for a rational and individual study and interpretation of the universe using logic and reasoning. Some significant influencers were Charles, Baron de Montesquieu, Thomas Aquinas, Isaac Newton, and John Locke. Charles, Baron de Montesquieu was instrumental in challenging the monarch of the Roman faith and favoring individual freedom. Aquinas’s influence with scholasticism, which is the Aristotelian study of the universe matched against the Scriptures. Newton’s influence with the discovery of gravity, which he explained in his Principia: Mathematical Principles of Natural Philosophy: “This most beautiful system of the sun, planets, and comets, could only proceed from the counsel and dominion of an intelligent and powerful Being. And if the fixed stars are the centres of other like systems, these, being formed by the like wise counsel, must be all subject to the dominion of One.” And Locke had the influence of establishing the individual rights of all people, which would be the bases of America’s ideals.
With Enlightenment, the European uneducated masses were liberated from the tyrannical Roman Catholic teachings of divine superiority of emperors, popes, and clergy with their assurance into heaven; while the peasants suffered from God-given punishment for sinful actions, leading to eternal damnation unless doing exhaustive good works. This liberation influenced the American settlers to resist the monarchy while demanding natural rights of life, liberty, property, and the pursuit of happiness resulting in the American Revolution.
The 13 colonies defected from Great Britain by signing the Declaration of Independence on July 4, 1776. They developed the Constitution of the United States (U.S.) drafted on September 17, 1787 and ratified in 1788 and it became the supreme law of the land. They adopted the Amendments on March 4, 1789. The new Nation faced huge debts with runaway inflation throughout the 1780’s due to the American Revolution. The debt was a staggering $75 million as Britain had a strong military. The annual national operating cost was an enormous $3 million.
Serving as the first president, George Washington entrusted Alexander Hamilton to resolving these economic burdens by appointing him as the Secretary of Treasurer. Hamilton promoted protectionist policies that would establish the capitalist economy that we have today by promoting a strong national government that relied on domestic manufacturing with tariffs (taxes) on imports goods and subsides (handouts to businesses) to generate the federal revenues. Many Southern farmers dislike him and his plan, which was based on the European economic model. Hamilton was the main driver to shift from agrarian to being an industrialized nation.

Northern Trade Policies

Despite southern opposition for the U.S. to remain agrarian with state authority, Alexander Hamilton successfully established a strong national economy. His followers were known as Federalists, which were primarily northerners. He promoted manufacturing and commerce using the federal government as the steering power and establishing national banks with credibility, as in England, to fund businesses. The federalist used tariffs to allow the growth and development of domestic goods to close out the lower cost imports from Europe. The federal money was used to support public projects such as roads, harbors, bridges, and railroads.
Hamilton submitted the first bill to Congress in January 1790 to establish tariffs to build America strong. His bill was the first to pass through Congress and become law. It was known as the Tariff Act of 1789. Section 1 of the Act states, “Whereas it is necessary for the support of government, for the discharge of the debts of the United States, and the encouragement and protection of manufactures, that duties be laid on goods, wares and merchandise.”
America declared independence, but defection was not achieved easily. Tensions were high between the U.S. and Great Britain, so the Jay’s Treaty was signed on November 19, 1794 to resolve issues from the American Revolution. Although Washington sent John Jay to set the negotiations with Great Britain, Jay looked to the insights of Hamilton for advice and most Southerners viewed it unfavorably

