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Trade Policy

Teacher, which is the greatest commandment in the Law?’  Jesus replied ‘Love the Lord your God with all your heart and with all your soul and with all your mind.’  This is the first and greatest commandment.  And the second is like it:  ‘Love your neighbor as yourself.’  All the Law and the Prophets hang on these two commandments.” 

 -          Matthew 22:36-40; note also that these two commands are taken from Deuteronomy 6:5 and Leviticus 19:18

 

“So in everything, do to others what you would have them do to you, for this sums up the Law and the Prophets.”

 -          Matthew 7:12

 

“Do not pervert justice; do not show partiality to the poor or favoritism to the great, but judge your neighbor fairly.”

 -          Leviticus 19:15

 

 “Appoint judges and officials for each of your tribes in every town the Lord your God is giving you, and they shall judge the people fairly.  Do not pervert justice or show partiality.  Do not accept a bribe, for a bribe blinds the eyes of the wise and twists the words of the righteous.  Follow justice and justice alone, so that you may live and possess the land the Lord your God is giving you.”

 -          Deuteronomy 16:18-20

 

 “Judge carefully, for with the Lord our God  there is no injustice or partiality or bribery.”

 -          2 Chronicles 19:7

 “Do not use dishonest standards when measuring length, weight, or quantity.  Use honest scales and honest weights, an honest ephah and an honest hin.  I am the Lord your God, who brought you out of Egypt.”

 -          Leviticus 19:36

 “You are all sons of God through faith in Christ Jesus…There is neither Jew nor Greek, slave nor free, male or female, for you are all one in Christ Jesus.”

 -          Galatians 3:26-28

 

“Be strong and very courageous.  Be careful to obey all the law my servant Moses gave you; do not turn from it to the right or to the left, that you may be successful wherever you go.  Do not let this Book of the Law depart from your mouth; meditate on it day and night, so that you may be careful to do everything written in it.  Then you will be prosperous and successful.”

 -          Joshua 1:7-8

 

I am the Lord your God, who brought you out of Egypt, out of the land of slavery.

  1.  You shall have no other gods before me.
  2. You shall not make for yourself an idol in the form of anything in heaven above or on the earth beneath or in the waters below…
  3. You shall not misuse the name of the Lord your God, for the Lord will not hold anyone guiltless who misuses his name.
  4. Remember the Sabbath day by keeping it holy.  Six days you shall labor and do all your work, but the seventh day is a Sabbath to the Lord your God.  On it you shall not do any work…
  5. Honor your father and your mother, so that you may live long in the land the Lord your God is giving you.
  6. You shall not murder.
  7. You shall not commit adultery.
  8. You shall not steal.
  9. You shall not give false testimony against your neighbor.
  10. You shall not covet…anything that belongs to your neighbor.”

 -          Exodus 20:2-17 (numbering added; see also the similar passage in Deuteronomy 5:6-21)

 

“Be sure to appoint over you the king the Lord your God chooses.  He must be from among your own brothers.  Do not place a foreigner over you, one who is not a brother Israelite.  The king, moreover, must not acquire great numbers of horses for himself or make the people return to Egypt to get more of them, for the Lord has told you, ‘You are not to go back that way again.’  He must not take many wives, or his heart will be led astray.  He must not accumulate large amounts of silver and gold.

 When he takes the throne of his kingdom, he is to write for himself on a scroll a copy of this law, taken from that of the priests, who are Levites.  It is to be with him, and he is to read it all the days of his life so that he may learn to revere the Lord his God and follow carefully all the words of this law and these decrees, and not consider himself better than his brothers and turn from the law to the right or to the left.  Then he and his descendants will reign a long time over his kingd

-          Deuteronomy 17:15-20

Summary of Conclusions:

A reformed trade policy that substantially reduced or eliminated America’s trade deficit in manufactured goods could potentially have a transformative positive impact on the American economy (increasing the rate of real economic growth by as much as 80%, from the WTO-era average of 2.0%/year back up to the pre-WTO long-term average of 3.6%/year), while also reducing the poverty rate by as much as 25%.  The long-term average increase in economic growth associated with a more balanced trade policy is potentially enough to make a generational difference in the rate at which the American economy expands.  At the pre-WTO average growth rate of 3.6%/year, the real economic output of the U.S. would double approximately once every 20 years.  But at the WTO-era average growth rate of 2.0%/year, real economic output doubles only once every 36 years.  And when the environmental and national security benefits of a more balanced trade policy are also considered, the need for a substantially reformed trade policy becomes even clearer.

The detailed content in this section of the site, which supports the above conclusions, will be presented in four subsections:

 1)      Introduction:  What does the Bible have to say about modern international trade policy?

2)      A Look at the Empirical Data:  Is America’s current trade policy problematic?

3)      How Did We Get Here?  (using Biblical principles as a road map to understand why the world’s existing institutions of global governance don’t work, and the theoretical solution to that problem.)

4)      Practical Solutions:  How we can begin reforming America’s trade policy?

 

 1)     Introduction:  What does the Bible have to say about modern international trade policy?

 At first glance, the Bible would appear to have relatively little to say that is directly applicable to modern international trade policy.  However, thinking systematically about how all of the “First Principles” of a Biblical worldview, and the Biblical view of governance in general, that were explained in earlier sections of this site might apply to the problems of modern international trade reveals that actually, the Bible has a great deal to say that is highly relevant to this subject.

 As explained in detail in the First Principles section of this site, the most important principle of Biblical morality[1] is that love is the supreme virtue, or more specifically, that we should “love our neighbors as ourselves” (Matthew 22:39) or “do to others what you would have them do to you” (Matthew 7:12.)  This has several implications for trade policy, the most important of which are:

a)      that the aim of our trade policy should be to treat all parties fairly, rather than advantaging one party at the expense of another.  This point is further reinforced by another one of the First Principles of a Biblical worldview (“A Commitment to Justice,”) which states even more explicitly that treating everyone fairly is a key component of a Biblical worldview.

b)      As also noted in several other places on this site, since love is a choice, saying that love is the supreme virtue also implies a strong commitment to individual freedom (which is another one of the First Principles of a Biblical worldview.)  So from a Biblical perspective, all of our institutions of governance (including those that oversee our trade policy) are supposed to exist in order to protect the freedom, prosperity, and economic and military security of each individual citizen.

The second point above becomes even clearer when the Biblical principles of governance are examined in more detail (as is done in the Role of Government section of this site.)   Two of the key principles of biblical governance are that all systems of governance should be as limited and local as possible, and that governments exist to protect the rights of individuals.

Another very important First Principle of a Biblical worldview is a commitment to truth.  The Bible teaches that the process of discernment (or the seeking of truth) works best when we submit ourselves to the leadership of God’s spirit.  However, since the pursuit of truth does not explicitly require a spiritual context, it provides a common ground in which the sacred and the secular can meet.  That is the basis for the founding fathers’ idea of “natural law,” and it is also the basis for much of what is written throughout the remainder of this section on trade policy (and throughout the entirety of this site.)  In other words, although the discussion throughout this site does have a spiritual context, the ideas advocated on this site are also intended to be ones that can be demonstrated to be wise by empirical evidence from history, and from the social and physical sciences.  Thus, the second section of this discussion on trade policy (“A Look at the Empirical Data’) evaluates  Americas’ current trade policy from a purely empirical point of view.

