Contemplating the reasons why once great economies and countries, the United States and Canada, found themselves in a miserable and deteriorating economic existence, masked by the unbearable, pressing amount of public and private debt, I came across an interview with a Canadian-based economist Jeff Rubin, pointing out to the free trade being a major threat for the North American economies.
Even though we know that absolute free trade has never existed between countries, it is obvious that the world trade has never been freer than it is now. It did not have positive effects on the wealthy nations; let’s take a quick look at what I actually mean by modern free trade.
Free Trade Today
First of all, one of the most prominent organizations concerning international trade is the WTO, which contributed greatly to the free flow of goods and services between nations. One of the commitments countries are making by joining the organization is to comply with the set bound tariff rates for their country. Here’s the definition of what are the bound rates from WTO itself:
Bound tariffs are specific commitments made by individual WTO member governments. The bound tariff is the maximum MFN tariff level for a given commodity line. When countries join the WTO or when WTO members negotiate tariff levels with each other during trade rounds, they make agreements about bound tariff rates, rather than actually applied rates.
In other words, each country has its own limit on how much their tariffs can grow, and each country has its own boundaries. The reason for such a pre-designed inequality was to create a favorable environment for the developing countries by making rich countries commit to low tariff rates for their imports while allowing those same developing countries to keep their import tariffs very high. For example, Vietnam’s average bound tariff rate is 11.7%, China’s average import bound tariff is 10%, India’s whopping 50.8%. At the same time, Canada is allowed to have on average 6.4% average tariffs, and the United States, one of the lowest rates in the world, 3.4%.
We are going to see the results of such an uneven playing field in this article below, but it’s worth adding that these bound rates haven’t been reevaluated for the last 20 years. It is clear that China, projected to replace the United States as the biggest economy in the world, is no longer in the position of a developing country and should have different bound tariffs, but it is still being treated as if it is a developing country.
Secondly, the United States has further liberalized its markets by signing the NAFTA agreement back in 1994, which resulted in numerous preferences for Mexico. Overall, the United States has one of the lowest tariffs not only in the world but in its own history.
What are the results of such Free Trade?
Shortly speaking, the result is the overall industrial, economic, and technological decline of the United States and Canada over the period of the last 20 years. Let’s look at the numbers.
According to the U.S. census statistics, since China joined the WTO in 2001 and up to 2015, about 60,000 manufacturing facilities has been shut down in this country. Think about this number, 60,000 is a lot, especially just for one country and over such a short period of time. To be clear, we are constantly being told that that is the future. The low-paying, unskilled work will move to Asia, while we, here in North America, will produce only high-tech, sophisticated products. Well, guess what? High-tech hardware manufacturing has been hit hardest among other manufacturing industries, United States hardly produces anything in this sector today.
Obviously, big American corporations found it more profitable to move their operations overseas to pay lower wages and still produce cheaper products to sell back home in the United States. Big corporations are definitely winners of such free trade, but what about Canadian and American workers?
According to the Bureau of Labour Statistics, 4.7 million manufacturing jobs have been lost over the same period. In my personal investigation on the matter, I came across interesting research done by the Economic Policy Institute demonstrating that with the increase of the American trade deficit in a particular industry, there’s a proportional loss of jobs in that same industry. On top of that, the sharpest decline was noticed in the computer parts and electronics category of manufacturing, with 1,249,100 jobs being lost over the period of 2001-2013.
As a result, we see the lack of the real wage increase for the last at least 30 years. The manufacturing employment in 2018 was the same as in 1949, a year historically remembered for its harsh recession and crisis. Yes, we still hear of the record-low unemployment rate in North America (before the COVID-19 crisis), but the majority of American workers today are employed in the services sector, which is traditionally lower-paying and provides fewer employee benefits.
Workers and consumers (typically the same people) turned out to be the losers in the long run of such trade.
North American Artificial Wealth
As we saw, Canada and the United States are losing their industrial resources, which made them the greatest countries in the world back at the beginning of the 20th century; their national and household debt was persistently climbing up, creating an illusion that we are still wealthy and prosperous countries. When you look around, you see people “buying” houses and cars, getting an education, just like “back then” in the 50s, 60s, and 70s, you might think. However, forgetting that back then, you could literally save your money for a few years to buy a house without a mortgage or take a mortgage just for 5 years instead of 25 years today. Similar story with education and student debt, which was virtually non-existent back then, but it is a major problem now. We simply cannot afford the most basic things anymore with the current wages. Probably, the reason for such a decline is that the United States is no longer producing anything.
To sum up, the research and thoughts above demonstrate that free trade is a major problem for developed countries right now, which should be addressed systematically and persistently by Washington and Ottawa if it’s not too late by now.
Here are some more resources to look at for further understanding of this topic:
Leave a Reply