Tariffs and Embargos

During that time, Europe was dominated by France under Napoleon Bonaparte, except Britain and it resulted in many wars and trade restrictions between them which impacted America. Britain tried to use their affiliation to influence America to trade exclusively with them. Without success, Britain began to seize U.S. ships resulting in America finally entering the war. President Thomas Jefferson attempted to resolve it prior to entering by passed The Embargo Act of 1807. It only resulted in halting U.S. exports by 75% and imports by 50%. Congress declared war with Great Britain on June 18, 1812 (the War of 1812). This was an important war, as America was successful at ending Britain’s dominance and setting up economic independent. The National Anthem was written to commemorate this victory and is still honored to this day.
Even after, the European War continued to plague the U.S. in excess manufactured goods flooding the U.S. economy. During the long trade restriction, Britain stored large quantities of goods which were dumped on American shores below market value to gain an advantage in the marketplace. John C. Calhoun supported the protectionism principles and enacted The Tariff Act of 1816 to address this issue. It was a mild measure of protectionism, averaging a 20% increase in tariffs, and it wasn’t enough to protect all American companies for many struggled and some went out of business. Despite the setback, America continued on with the industrialization and it began to flourish even to the point of expansion. New territories to the west were gained and developed.
The western territories were fertile lands for development, so Britain and the U.S. both desired to gain it for their advantage. President James Monroe made an address to Congress on December 2, 1823 where he defined the Monroe doctrine (aka Tariff of 1823), which was the work of John Quincy Adams, the Secretary of the State. It warned European powers to not interfere with the affairs of the Western Hemisphere. It was a successful and longstanding foreign policy.
To further help domestic producers, Congress passed the Tariff Act of 1828 into law on May 19th. The tariff marked the highest tariffs for the U.S. in her national history, but it provided the support needed for the domestic market to really flourish. Again it sparked domestic controversy as it supported northern manufacturing at the cost of southern trade relations with Europe. The South labeled it the “Tariff of Abominations” because of the negative impact on the textile industry, especially in South Carolina. The south typically felt the tariffs were harmful to their agricultural economy even to the point of being unconstitutional for favoring only one sector. However, New England and newly colonized western states favored industrialization and felt it strengthened the entire nation. Industrialization of the nation had built momentum and America wasn’t about ready to turn back now.

Southern Agriculture

The Southern states wished to remain state ran with an agricultural economy. Their raw materials, cotton especially, were exported to Europe for manufacturing into textile goods to be sold back to the U.S. Tariffs were unfavorable as it reduced foreign imports which lowered cottons sales, leaving them with significant job loss and highly priced goods. Many lost their homes and farms.
This faction was known as the “Anti-Federalists” and was led by Thomas Jefferson. They wanted power to remain in the hands of the individuals and believed the “chosen people of God” were to labor the earth. Washington appointed Jefferson as his first Secretary of State. Jefferson, with the support of Madison, led the Anti-federalists.
The South was unsuccessful at holding off the industrialization of the North, as the Federalists remained in control until it split over negotiations with France during President John Adam’s administration in his re-election year of 1800. It split into the Democratic and Whig parties in the 1820s. It was successful at establishing the successful economic power structure to ensure that America would become the world leader and primary producer of manufactured goods due to the Industrial Revolution.

The Industrial Revolution (1820 – 1870)

America achieved the victory of becoming the leading world producer of consumer goods as a result of the Industrial Revolution, the “Gilded Age” from 1820 to 1870. The Industrial Revolution significantly increased the economic power of the U.S., when the nation switched from being agricultural to industrialize. Interestingly, the primary industry was cotton and textiles, as America now had their own machines to make the goods. Additionally in Pennsylvania; furnaces, steel mills, and coal mines were emerging as primary revenue generators. High pressure steam engines and railroads were also being built. These factories were expensive, so state laws were created to allow companies to seek funds from investors, which was the creation of a corporation.
Congress used another tariff to fund the building of railroads and continue to pay off former war debts. The Morrill Tariff of 1861 was passed by Congress and signed by President James Buchanan on March 2, 1861 which was two days before he left office and Abraham Lincoln was inaugurated. It raised tariffs by 44% and the South was outraged, by the tariff and by Lincoln as President. Lincoln was a tariff supporting Republican and this sparked the Civil War.

The Civil War (1861 – 1865)

The point of contention between the north and the south went beyond the economic strain spilling over into ethical and moral issues pertaining to slave labor, which lead to Civil War (1861 – 1865). Back in 1793, the cotton gin was invented which sped up the removal of seeds from cotton. Many plantations switched to cotton for quick gain but it resulted in a single crop economy which required dramatic increases in cheap labor (slaves) for all these plantations. The north was modernizing so they increasingly distained the southern system of slavery. As America acquiring new land from the Louisiana Purchase and the Mexican War, the question of slavery remained, should they have slaves or not?
Although conflict existed, the south needed slavery to remain economically viable, so they revolted in 1860 with the election of Abraham Lincoln. Because South Carolina was most impacted, they succeeded first by issuing a "Declaration of the Causes of Secession." They were shortly followed by Mississippi, Florida, Alabama, Georgia, Louisiana, and Texas. This is important as wars are costly and revenue must be generated. This was achieved with tariffs and America once again rebuilt herself to being an even more dominant force in the world, but that pentacle would not be achieved undeniably until after World War II.