Another of the First Principles of a Biblical worldview is a commitment to the rule of law.  The rule of law is closely related to justice, and ensuring that America is governed by a system of laws that apply equally and fairly to all (rather than by the arbitrary decrees of individual political leaders) is one of the key means of implementing and administering the more general concept of justice.  These laws (including the Constitution itself) amount to a “social contract,” which is culturally unique to the United States (just as the laws governing every other nation around the world are culturally unique to that nation.)  And the complex and painstakingly developed cultural consensus which the laws of each nation represent should not be changed hastily or without following the appropriate legal processes within each nation.   Furthermore, as demonstrated in the third part of this discussion on trade policy (“How Did We Get Here?”), the Biblical principles of governance which are part of America’s cultural heritage are also very valuable in discerning why the world’s current institutions of global governance do not work very well, and why they should not be allowed to continue usurping power from national governments throughout the world. 

The fourth part of the discussion on trade policy presents practical steps that can be taken to begin reforming America’s trade policy.

 

2.  A Look at the Empirical Data:  Is America’s current trade policy problematic?

As of the end of 2020, America’s trade deficit in goods was approximately $915 billion, or about  4.4% of GDP.[1]  This was partially offset by a surplus of about $236 billion in services (about 1.2% of GDP), resulting in an overall trade deficit of about $679 billion, or 3.2% of GDP.

As shown in Exhibit T-1 below, America’s trade deficit during the entire NAFTA and WTO era (1994-2020)[2] adds up to a cumulative total of about $12.3 trillion, consisting of a cumulative deficit of about $16.2 trillion in goods, partially offset by a cumulative surplus of about $3.9 trillion in services.  The cumulative trade deficit of $12.3 trillion over this 27-year period represents about 59% of America’s 2020 GDP, or about 46% of the total market capitalization of all of the companies listed in the S&P500 stock index as of May 2021.  So the only way to pretend that America’s current trade policy is not a huge problem is to have a very short time horizon.

Furthermore, the more the details of America’s current trade policy are analyzed, the clearer the magnitude and significance of the problems become.  Any realistic assessment of the true magnitude of the impact of unrestricted free trade on America’s economy must begin with an assessment of America’s trade deficit in goods (which primarily consists of manufactured goods.)  As will be shown in Exhibit T-3 later in this section, America’s trade deficit in goods has averaged about 4% of GDP each year for the entirety of the WTO era (2001-2020.) 

Although the trade deficit in goods (about 4% of GDP as of 2020) is partially offset by a trade surplus in services, so that America’s net trade deficit was “only” about $679 billion or 3.2% of GDP in 2020, the costs and benefits of the free trade agreements are not allocated equally.  Since manufacturing is acknowledged to be one of America’s primary sources of higher-paying jobs for people who have only a high-school degree,[1] the primary cost of the free-trade agreements (reduced U.S. manufacturing output and employment) falls disproportionately on the lower middle and middle classes of society.[2] 

By contrast, the primary benefit of the free trade agreements (the surplus in services) applies disproportionately to people with graduate degrees (including managers and executives at Fortune 500 companies, lawyers, consultants, and other professionals such as the key professional employees at technology companies, and government employees), who constitute only 10% of American society.  Thus, America’s current trade policy is one of the few elements of its current government policy (essentially uncontrolled mass immigration[3] being the other major one), whose economic impact is clearly regressive, benefiting the higher-income segments of society at the expense of the middle class and the poor.

 

 

The economic impact of America’s trade policy over the last three decades is shown in more detail in Exhibit T-2, which analyzes the performance of the American manufacturing sector as compared to the rest of the economy during 1988-2020 (longest complete dataset available).  To screen out the negative impact of COVID-19 during 2020, the remainder of the quantitative analysis in this section focuses on the 1988-2019 period. 

As shown in Exhibit T-2 this chart, during 1988-2019 America’s real GDP[4]  (blue line with small dashes) grew by a total of about 112% (or an average annual growth rate of about 2.5%/year.)  During the pre-WTO portion of this period (1988-2000), America’s real manufacturing output grew at approximately 90%[5] of the growth rate in real GDP.   Therefore, even though labor productivity in the manufacturing sector grew slightly faster than real GDP during the pre-WTO period, total U.S. manufacturing employment (the solid black line on Exhibit T-2) declined only slightly, from an average of 17.9 million workers in 1988 to an average of 17.3 million workers in 2000.

More recently, the trends have changed significantly for the worse.  As of 2019 (the latest pre-COVID year), American manufacturing employment stood at 12.8 million workers, a net decline of almost 4.5 million workers (or 26%) from the pre-WTO level of 17.3 million workers in 2000.   

And this steep drop in manufacturing employment has resulted primarily from the growth in America’s trade deficit.  If the 1988-2000 economic relationships had continued to hold after 2000 (i.e., without the WTO agreement), then the 37.1% growth in America’s real GDP that occurred between 2000 and 2019 would likely have produced an increase in real manufacturing output of about  [37.1% x 0.9] or 33.4%.   American labor productivity in the manufacturing sector is estimated to have increased by about 41% over the same 2000-2019 period.[6]  Therefore, without the WTO agreement, American manufacturing employment would likely have declined to about 1.334/1.41, or 94.6% of the 2000 level by 2019 (a hypothetical decline of 5.4% in manufacturing employment, much smaller than the 26% decline in manufacturing employment that actually occurred.)   So without the WTO agreement, American manufacturing employment as of 2019 likely would have been about 16.4 million workers.  This represents an increase of about 3.6 million workers over the actual 2019 manufacturing employment of 12.8 million workers. 

Or in other words, as of 2019 the WTO agreement has most likely cost America a total of about 3.6 million manufacturing jobs. In the same year, there were approximately 128.6 million households in the United States, and somewhere between 10.5% (official measure) and 11.7% (supplemental measure) of the American population lived in households with incomes below the poverty threshold.[7]  This means that, as of 2019, somewhere between 13.5 and 15.0 million American households likely had incomes below the poverty threshold.  And therefore, adding another 3.6 million manufacturing jobs might reduce the poverty rate by as much as one-fourth (between 24% and 27%, depending on which measure of poverty is used.)

The index of labor productivity for the American manufacturing sector (the dotted red line on Exhibit T-2) also shows that productivity has grown very slowly (at an average rate of only 0.38%/year) over the most recent decade for which data is available (2009-2019.)  This is one of the classic signs of underinvestment in an economic sector, and suggests rather strongly that America’s current lack of manufacturing capacity may significantly impair its future industrial competitiveness if corrective action is not taken.

 

 

America’s trade deficits in manufactured goods, by country, during the entirety of the NAFTA and WTO eras (1994-2020) are summarized in Exhibit T-3 above.   Note that, although the 2020 data is shown in Exhibit T-3 for the sake of completeness, the analysis of America’s trade deficit focuses on 2019 data to show the patterns that were typical before the COVID-19 lockdowns began in mid-March of 2020.

As shown in Exhibit T-3, as of 2019, America’s total trade deficit in manufactured goods was about $854 billion, or about 4% of GDP.[8]  Nearly 40% of this amount ($345 billion) resulted from trade between the U.S. and China.   Other Asian countries contributed a total of another $223 billion to America’s trade deficit in manufactured goods, resulting in a total deficit of about $568 billion (67% of the global total) for trade in manufactured goods between the U.S. and Asia in 2019.  The most significant remaining portions of America’s trade deficit in manufactured goods came from the European Union ($178 billion, or 19% of the total) and the NAFTA region ($128 billion, or 15% of the total, primarily resulting from U.S. trade with Mexico.)

The data in Exhibit T-3 also clearly show that America’s trade deficit has widened significantly as the principle of unrestricted free trade has been applied to more and more of America’s trading relationships over time.  During the NAFTA era (1994-2000), America’s total trade deficit in manufactured goods averaged about 2% of GDP.  However, during the WTO era (2001-present), the total trade deficit in manufactured goods has averaged more than 4% of GDP, peaking at about 6% of GDP during the mid-2000’s.  In other words, as the principle of unrestricted free trade has been applied to more and more of America’s trading relationships, the redistributive effects of these agreements (i.e., the redistribution of both America’s manufacturing jobs and America’s wealth to other countries) have become larger and larger, appearing to substantially outweigh any theoretical gains in global economic efficiency that result from the free trade agreements.

Even a cursory look back at the economic history of the U.S. appears to further weaken the argument that the greater theoretical efficiency of unrestricted free trade will lead to higher economic growth within the U.S.  In fact, the opposite appears to be true to a significant extent.    Data from the U.S . Bureau of Economic Analysis for 1930-2020 (longest period available) show that, during 1930-1946 (i.e., prior to the signing of the General Agreement on Tariffs and Trade in 1947, which was the first broadly applicable multilateral agreement to reduce tariffs), the annual growth in real GDP within the U.S. averaged 3.7%/year.  During the GATT era (a 47-year period from 1947-1993, during which tariffs were higher than at present, but below pre-GATT levels), annual growth in real GDP within the U.S. averaged 3.4%/year. During the NAFTA era (1994-2000), annual growth in real GDP within the U.S. averaged 4.0%/year.  For the 1930-2000 period as a whole, annual growth in real GDP within the U.S. averaged 3.6%/year. Taken together, this data suggests that, prior to China’s entry into the WTO in 2001, America’s overseas trading relationships were well enough balanced (and small enough in magnitude) to have only a modest net effect on the overall performance of the U.S. economy, which continued to grow at a remarkably consistent and relatively high rate over the long term.

In the WTO era, however, things have changed significantly.  Between 2001 and 2019, annual growth in real GDP within the U.S. averaged only 2.0%/year.[9]  Even if the “Great Recession”  of 2008-2009 were excluded from the WTO-era dataset (which would bias the comparison significantly in favor of free trade, since most of the effects of the Great Depression are included in the 1930-2000 dataset), that would only increase the WTO-era growth rate to an average of 2.2%/year. 

Thus, a reformed trade policy that substantially reduced or eliminated America’s trade deficit in manufactured goods could potentially have a transformative positive impact on the American economy (increasing the rate of real economic growth by as much as 80%, from the WTO-era average of 2.0%/year back up to the pre-WTO long-term average of 3.6%/year), while also reducing the poverty rate by as much as 25%.  The long-term average increase in economic growth associated with a more balanced trade policy is potentially enough to make a generational difference in the rate at which the American economy expands.  At the pre-WTO average growth rate of 3.6%/year, the real economic output of the U.S. will double approximately once every 20 years.  But at the WTO-era average growth rate of 2.0%/year, real economic output doubles only once every 36 years.  And when the environmental and national security benefits of a more balanced trade policy are also considered, the need for a substantially reformed trade policy becomes even clearer.

And the key reasons why unrestricted free trade has led to significantly lower economic growth within the U.S. are not difficult to understand on a conceptual level.  In addition to the substantial redistributive effects of unrestricted free trade (as of 2019, America’s total trade deficit was about $601 billion, or 2.9% of GDP, including a trade deficit in manufacturing of about $854 billion, or 4.0% of GDP), there is a higher “multiplier effect” associated with manufacturing jobs than with other sectors of the economy.  The “multiplier effect” refers to the fact that any new enterprise requires support services that generate additional economic activity.  To use a simple example, even opening a single retail store will likely require the store owner to purchase at least one new cash register and/or computer, will pay salaries to a number of employees (which they will then put back into the economy as they pay their bills), and will also create some additional demand for services in sectors such as accounting, payroll, and information technology.  And since manufacturing typically requires a broader range of more complex and higher-value support services than retail or service industries (including suppliers who make parts or sub-assemblies for industries such as automobile manufacturing, commercial aircraft manufacturing, or defense), it makes intuitive sense that the “multiplier effect” associated with manufacturing jobs should be significantly higher than for other sectors of the economy.  And, conversely (as the high-level empirical evidence discussed above seems to confirm), losing manufacturing jobs should hurt the economy even more than losing other types of jobs.

The precise size of the higher “multiplier effect” for manufacturing jobs than for other sectors of the U.S. economy is a matter of some controversy.  However, two independent estimates conclude that the “multiplier effect” for manufacturing jobs is at least twice as high, and may be as much as 3.5 times as high, as the multiplier effect for retail jobs or professional services.  Specifically, an analysis published by The Manufacturing Institute shows a multiplier effect of $1.33 for manufacturing (i.e., every dollar’s worth of sales from the manufacturing sector supports an additional $1.33 in other, related economic activity), which is slightly more than twice as high as the multiplier of $0.66 for retail (or less for several other service sectors.) Another study, by a consulting firm (Inforum) affiliated with the University of Maryland, estimated a multiplier of $1.92 for manufacturing compared to $0.54 for retail, meaning that the multiplier effect for manufacturing is estimated to be more than 3.5 times greater than the multiplier effect for retail.[10]

In addition to the substantial negative economic effects associated with unrestricted free trade (which include both regressive redistribution effects, and the disproportionate direct impact of losing the high multiplier effect manufacturing jobs), there are substantial negative impacts on America’s national security, and the global environment as well.   The impact on national security is difficult to analyze in detail, but is actually relatively easy to quantify at a high level.  As of 2019, America’s trade deficit in manufacturing with the People’s Republic of China (“PRC”) alone totals approximately $345 billion per year (see Exhibit T-3 above.)  By contrast, as of 2017 (latest data available) the entire defense budget for the PRC totaled about $228 billion.[11]   

Thus, America’s trade deficit with the PRC essentially allows the leaders of the Chinese Communist Party (who make all of the significant military and economic policy decisions within the PRC) to bully their neighbors (and their own people as well) for free, while also having an additional “slush fund” of about $115 billion/year left over to reward their political cronies, and/or re-invest in their own economy.  And of course, if the PRC ever does act on their long-stated foreign policy goal of taking over Taiwan, or follows through on their threats to any of America’s other allies in the China Sea region, American taxpayers will likely be expected to pay a large share of the bill for stopping the PRC’s military action.  

And when the question is considered in more detail, it becomes clear that the risk to American national security that results from most of the world’s manufacturing capacity being concentrated in the PRC is even greater than the above high-level overview would indicate.  Ever since the Persian Gulf war of 1990-1991, it has been generally acknowledged that warfare has now entered a “technological” age, in which high technology (rather than mass production of armaments) is likely to be the decisive factor on the battlefield.  And many commentators falsely assume that this “technological” age of warfare is also a “post-industrial” age of warfare.  But this is dangerously shallow and fallacious thinking.  In reality, the technological age of warfare is a hyperindustrial age of warfare, in which the decisive weapons are often very complex and expensive, and take many years of complex and large-scale effort to develop.  Future battles may to a large extent be decided before military forces are ever deployed, by the level of technology each society is developing, and the level of complex, expensive, high-technology, very precise, and highly quality-controlled manufacturing effort it is able to sustain to support the deployment and maintenance of high-technology weapons systems.  Therefore, it is strategically vital for the United States (and the rest of the free world) to maintain domestic manufacturing capabilities (in both defense and non-defense sectors of the economy) that are technologically up-to-date, capable of a high level of quality control, and operate on as large a scale as possible.  The strategic peril of having certain electronic components of the F-35 fighter (which is one of the major components of America’s current and future air defense) made in the PRC and only available from the PRC should be obvious.  And it is equally obvious that America’s trade policy toward the PRC from 2001 to the present has been grossly dysfunctional on national security grounds alone.