The Restoration Of America (1865 – 1877)

The Civil War’s Restoration expenses were enormous and would require steep tariffs to rebuild the war-torn nation and would last from 1865 to 1877. Lincoln was assassinated in 1865 and Andrew Johnson became the President to lead the reunification of the southern states, rebuilding the south, and providing opportunity to the liberated slaves. According to George Barlow of Economy in Crisis, “A largely overlooked article by Dartmouth economist Douglas Irwin suggests that the most important policy tool used to promote economic recovery after 1865 was a regime of steep taxes on imports.” (2011).
The tariff system was undoubtedly flawed with the weight of bureaucracy; however it accomplished the goal of satisfying the nation’s revenue required in becoming the world leader. By 1890, the U.S. had successfully bypassed Britain as the world’s most productive economy by manufacturing twice their volumes. Due to political party interest, complexity of tariff arrangements, and increase in the number of tariffs; the political parties volleyed tariff reform back and forth for years.
An example of tariff reform is the significant change of The McKinley Tariff of 1890 which authorized the President to impose penalty duties on imports such as sugar, molasses, coffee, tea, and hides from countries that had unreasonable trade arrangements. The Democratic Tariff of 1894 abolished it; and the Republicans reauthorized it in the Tariff Act of 1897. The Democrats abolished it again in 1913 and established Income Taxes as the new means of generating revenue for the nation and government. The tariff was not reinstated by the Republicans until 1920s; however Income Taxes were never removed and still remain a primary source of revenue today. This is a significant shift and part of the cause of America’s current struggle and inability to rebound in the face of current adversities.

Birth Of Income Taxes (1913)

From the civil war until 1913, the U.S. engaged in protectionism foreign polices by used high tariffs to shelter the emerging manufacturing industries to generate revenue for the government. The U.S. Revenue Act of 1913 (aka, Underwood-Simmons Tariff Act) changed the U.S. policies drastically by lowering tariffs following the ratification to the 16th Amendment of the U.S. Constitution to permit a federal income tax. This drastic shift in federal revenue’s power and earning potential was signed into law by President Woodrow Wilson. Wilson reduced tariffs in 1913 and kept them low. This becomes significant following the close of World War I.
With the lowering of tariffs, the federal revenue would have to be offset, so Congress passed the first permanent income tax in October of 1913. The 16th amendment ratification allowed Congress to collect federal income taxes without apportioning it to states or basing it on Census results. Many tariffs were completely removed for steel, iron, wool, farm machinery, and agricultural commodities. To support the new federal government taxation system of generating revenues, the banking system was put under government supervision with the Federal Reserve Act of 1913. And the Federal Trade Commission Act of 1914 was assigned management of antitrust laws and preventing the suppression of competition.
Former acts to attempt to collect income taxes included the Act of 1861 which was to be a temporary tax to raise money for the Civil War. Nothing was collected until it was revised in the Tax Act of 1862. It was amended and finally repealed in 1872. Another attempt in 1894 to tax individual earnings on a gradual scale, but it was found unconstitutional by the U.S. Supreme Court of 1895.