America’s WTO-era trade policy toward the PRC is also grossly dysfunctional on environmental grounds.  As of 2017, the PRC’s total CO2 emissions were approximately 1.9 times as large as those of the United States (9,839 million metric tonnes CO2 for the PRC compared to 5,270 for the U.S.[12]), while the total size of the PRC economy was about 15% larger than the U.S.[13].  Thus, in terms of CO2 emissions per unit of Gross Domestic Product (which I believe is the most appropriate comparison to use when evaluating the environmental impact of the U.S. trade deficit), the PRC’s economy is currently about 1.6 times more carbon-intensive as the U.S. economy.  And if levels of other emissions (such as fine particulates, SO2, and NOX) that have more direct effects on human and animal life are also considered, the environmental comparison becomes even less favorable to the PRC.  Thus, unrestricted free trade not only exports a substantial portion of America’s pollution to other countries (which would be morally questionable in itself), but results in global emissions per unit of GDP that are much greater than what would occur if all of the goods consumed in America were also manufactured in America.

A fourth major factor (in addition to the empirical economic effects, the national security effects, and the environmental effects) that makes the current trading relationship between the U.S. and the PRC very unfavorable to the U.S. is that the PRC simply does not play by the same trading rules as the U.S. (and even more importantly, is not required by the WTO to do so.)   There are at least four major components of the massive difference between the trading rules that are applicable to the U.S. and those that are applicable to the PRC: 

  • Intellectual property laws are enforced very poorly (if at all) in the PRC.
  • The PRC requires many (if not all) companies that sell goods within the PRC to enter into joint ventures that are majority-owned by companies controlled by the PRC government as a condition of market access.  These arrangements amount to a direct conduit for both legally-required and illegal technology transfers between American companies and the PRC government.
  • The PRC applies considerably higher tariffs to imports than does the U.S. government. According to the WTO’s Tariff Profile 2017 (the latest data available before the start of the current trade dispute between the U.S. and the PRC), the average tariff applied by the U.S. to trade with its “most favored nation” (“MFN”) trading partners was 3.5%, compared to an average of 9.9% across all products for the PRC.  The discrepancy in tariffs was even higher for manufactured goods (2.1% for the U.S. vs. 12.2% for the PRC), and higher still for certain key industries (i.e., the PRC imposes a 15% tariff on automobiles imported from the U.S.)[14]
  • Any U.S. complaints about the negative consequences of these rules are required to be adjudicated according to the WTO grievance process, which specifies that remedies cannot be pursued until after the WTO’s arbitration panel has found the PRC to be in violation of WTO rules, and lacks sufficient enforcement mechanisms even then.   

According to the Commission on the Theft of American Intellectual Property (“IP Commission”,)[15] as of 2017 the global theft of intellectual property cost the U.S. economy a total of between $225 billion and $600 billion per year.  The 2017 Update to the IP Commission’s report includes the following summary of how these issues affect the trading relationship between the U.S. and the PRC:

“China, whose industrial output now exceeds that of the United States, remains the world’s

principal IP infringer. China is deeply committed to industrial policies that include maximizing the acquisition of foreign technology and information, policies that have contributed to greater IP theft.  IP theft by thousands of Chinese actors continues to be rampant, and the United States constantly buys its own and other states’ inventions from Chinese infringers.

China (including Hong Kong) accounts for 87% of counterfeit goods seized coming into the United States.

China continues to obtain American IP from U.S. companies operating inside China, from

entities elsewhere in the world, and of course from the United States directly through conventional as well as cyber means. These include coercive activities by the state designed to force outright IP transfer or give Chinese entities a better position from which to acquire or steal American IP.”

Many other sources confirm a long-term and large-scale pattern of military and industrial espionage within the PRC, both by individual Chinese companies and in some cases with the direct involvement of the PRC government.  (Many of the leading Chinese companies are owned by the PRC government, and ultimately controlled by the Chinese Communist Party.  And even those companies not owned by the government are subject to coercion by the government and/or the Party.  So the line between the public and private sectors is somewhat blurred in the PRC.)

For example, a recent article in Popular Mechanics entitled “Counterfeit Air Power: Meet China's Copycat Air Force”[16]   documents how at least seven of the most important aircraft and drones in the PRC’s air force are based on technology stolen from either the United States or Russia.  This includes theft of the plans for both of the U.S.’s latest fighter planes, the F-22 Raptor and the F-35 Joint Strike Fighter.

A recent article published by economist Rick Newman documented Chinese-backed industrial espionage targeting many leading American companies, including Boeing, Apple, Microsoft, General Motors, and many others.[17]

Alibaba’s Taobao online marketplace (which is the largest e-commerce site in the PRC, and is roughly equivalent to E-Bay), was designated a “notorious market” for counterfeit goods in 2017 (for the second year in a row.)[18]  A 2016 OECD report estimated that 84.5% of the world’s total trade in counterfeit goods (with a value of about $390 billion per year) originated in either mainland China or Hong Kong (i.e., areas under PRC sovereignty.)[19]  In 2015, Xinhua, the PRC’s official news agency, admitted that 40% of the products sold on Chinese e-commerce sites were counterfeit.[20] 

And it is not only products with a military application, or products made by big companies, that the PRC will steal.  A friend of mine in the consulting business discovered the hard way that the only way to be sure of getting paid when dealing with Chinese clients was to both:  a) make sure that you do business with a U.S.-based subsidiary of the Chinese company you are dealing with, and b) also insist on payment in advance, as part of the terms of the deal.  In fact, small and mid-size businesses are even more vulnerable than large businesses to the Chinese theft, because smaller businesses often lack the resources to pursue either dispute resolution processes or litigation internationally.  For some representative examples of the scale of this problem, see “A Small Table Maker Takes on Alibaba’s Flood of Fakes” (New York Times, 3/18/2017), and “Investigators Seize Fake Luxury Goods Worth Half A Billion Dollars” (New York Times, 8/16/2018), and “Meet the Man Fighting America’s Trade War Against Chinese Counterfeits (It’s Not Trump)” (Forbes, 3/29/2018).

Considering the scale, thoroughness, and long-term, structural nature of the PRC’s theft, it is not surprising that when Jeffrey Immelt (then CEO of General Electric) briefly went off-script in mid-2010, he reacted as any sensible person would:  “I really worry about China.  I am not sure that in the end they want any of us to win, or any of us to be successful.”[21]  Many other American business leaders are undoubtedly also privately aware of the extent to which the PRC’s theft damages their profit margins in China and worldwide (particularly when the value of the stolen intellectual property is figured in.)  Put very simply, it is impossible to “lose a little bit on each sale and make it up on volume.”

And the reality of this situation is actually even worse than it appears from the outside.  As Richard McGregor (formerly the China bureau chief for the Financial Times) explains in detail in his excellent 2010 book, The Party:  The Secret World of China’s Communist Rulers,  the Chinese Communist Party “controls the government…state-owned businesses…courts, media, and military, and…keeps all corruption accusations against its members in-house.  The Party’s decisions have a global impact, yet [it] remains a deeply secretive body, hostile to the law, unaccountable to anyone or anything other than its own internal tribunals.”  Or in other words, the Chinese Communist Party shares many of the attributes of a mafia organization, with most of the benefits of both the legal and illegal business dealings of the PRC ultimately flowing to a tiny elite within the Party.

And this is not merely the conclusion of a single author (however well-informed) with an axe to grind.  David Remnick’s 1993 book Lenin’s Tomb (which is by far the best book I have ever read about the collapse of the Soviet Union), comes to a similar conclusion about the Communist Party of the Soviet Union, from completely independent sources.  Chapter 12 of Remnick’s book (which is titled “Party Men”) documents the many mafia-like activities of the CPSU, which the Soviet people openly described as such during the brief period (toward the end of the Gorbachev era, and at the beginning of the Yeltsin era) when they were able to speak freely about such things.

And it is also clear from even a cursory look at the Chinese Communist Party’s (“CCP”) recent writings that they see no need to change their business model.  In fact, they are planning to double down on the things that have brought them success in the past.  The CCP’s latest 10-year plan (announced in 2015) is entitled “Made In China 2025” and is summarized in a report from the Council on Foreign Relations[22] as follows:

“The Chinese government has launched “Made in China 2025”, a state-led industrial policy that seeks to make China dominant in global high-tech manufacturing. The program aims to use government subsidies, mobilize state-owned enterprises, and pursue intellectual property acquisition to catch up with—and then surpass—Western technological prowess in advanced industries.  

For the United States and other major industrialized democracies, however, these tactics not only undermine Beijing’s stated adherence to international trade rules but also pose a security risk. Washington argues that the policy relies on discriminatory treatment of foreign investment, forced technology transfers, intellectual property theft, and cyber espionage, leading President Donald J. Trump to levy tariffs on Chinese goods and block several Chinese-backed acquisitions of technology firms.

Meanwhile, many other countries have tightened their oversight of foreign investment, intensifying debate over how best to respond to China’s behavior.”

Other sources also provide similar descriptions of the “Made In China 2025” plan.[23]

So, in summary, the economic models that favor unrestricted free trade (in the face of an abundance of contrary empirical data from the unfavorable U.S. trading relationships with the PRC, several other Asian nations, and Mexico) are not only presenting a very distorted picture of economic reality, but also ignore many other factors (such as national security effects, environmental effects, the existence of unequal trading rules, and worker safety and health standards) that cannot be included in the model but are important policy considerations in the real world.  (The economic modelers’ standard way of dealing with any factors that cannot be explicitly represented in their models is to label them “externalities” and then ignore them.)   In other words, the economic models favoring unrestricted free trade both a) significantly understate the negative impacts of unrestricted free trade on the U.S. economy, and b) significantly understate the global “negative externalities” associated with unrestricted free trade (such as empowering dictators throughout the world and increasing global pollution) by failing to even include them in the modeling.

For even fuller explanations of why the economic models supporting free trade don’t work in the real world, see the following two books:

Free Trade Doesn’t Work:  What Should Replace It and Why, by Ian Fletcher, 2011.

Bad Samaritans:  The Myth of Free Trade and the Secret History of Capitalism, by Ha-Joon Chang, 2007.

See especially chapter 6 of Free Trade Doesn’t Work:  What Should Replace It and Why  (titled “The Deliberately Forgotten History of Trade,” for additional examples from the history of the United States and other nations which prove that intelligent (or even mediocre) protectionist policies actually work far better than unrestricted free trade.

Considering the applicable scriptural principles only reinforces the conclusions reached from the empirical data.  This is equally true whether one thinks in terms of the big-picture principles presented throughout this website (such as treating one another as you want to be treated, commitments to justice, truth, and the rule of law, and designing institutions of governance that genuinely serve and protect the interests of individual citizens), or whether one considers the smaller picture of the direct impact of unrestricted free trade on individual citizens of the United States. 

In reality, the big picture is both the sum of, and a logical extension of, many small pictures. And in addition to all the “big picture” scriptural principles mentioned above, there are also two “smaller-picture” principles that seem particularly applicable here:

“Whoever can be trusted with very little can also be trusted with much, and whoever is dishonest with very little will also be dishonest with much” (Luke 16:10), and

“Feed my sheep.”  (John 21:15, 16, and 17)

Concerning the first of these passages, America’s trading relationship with the PRC during the 18 years since the PRC received “most favored nation” status from the WTO has consisted predominantly of the PRC consciously imposing unequal and discriminatory trading rules, while also simultaneously making a very highly organized effort to steal whatever they think they can get away with stealing.  And given that kind of history, it would obviously be foolish for the United States to continue further down the same path with the PRC, and actually encourage them to manufacture more higher-value and higher-technology items in the future (while also continuing to flood the United States with counterfeit junk as well.)   In fact, America desperately needs to do less business with the PRC.

The second passage above (John 21:15-17) is the famous passage where Jesus, just before departing the earth, tells Peter (one of His most important disciples) three times to “feed my sheep.”  In other words, what Jesus is repeatedly telling Peter here is that the most important criteria for judging the value and effectiveness of a Christian leader will be how well that leader takes care of his own people.

And this is an area in which the American people have a very legitimate complaint against their own government.  America’s political, business, academic, and media leaders (and our establishment in general) simply have not responded adequately to the predatory trading practices of the PRC government (or to the negative effects of America’s unilateral belief in unrestricted free trade in general), and have not established a trade policy that takes adequate care of the people they are supposed to represent.  And that must change.

The key conclusions from this review of more than 20 years of empirical data on American trade policy are as follows:

1)  Whether considered in terms of big-picture economic, national security, and environmental impacts, big-picture scriptural principles, or smaller-picture direct impacts on individual American citizens, our trading relationship with the PRC (and also with other countries where the U.S. currently runs a big trade deficit, such as Japan, several other Asian nations, the European Union, and Mexico) needs to change substantially.   And as the example of the PRC illustrates, meaningful changes in America’s trade policy will involve a systematic assessment of both the tariff and non-tariff barriers America faces in the countries where we run a big trade deficit, with a view to both:  a) adapting America’s future trade policy to the empirical realities that exist on the ground in other countries, and b) to the extent that it is both ethical and practical, implementing policies somewhat similar to those of our key trading partners.

2)  Economic models are a radically inferior substitute for empirical data and should not be considered “science” that somehow supplants the empirical data.  The reality of the scientific process is the reverse of this – that science should be data-driven, and that models should be trusted only to the extent that they can confirm or explain the empirical data, rather than somehow magically overriding the empirical data. 

3)  As noted at the beginning of this section, during the first 25 years of the NAFTA and WTO eras (1994-2018), America’s trade deficit totaled about $11.0 trillion, which was about 47% of the total market capitalization of the S&P500 companies as of November 2018.  In other words, it has only taken 25 years of commitment to unilateral and unrestricted free trade for America to export nearly half of the wealth that it took us the previous 375 years to accumulate.  And about half of this total (a cumulative deficit of $5 trillion in manufactured goods) has gone to the government of the PRC, which is not only ungrateful but actively seeks to use the gullibility of America’s political, business, academic, and media establishments against us.  And the logical outcome of continuing to conduct business as usual for another 15-20 years would be for the United States to in effect become a majority-owned subsidiary of the Chinese Communist Party.  And that would indeed be an ironic ending of the American experiment. 

 

3.  How Did We Get Here?  (using Biblical principles as a road map to understand why the world’s existing institutions of global governance don’t work very well, and the theoretical solution to that problem.)

As explained in detail in the First Principles section of this site, the most important principle of Biblical morality[24] is that love is the supreme virtue, or more specifically, that we should “love our neighbors as ourselves” (Matthew 22:39) or “do to others what you would have them do to you” (Matthew 7:12.)    And as noted at the beginning of this discussion on trade policy, there are also many other principles of Biblical morality that have important applications to modern international trade, including commitments to justice, truth, the rule of law, and individual freedom, and to the ideas that institutions of governance should be as limited and local as possible, and should exist to protect the military and economic security of each individual citizen. (All of these principles are also explained in more detail in the Role of Government section of this site.)  