World War I (1914 – 1919)

Europe remained divided enough to spark World War I (WWI). America enters the war amassing debt again, which would be paid using tariffs. European countries operated independently following the fall of Roman Empire and Germanic invasions, but had partnerships with some and tensions with others. Austria-Hungary’s heir to the throne, Archduke Franz Ferdinand, was assassinated by a Serbian nationalist secret society, the “Black Hand.” Austria-Hungary took three weeks to retaliate on Serbia, which allowed alliance to be reinforced on both sides, which escaladed the war. Austria-Hungary united with Germany, while Serbia had Russian backing. Germany (Austria-Hungary’s Allie) declared war on Russia which got France involved as the Allie to Russia. Germany turned and quickly invaded neutral Belgium on the shortest path to Paris France, which brought Britain to the aid of France. With the war ravished European nations, the U.S. declared a Policy of Absolute Neutrality, but as forced to entering also. Japan declared on Germany and Italy broke ties with Germany and entered on the side of the Allies.
The U.S. was in a recession prior to the war, but the Allied nations began to purchase war supplies from America and after entering the war production increased further. However, the cost of WWI was enormous, $32 billion (52% of the gross national product) according to the National Bureau of Economic Research. The need for tariffs was evident, and as soon as Warren Harding replaced Wilson as President, he raised tariffs using the 1921 Emergency Tariff Act. Agriculture thrived during the war as they supplied Europe at increased prices; however a surplus developed afterwards which dropped prices and companies underperformed on the market, especially as European nations became self-sustainable again. This problem escalated during the 1920s and remained undetected. This plus credit and banking issues lead to the famous “Black Tuesday” event of the 1929 Stock Market Crash.

Roaring 20s (1920s)

After the War, America rebounded quickly into the Roaring 20s, when the nation’s total wealth doubled during that decade with the Northern Republicans in power in the Presidency and Congress. They re-established the protective, almost isolationism, foreign policies to insulate the U.S. from foreign post war surplus. The 1920s was the age of prosperity due to mass production and the advances in the automotive industry. The economy slumped slightly when ending production of war supplies, but it shifted to new inventions and technologies and many people began investing in the stock market. The culture of America forever shifted into a “mass society” as many people moved from rural areas to work in the cities, so they eat the same things, wore the same things, and listened to the same things.
In 1921, the Emergency Tariff Act was passed to spike tariffs by 50% to stabilize the market. President Warren Harding also reduced corporate taxes for businesses and large corporations were created with mergers. He introduced the 1922 Fordney-McCumber Act to ensure U.S. goods would always be less than imports, for farmers and manufacturing, for it linked imported sales prices to U.S. prices and ensure they would always be lower. They were the highest tariffs in history with some being 400%, with an average of 40%. He adopted the laissez-faire (free market) policy, so an independent economy would flourish without need for heavy governance. Calvin Coolidge and Herbert Hoover followed with the same economic principles and the economy continued to thrive.
The extravagant decade thrust onward with irrational exuberance, for the production wheels were grinding downward and agricultural decline was crippling the banking system, yet they lived on in splendor until that dreadful day on Black Tuesday of the Stock Market Crash.

The Great Depression (1929 – 1939)

The inconsistency of economic prosperity and stability brought the stock market to a screeching halt on Black Tuesday, Stock Market Crash which lead to the Great Depression of America and to the world economy. And there were two primary causes.
First the agricultural surplus after the war spread to the banking industry, thereby crippling it. The farming machines caused overproduction which reduced prices and the farmers accumulated excessive debt prior to going bankrupt. They became vagabonds and were labeled, “hobo.” The banking industry had expanded to having some 30,000 banks which included many small rural unsecured ones, which were devastated by the farming recession. This weakened the entire financing institution, which was crashed by the second event that was unfolding at the same time. The Tariff Act of 1930, known as the Smooth-Hawley Tariff, was enacted to try to protect farmers.
Secondly the mismatch between supply and demand in a hyper-inflated stock market bubble finally burst. The extravagant lifestyle with high consumer demand unknowingly began to wane, while stock market investments and stock prices soared. The advisers who warned of potential fall were labeled doom-mongers, and the scale tipped due to the imbalance, when the big businesses issued their financial statements which were well below expected values on October 24, 1929, Black Tuesday. The investors pulling out as the prices declined wiped the market out. It was exacerbated as most stocks were well above their true value and they were “purchased on the margin,” meaning the investor only put down 10 – 20% and borrowed the other 80 – 90%. This really brought the banking industry to its knees.
Having just experienced the Stock Market Crash of 1929 and the failing banking industry, the Great Depression was ushered in. To make matters worse for America, the Mississippi Valley experienced a severe drought, the “The Dust Bowl” and many lost all they owned. The Smoot-Hawley Tariff expanded beyond the agricultural sector to include 3,000 products with a 60% tariff, a historically high level. It ended up farther halting supply and demand conditions, which was costly during these conditions. This trade policy was seen as being too protectionist and at the expense of other nations as 60 countries enacted retaliatory tariffs. This excessive measure overinflated use of tariffs created isolationism and world trade declined by 66% by 1933.
The 1934 Reciprocal Trade Agreements Acts (RTAA) marked the end of high tariffs in the US, as they began to form bilateral or multilateral tariff reductions. With the crippling economic conditions of the Great Depression, Congress passed the RTAA which granted the president the power to levy tariff rates and create bilateral trade agreements taking power off Congress. This marked the end of using protectionist policies to support the U.S. economy. Historically the Republicans held office and they enacted the high tariffs previously reported. With the Democrats in office the tariffs were drastically reduced from over 50% to about 13% during the 1930s. Revenues hit their heights with the 1930 tariffs, but began their decent with the 1934 RTAA and further liberal trade policies. Tariffs official die as a revenue source for the United States at the close of World War II.