Taken together, the Biblical principles constitute an entire value system, which is summarized in the  Ten Commandments (Exodus 20:2-17 or and Deuteronomy 5:6-21), and further explained in other Biblical passages that focus more specifically on some of the details of governance.  One of the key purposes of the Ten Commandments was to summarize the necessary boundaries between freedom and order within a society that was designed to be as free as possible, but also to maintain the necessary minimum of order. Another important passage on Biblical governance is Joshua 1:7-8, which states explicitly that adherence to the rule of law in general, and the Law of Moses in particular, was one of the foundational principles for maintaining a just and prosperous nation of Israel. 

The idea that shared values and culture (leading to a meaningful and effective rule of law) is one of the foundational principles of a successful and prosperous society is also stated even more  explicitly in another of the major Biblical passages on governance, in Deuteronomy 17:15-20:

“Be sure to appoint over you the king the Lord your God chooses.  He must be from among your own brothers.  Do not place a foreigner over you, one who is not a brother Israelite.  The king, moreover, must not acquire great numbers of horses for himself or make the people return to Egypt to get more of them, for the Lord has told you, ‘You are not to go back that way again.’  He must not take many wives, or his heart will be led astray.  He must not accumulate large amounts of silver and gold.

When he takes the throne of his kingdom, he is to write for himself on a scroll a copy of this law, taken from that of the priests, who are Levites.  It is to be with him, and he is to read it all the days of his life so that he may learn to revere the Lord his God and follow carefully all the words of this law and these decrees, and not consider himself better than his brothers and turn from the law to the right or to the left.  Then he and his descendants will reign a long time over his kingdom in Israel.”

-          Deuteronomy 17:15-20

Deuteronomy 17:15, which specifies that ancient Israel’s king should be “from among your own brothers” and “not a foreigner,” amounts to a Biblical endorsement of the ideas of the nation-state (and/or national self-determination), which has been a long-term aspiration of many peoples around the world, and which the United States has traditionally considered both an important human right, and one of the keys to maintaining peace and order around the world.[25]     The U.S. Constitution follows the same principles stated in Deuteronomy 17:15, requiring that the President of the United States be “a natural-born citizen” of the United States (Article II, section 1), and that Senators and Representatives be “citizens” of the United States (Article I, sections 1 and 2.) 

Especially when Deuteronomy 17:15 is read in context with other passages of scripture, including Galatians 3:26-28, which says “You are all sons of God through faith in Christ Jesus…There is neither Jew nor Greek, slave nor free, male or female, for you are all one in Christ Jesus” and the passages on immigration (which are discussed in detail in the Immigration section of this site), it is clear that the Biblical requirement for each nation to be governed by its own citizens does not exist for racial reasons.   And this point becomes even clearer when one considers that, consistently with scriptural principles, both the United States and the modern nation of Israel are among the most ethnically diverse societies in the world. 

As explained in more detail in the section of this site on Immigration, the principles that united the ancient nation of Israel were primarily religious and cultural rather than primarily racial (a common language, and obedience to both the moral and the ceremonial parts of the Law of Moses), and foreigners were to be allowed to live with the Israelites as long as they obeyed the same laws.

America’s governing creed is somewhat more secularized, but is summarized in the Declaration of Independence:

“We hold these truths to be self-evident:  that all men are created equal; that they are endowed by their Creator with certain inalienable rights; that among these are life, liberty, and the pursuit of happiness; that, to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed; that whenever any form of government becomes destructive of these ends, it is the right of the people to alter or to abolish it and to institute new government, laying its foundation on such principles, and organizing its powers in such form, as to them shall seem most likely to effect their safety and happiness…

…and for the support of this declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our lives, our fortunes, and our sacred honor.”

As discussed in more detail in the Role of Government section of this site, ancient Israel’s system of governance was a theocracy, in which civil and religious authority overlapped considerably.  America’s system of governance is somewhat more secularized, in that our civil laws are not synonymous with the laws of any particular religion, and are in fact a completely separate system of laws, in accordance with the requirement in the First Amendment of the Constitution that the U.S. Congress shall “make no law respecting an establishment of religion.”  

However, as discussed in much more detail in the “Our Spiritual Heritage” section of this site, it is also vital to the preservation of American ideals that Americans of all religions (or no religion) should be allowed to freely advocate their ideas for what the laws of the United States should be (including their ideas about the role of religion in America’s public life, and the role of secular laws in protecting and preserving our spiritual ideals.)  This is consistent with the second major clause regarding religion in the First Amendment, which states that the U.S. Congress shall also make no law “prohibiting the free exercise” of religion.  And even more importantly, it is also consistent with the overall purposes of the Constitution (as defined in its Preamble), one of which is “to secure the Blessings of Liberty to ourselves and to our Posterity.”[26] 

By the time the Declaration of Independence and the Constitution were written, America already had a long tradition of considering God to be a “separate but higher” authority than secular government, and this is one of the most important things that our founding documents were designed to preserve.[27]  And the basic reason for this is very simple.  Since all of our laws play an important role in defining and determining how we treat one another, all of our laws (even if they are secular, in the sense of making no specific reference to any religion) are in fact moral laws.  And both the history of the United States (and the history of the world prior to the founding of the United States) suggest rather strongly that morality will rarely be very humane (or arguably, can hardly survive at all) in the absence of religion.  Or as George Washington put it in his famous Farewell Address in 1796:  

“Of all the dispositions and habits which lead to political prosperity, religion and morality are indispensable supports. In vain would that man claim the tribute of patriotism, who should labor to subvert these great pillars of human happiness, these firmest props of the duties of men and citizens.  The mere politician, equally with the pious man, ought to respect and to cherish them. A volume could not trace all their connections with private and public felicity. Let it simply be asked: Where is the security for property, for reputation, for life, if the sense of religious obligation desert the oaths which are the instruments of investigation in courts of justice?

And let us with caution indulge the supposition that morality can be maintained without religion. Whatever may be conceded to the influence of refined education on minds of peculiar structure, reason and experience both forbid us to expect that national morality can prevail in exclusion of religious principle.”

The practical consequences of all of this theoretical discussion of America’s spiritual heritage become much clearer when one uses Biblical principles of governance as an analytical framework, or roadmap for diagnosing the reasons for the failure of America’s current trade policy.  When considered in light of the Biblical principles of governance, at least three major (and overlapping) problems with our existing institutions of global governance (such as the United Nations, the World Trade Association, and the European Union) readily become apparent.  These are:

1)      Scale

2)      Fundamental Conflict of Worldviews

3)      Tendencies Toward Authoritarianism, Elitism, and Social Darwinism in Practice

 

Each of these problems is discussed in more detail below.

 1)      Scale

Even in the United States, where the system of government was carefully designed to be representative of and accountable to the people (and which not coincidentally has the oldest written constitution in the world), the sheer scale of the federal government sometimes makes it difficult for individual citizens to feel that their views are meaningfully represented at the federal level, or that they have a meaningful opportunity to participate in the processes of the federal government. 

In the United States as of 2020, the total population is about 331.5 million people, but there are only 435 members of the House of Representatives and 100 members of the Senate.   So there is only one member of the House of Representatives for every 762,000 people.  And although there are two Senators for each state (regardless of that state’s population), each Senator represents an average of about 3,300,000 people.  The combination of the relatively large population of the U.S., the small number of decision-makers in the federal government, and the vast amounts of money at stake in the operation of the federal government (the U.S. government’s budget outlays for FY2019 (the last fiscal year completed before the coronavirus pandemic) totaled about $4.5 trillion, and a total of about $14.4 billion was spent on federal political campaigns during the 2020 election cycle), mean that in practice, the average citizen’s ability to influence the federal government is very limited. 