The Great Depression blanketed the world economy, especially Germany and was the spark needed to ignite World War II. Germany and the U.S. had a 50% decline in industrial output with 25 to 33% unemployment.

World War II (1939 – 1945)

The worldwide collapse of the economic and banking system was the needed fuel to kindle World War II (WWII), with the base being agreements made at the close of WWI against Germany. One leading cause of WWII steams back to reparations set on Germany by England, Italy, and France (“The Big Three”) which were established in the Treaty of Versailles in 1919 at the close of WWI. Germany was also stripped of 1/6 of its territories. This economic crisis resulted in runaway inflation and extreme unemployment for Germany and their money was almost worthless. When America recalled the 1924 Dawes Plan Loans and the 1929 Young Plan Loans within 90 days of the stock market crash, it seriously impacted Weimar Germany. The Weimar Republic was the link to the U.S. in receiving and repaying the loans, and no other nations were able to offer loans as they were impacted too. Once U.S. dollars were removed from the system, unemployment rose by 6 million and they had hyperinflation. The people were starving and blamed the Weimar Republic and lost faith in the Democratic system so they turned to the Communist Nazi party as Hitler promised to overthrow the Treaty of Versailles.
The recalled loans on Great Britain and France were paralyzing to their economies, especially considering the excessive abuse of U.S. tariffs. The mismanagement of U.S. foreign policy and power forced other countries to retaliate leading to their own disproportionate trade barriers on U.S. exported goods. Trading became hostile as countries tried to sustain themselves, and trading blocks were formed which permitted and prohibited trade between certain nations.
Once Germany began the advances on these struggling nations, success was eminent and WWII was underway, until the U.S. ended it. The war brought wealth to the U.S. as it was the primary producer of goods so allied countries bought war supplies again. WWII brought America out of the Great Depression, and enabled it to have the necessary power and force to end the war completely with Germany and Japan. Because of the U.S. foreign policies excessive abuse of tariffs, it ended the winning streak of generating revenue for the federal government. Income taxes would officially replace it, which is the domino effect for America’s stagnation following the 2009 economic crisis.

GATT (1948) & WTO (1995)

In the aftermath of the bloodiest war, European nations and the United States realized international trade would require some necessary oversight to ensure that another world war would not ensue, that was the birth of General Agreement on Tariffs and Trade (GATT) in 1948. Republican leadership accepted the effects of the spiked tariffs so they supported GATT to foster European recovery and America’s security. GATT lasted until 1994, when it was replaced by the World Trade Organization (WTO) in 1995 which has 159 nations in membership. The desired goal was to liberalize trade beyond just manufactured goods to include services, agriculture, and intellectual property.
The WTO principles were to normalize fair trade among trading nations, without preferred status, while having reciprocity and transparency, and allowing emerging countries to have a “positive discrimination” to catch up after having unfavorable conditions historically. According to protestors in Bali, Indonesia during the WTO conference there, they stated, ‘After 18 years, the WTO delivered only development for Transnational Corporations (TNCs). And according to the 2013 World Investment Report published by the United Nations Conference on Trade and Development (UNCTAD), “Transnational Corporations coordinated Global Value Chains account for some 80% of global trade. The rules of free trade have deepened the concentration of wealth in fewer and fewer hands.” (Viacampesian.org 2013). Many others criticize the WTO for favoring these TNCs while dismantling national rights to human health and safety with examples that include participating nations not being permitted to restrict genetically modified foods or the ruling to reverse the U.S’s ban on shrimp nets which endanger sea turtles. These national laws are seen as being WTO-illegal. The organization Farm Aid reports, the US agricultural market place is dominated by ‘Big Agriculture’ with 4 companies dominating the market and owning meat at 84%, hogs at 66%, chicken at 59%, and seed at 50% with Monsanto holding corn at 85% and soybean at 91%.
The WTO policies permitting large corporations to transfer operations to emerging nations with cheap labor, lack of governmental regulations or unions, and no environmental or human rights has negatively impacted the developed nation’s economies as manufactures did a mass exodus to this cheaper nations. This was the birth of TNCs and the loss of quality paying jobs that supported the middle class of America.

GLOBALIZATION

GATT/WTO, along with others, such as North American Free Trade Agreement (NAFTA) and North Atlantic Treaty Organization (NATO), ushered in globalization and the entry of emerging countries into the industrial marketplace. Although their principles are genuinely good, its application isn’t always as intended. According to the BBC, they state, “Although globalisation is probably helping to create more wealth in developing countries - it is not helping to close the gap between the world's poorest countries and the world's richest.” They continue stating that globalization has resulted in many businesses becoming TNCs and that the majority of these come from MEDCs (More Economically Developed Countries) as opposed to the LEDC (Less Economically Developed Countries). They site five reasons for companies to open abroad: cheap raw materials, cheap labor, good transport, access to markets where the goods are sold, and friendly government policies. The BBC identifies the negative impacts of globalization to include the interests of the TNCs of the MEDCs are satisfied at the expense of the LEDC as the TNCs are being provided cheap labor and supplies, while there are no guarantees the wealth will remain in the LEDC as profits are sent back to the MEDCs.
The BBC further adds the TNCs drive the local producers out of business. And the TNCs have little to no governmental oversight so safety, environmental, and human rights are exploited. And the BBC also states the LEDCs industries are thriving at the expense of the jobs in the MEDCs. Essentially it has created a monopolistic corporate empire that operates at the expense of the workers in both the MEDCs and the LEDCs. This allows the rich to get richer and the poor to get poorer.
The notion of the rich getting richer and the poor getting poor is explained by CBC News to be the result of middle class being “squeezed” out and the gains going to the top 1%. One expert refers to this as the “Downton Abbey Economy” with the 1% wealthy and the remaining 99% being poor workers. (CBCNews 2014) The middle class is being squeezed into the poor working class with loss of work, high prices, inflation, and stagnant wages. Free trade, Globalization, and TNCs have weakened the U.S. economy as manufacturing has shifted to the LEDCs. This is exemplified as we see China become the world’s larger producer in 2010.

China Is The World Leader

The title of the U.S. being the world’s largest producer has shifted to China. Chinas entry into the WTO put them on the fast track to being the world leading manufacturing producer. China signed a bilateral trade agreement in July 1979 with the U.S. and joining the WTO in 2001 resulted in them being the world’s fasting growing economy. An imbalance quickly emerged for the U.S. has lost jobs and developed wage disparage as manufacturing companies moved operations to China due to cheaper labor and lack of governmental, environmental, or human rights oversight.
According to Industry Week, America lost 5.7 million, or 33%, of its manufacturing jobs in the 2000s.” (Industry Week 2013). Chinas entry into the WTO created controversy, with the conservative Republican’s citing loss of U.S. jobs due to the surplus of low income labor and lack of humanitarian rights. The fear of weakening the U.S. economy served to be correct. According to China.org.cn, the Chinese economy experience significant growth while world trade volumes ranged from a 1.5% reduction to a meager 1.0% increase. In contrast, the Chinese GDP grew 7.9% and their exports increased by 19.4% in the first three quarters of 2002 as the average import tariff was dropped from 15.6% to 12.0%. To further increase their productivity, there was a surge of foreign investment in China. And they reported that 15.4% of the 104 anti-dumping cases filed with the WTO were against China. (China.org China Daily 2002).