In practice, disproportionate political influence over the U.S. federal government inevitably goes to two groups of people:

a)      people of all political parties who are wealthy enough to hire professional lobbyists and/or fund political action committees (the “donor class,” which largely overlaps with the top 1% of household incomes in the U.S.), or

b)      the recipients of federal government benefits of all types (ranging from wealthy corporate lobbies receiving tax breaks or other subsidies for a wide variety of items, to poorer individuals receiving welfare payments), all of whom can be relied upon to vote disproportionately to either maintain or expand those benefits.

These inevitable structural flaws in the operations of even the most representative and open large systems of government (such as the U.S. federal government) tend to leave the middle-class taxpayers who actually have to fund the operations of the government significantly underrepresented when it comes time to make decisions about how the government’s funds are allocated (or any other aspect of the government’s operations.)  This is one of the major reasons why the Bible says that government should be as limited and local as possible, and also one of the major reasons why the principle of federalism (the principle that, in the words of the Tenth Amendment to the U.S. Constitution, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people,”) is one of the most important founding principles of the United States government.

The principle of federalism is arguably even more important to the successful governance of the United States today than it was at the time the U.S. Constitution was ratified in 1788, for at least two reasons:

a)      State and local legislators represent far smaller numbers of people than the federal legislators do, and often are also only part-time (rather than full-time professional) politicians, who must also work a non-political job to support their families.  State and local political campaigns also have far smaller budgets than federal campaigns.  For all of these reasons, state and local legislators are much more accessible and accountable to individual citizens, and much more likely to share their outlook, than federal politicians.

b)      Unlike the U.S. federal government (which was approximately $28 trillion in debt as of the end of May 2021), the state and local governments are required by law to balance their budgets, which means they are essentially required by law to have a more realistic outlook on what the government can actually afford to do than federal politicians do.

The tendency for problems of scale alone to make meaningful representation impossible are compounded with international organizations.  In both the United Nations General Assembly and the World Trade Organization, there is only one representative per member nation, and these representatives are generally appointed by the member governments, which further reduces their accountability to individual citizens. 

As the Brexit vote, and the recent rise of various other nationalist political parties throughout Europe illustrate, even the European Parliament, which is the most representative of the major international organizations (with a total of 705 members directly elected for five-year terms, representing about 447 million people as of January 2021), is widely perceived to lack meaningful accountability to the voters, and to be pursuing policies in a wide range of areas (including immigration, trade, monetary and fiscal policies, and regulation in general) that are contrary to the interests of ordinary European citizens.  And it is even more difficult to dismiss the recent and contemporaneous rise of nationalist and populist protest against “government by elites” in both the United States and western Europe as merely a coincidence when one considers that the scale of representation in the European Parliament (about 1 Member of the European Parliament or “MEP” for every 634,000 citizens) is similar to the scale of representation in the United States House of Representatives (about one representative for every 762,000 citizens as of the end of 2020.)

 

2)      Fundamental Conflict of Worldviews

According to Freedom House,[1] as of 2020 only 20% of the world’s population (or about 1.6 billion people) lives in “free” countries, with the remaining 80% living in “partly free” (42%) or “unfree” (38%) countries.   The “free” countries are primarily concentrated in the Americas, Europe (especially western Europe), and the former British empire, with most of the rest of the world being classified by Freedom House as either “partly free” or “unfree.”  Since the Judeo-Christian worldview includes strong commitments to individual freedom and the value of each individual human life, it is not a coincidence that the areas of the world in which the Judeo-Christian worldview has had the greatest cultural and political influence (the United States, Israel, and Europe) overlap significantly with the areas of the world which enjoy the greatest political freedom and economic prosperity in the modern world.

However, Freedom House appears to have used a fairly leftist definition of “freedom,” which extends an overly generous benefit of the doubt to various governments around the world.  In particular, Freedom House’s ranking system appears to ignore the much higher tax burden in the European Union as compared to the United States,[2] which significantly reduces the degree of economic freedom, per-capita incomes, and the rates of economic growth and job growth in the EU as compared to the U.S.  Thus, if they actually had to live under the European system of government, a majority of American voters (including both conservatives and libertarians)  would probably consider the EU “partially free” rather than completely free.  The political and economic history of Europe since 1600 (as contrasted with that of the United States) illustrates the ease with which both freedom and prosperity can be lost (or at least imperiled) in a “post-Christian” world which no longer values either individual freedom or individual human lives appropriately.  And since there were approximately 447 million inhabitants in the EU-27 as of January 2021, reclassifying the EU as “partially free” would reduce the “free” portion of the world’s population to about 1.1 billion people, or only about 14% of the world’s total population as of 2020.

In this context, it should be no surprise that the two major existing institutions of global governance (the United Nations and the World Trade Organization) are far friendlier to authoritarianism than most American voters are comfortable with.  And when this natural political  tendency to be friendly towards authoritarianism is combined with the secular humanist worldview held by the majority of the globalist elite (which holds that tolerance rather than love is the supreme virtue, or in other words that there are no moral absolutes, and that by extension authoritarian governments should be regarded as morally equivalent to free ones), then it is not difficult at all to see why a large majority of American voters (of all political parties) view institutions of global governance with great (and deserved) skepticism.



[1] Freedom House is a U.S.-based non-governmental organization which has created a ranking system for classifying 195 countries on a scale from 0 (completely unfree) to 100 (completely free.)  See www.freedomhouse.org.  The statistics in this paragraph are taken from Freedom House’s “Freedom in the World 2021” report.

[2] As discussed in the Role of Government section of this site, between 1992 and 2014 the total tax burden in the U.S. averaged 26%, compared with an average of 39.5% in the EU-15 (western Europe.)

 

3)      Tendencies Toward Authoritarianism, Elitism, and Social Darwinism in Practice

Given the problems of scale and the fundamental conflict of worldviews that are inherent in global institutions of governance, it is not surprising that these institutions have strong tendencies toward authoritarianism and elitism.  An additional inherent weakness of every truly global institution of governance is that the fundamental conflict of worldviews within these institutions (which results from a majority of the globe being under varying degrees of authoritarian rule, in combination with the globalist elite’s reluctance to hold authoritarianism accountable for its excesses), often prevents institutions of global governance from achieving enough political consensus to be even partially effective.

According to the Bible, the primary responsibility of secular government (which is also the only responsibility specifically given to secular government in the scriptures)[31] is the “power of the sword,” or in other words the responsibility for maintaining public order, against both external and internal threats, for the good of ordinary citizens (Romans 13:1-7).  Therefore, from a Biblical perspective, the most basic test of the effectiveness of any institution of global governance is its ability to either stop or mitigate military aggression between nations, or large-scale civil conflict within nations. 

And the UN has repeatedly failed this test.  The most recent example of the UN’s ineffectiveness in stopping armed aggression between nations is its complete failure to either prevent Russia’s invasion of the Ukraine in 2014, or to negotiate a meaningful and effective cease-fire since.  The UN also failed to stop three military attacks on Israel by various coalitions of other Middle Eastern nations (in 1948, 1967, and 1973.)  And the UN has also been mostly ineffective in halting major civil conflicts and/or atrocities within various nations (including the civil war in Syria, which has been ongoing since 2011 and has displaced several million people, and the 1994 genocide in Rwanda, which was not stopped until it had lasted 100 days and claimed approximately 500,000 lives.)  Since the founding of the UN in 1946, there has only been one instance in which the UN mobilized military forces in order to stop aggression (rather than merely offering peacekeeping forces and humanitarian aid to help clean up after the fact.)  That occurred in 1950, when Russia walked out of the UN Security Council meetings in which a response to North Korea’s invasion of South Korea was being discussed.  And that is a circumstance that is unlikely to recur.  Thus, the responsibility for securing ordinary people against either external or internal threats to public order (which the Bible says is the primary responsibility of secular government) indisputably still rests with nation-states.