The U.S. trade deficit with China has remained high, reaching $315 billion in 2013 according to Forbes. Economists indicate that a high deficit for a short period of time is positive as it reduces prices, keeps inflation low, and improves the standard of living. However, a long term deficit is damaging as many domestic suppliers go out of business, skills are lost, and unemployment rises. Also, with financing coming from foreign investors, they hold a large portion of the nation’s currency which could be sold thereby reducing the currency value which would reduce purchasing power. Forbes states, “That big drain (trade deficit) tends to slow U.S. economic growth at a time when our government debt is huge and unemployment is high.” (Forbes 2014). The Economic Policy Institute states the, “Net job displacement since China entered the World Trade Organization in 2001 cost the economy $37.0 billion in lost wages in 2001 alone.” They state that between 2001 and 2011 the U.S. trade deficit has eliminated 2.7 million U.S. jobs with over 2.1 million (76.9%) being manufacturing. (Economic Policy Institute 2013).
Many economists state a long-term trade deficit is a sign of trade imbalance and it can be most easily corrected using protectionist tariffs, as demonstrated in U.S. history. Forbes indicates the U.S. could encourage the Small and Medium sized Companies (SMEs) to expand and conduct international trade, as they account for 34% of U.S. exports, instead of increasing tariffs. However, this theory is retiled with problems due to the lack of liquidity and confidence in the domestic market and the known problems with Chinese trade relations. China’s government rules their marketplace and they are intent on gaining and maintaining dominance of global manufacturing as witnessed by their lack of upholding WTO obligations, their undervaluing of their currency to the dollar, their copyright and intellectual property infringements, espionage, and their domestic protectionism for their own companies.

Summary

The U.S. will continue to struggle to regain its dominant and strong economic position due to being crippled with the current imbalance of trade relations while under the weight of domestic policies. The U.S. manufacturing industry has experienced a sharp decline as factories shifted to the emerging markets (mostly Mexico with NAFTA and China with WTO) which offered lower wages, business subsides, and minimal to no environmental, health, or safety regulations. This has resulted in a trade deficit which weakens the confidence of the dollar, closed businesses, and increases unemployment which reduces earnings and purchasing power of U.S. citizens. Adding the devastating global financial crisis, America is unable to generate the businesses, jobs, and earning power to fund a full economic recovery as we have seen in prior U.S. history because the manufacturing industry is weakened.
Adding to the lowered earning power of a shrinking industrial sector, the U.S. economy is sluggishly wading through the weight of individual income and payroll taxes (Medicare and Social Security Taxes). According to the Tax Policy Center, income tax (average 8% of GDP) and payroll tax accounted for 82% of the total federal revenues for 2010 with corporate income taxes being at 9% and all others (Federal Reserve System and fees and charges) make up the remaining 9%. (Tax Policy Center 2011).

The nation has slipped from using tariffs at 90% funding of the U.S. revenue, to virtually nothing under the free trade agreements of globalisation. The current administration is seeking more free trade agreements for the future with the same promises of new job opportunities and a stimulated market, just as the futile promises of NAFTA. Removing tariffs and increasing income taxes with a weak manufacturing sector will keep the American economy stagnant. Industry Week states, “The real reason the U.S. lost 5.7 million manufacturing jobs in the last decade was due to the decline in manufacturing output, which in turn was caused by U.S. manufacturing losing out in global competition.” And they further add that, “As a result, ITIF (Information Technology and Investment Foundation) estimates that over 60% of U.S. manufacturing job losses in the 2000s were due to competitiveness challenges, rather than productivity gains.” (Industry Week 2013). And this problem will only continue, as America continues to spend more than is earned in revenues. Will America awake? Will there be another Age of Enlightenment to bring America back?

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