The other major institutions of global governance (the Paris Climate Agreement and the World Trade Organization) are also very elitist and somewhat authoritarian in nature, and fairly ineffective (in the sense of having limited if any long-term benefit to anyone except a small global elite.)  Both of these organizations also significantly erode the sovereignty of individual nations (which is an additional point in their disfavor, that somewhat overlaps with the first three.) 

As will be discussed in detail in the Environment and Energy section of this site, the Paris Climate Agreement will be very expensive to implement, and will have little if any impact on global temperatures even if it is fully implemented (which is unlikely.)  To the extent it is implemented, it will significantly increase energy costs both in industrialized nations and in the developing world (thus significantly increasing the global rate of energy poverty), and will create a significant incentive to move even more of the world’s manufacturing capacity away from nations that regulate carbon emissions strictly and into nations that regulate carbon emissions lightly or not at all.  And with the exception of the United States, nations that regulate carbon emissions lightly or not at all also tend to have looser environmental regulations in other areas.  Therefore, the net impact of the Paris Climate Agreement is likely to be a significant increase in global energy costs (and other economic costs), as well as a significant increase in global pollution.  These negative effects more than offset the Paris Climate Agreement’s minimal impact on global temperatures.  Thus, although a small global elite of climate policy mavens will in some senses derive some degree of short-term benefit from the Paris Climate Agreement, from a longer-term and/or more global perspective, no one really benefits. 

The process by which the Paris Climate Agreement was negotiated is also problematic.  Because it was negotiated by each nation’s representatives to the UN (primarily in in consultation with the UN’s climate bureaucracy and other appointed rather than elected officials within the major governments involved), individual citizens throughout the world have had very little opportunity to review or meaningfully consent to the terms of this treaty.  Essentially, the Paris Climate Agreement was negotiated by and for the (alleged) benefit of a small global elite, and is thus both elitist and authoritarian in nature.  (In the United States, the Paris Climate Agreement still has the legal status of an unratified treaty – meaning that it technically has no legal effect whatsoever – because the two-thirds vote of the U.S. Senate that is necessary to ratify the treaty is unlikely to be forthcoming for the foreseeable future.)  Furthermore, because China, India, and most of the rest of the developing world (which are the sources of most of the recent growth in global CO2 emissions) have not committed to meaningful emissions reductions under the Paris Agreement, it is likely to be ineffective even when judged relative to its stated goals.

The criticisms of the process by which the Paris Climate Agreement was negotiated apply with even greater force to the World Trade Organization (“WTO”) treaty.  This treaty was also negotiated by a single appointed representative from each member government (backed up by additional small delegations of appointed officials from each member government), and the WTO and other similar agreements are sufficiently controversial worldwide that the negotiators have often had to be literally “walled off” from ordinary citizens to prevent popular protests from disrupting the negotiations. 

Furthermore (as the empirical data presented earlier proves in detail) the WTO and other free trade agreements have largely failed in their stated goal of bringing about a more open, transparent, fair, and mutually beneficial system of global trade.  Instead, they have largely become vehicles by which the United States (which is by far the biggest believer in the theory of unrestricted free trade) subsidizes China and various other Asian nations, plus Mexico, on a large scale, and the European Union on a smaller but still significant scale. 

Similarly, Germany’s trade surplus within the European Union is highly controversial within the EU.  Developing nations, though benefiting to some extent from trade surpluses, have also suffered to some extent as a result of having to structure their manufacturing sectors to meet global rather than local imperatives, and having to open their agricultural sectors to global competition rather than being able to adopt policies that are more protective of local agricultural employment.  The only consistent “winners” under the current system of global trade have been a small global elite (roughly the top 1% of incomes worldwide), who have benefited from greater flexibility to locate global manufacturing in the least-cost locales worldwide (meaning places with the least stringent environmental and safety regulations, and lowest labor costs worldwide.) 

Furthermore, the above review of our current institutions of global governance suggests rather strongly that, whether by omission, commission, or some combination of each, we still live in a fairly Darwinian world, which the institutions of global governance are unable to regulate effectively.  And this is occurring for structural reasons that are inherent in the very nature of our institutions of global governance, and are unlikely to be correctable in the foreseeable future.

Therefore, both the empirical data and all of the principles of Biblical governance suggest that the processes of globalizing trade and globalizing governance  should be viewed with great skepticism.

 

4.  Practical Solutions:  How We Can Begin Reforming America’s Trade Policy?

The above review of the past 28 years of empirical data on American trade policy has made it clear that our trading relationships with the PRC (and also with other countries where the U.S. currently runs a big trade deficit, such as Japan, several other Asian nations, the European Union, and Mexico) need to change substantially.

And substantially reducing America’s trade deficit is a very achievable goal, that is well within reach of a trade policy that is more mindful of America’s long-term economic and strategic interests.   This is shown in Exhibit T-4 below, which compares the U.S. and EU-27 trade balances in goods during 2019 (the latest year of pre-COVID data.)

As shown in Exhibit T-4, the EU-27’s trade strategy is essentially to run large surpluses with both the United Kingdom and the United States, which are more than sufficient to offset relatively modest trade deficits with China and a few other Asian nations.  Since the EU-27 also runs a modest net surplus with the nations not shown on Exhibit T-4, the overall result was a respectable trade surplus in goods of about $220 billion (or E196 billion) in 2019.

By contrast, the United States’ unmanaged or laissez faire trade policy has resulted in sizeable trade deficits with many of the U.S.’s major trading partners (including a deficit of $345 billion to China alone in 2019, even after a portion of President Trump’s corrective measures took effect.)  Globally, the United States ran a net trade deficit in goods of $854 billion in 2019.   

Thus, the EU-27’s trade policy (as compared to that of the United States) represented a net advantage of approximately $1.07 trillion for the EU-27 in 2019 alone.  This represents about 5% of the United States’ 2019 nominal GDP of $21.4 trillion, or 7% of the EU-27’s 2019 GDP of $15.6 trillion.  And when the longer-term cumulative effects, the multiplier effects, and the regressive economic effects of de-industrializing the United States (discussed in detail earlier in this chapter) are also considered, it is clear that the United States’ terrible trade policy represents an even larger long-term penalty to the U.S, economy than the 5%-7%/year “snapshot” measurement during 2019 indicates.

Furthermore, since the EU-27 faces many of the same structural issues as the United States when competing in the global economy (such as labor costs, environmental standards, and workplace safety standards that are all relatively expensive when compared to less regulated developing countries) it is clear that the trade policy of the United States is well within the realm of policy choice, and that better policy choices would likely result in a U.S. economy that is faster growing, more equitable, more competitive with other major manufacturing nations, and also stronger from a national security perspective all at once.  Since the United States also has higher (i.e., more stringent) environmental policy standards than many developing nations, bringing more manufacturing back to the United States would also have a net positive impact on the global environment.

An examination of the recent trade deficits between the U.S. and China makes it even clearer that U.S. trade policy is in fact within the realm of policy choice, and that policy choices better adapted to the global trading environment the U.S. actually faces (in which the U.S. and the U.K. appear to be among the few, if not the only major global economies that still believe in unrestricted free trade), would likely produce better outcomes.  Between 2018 and 2020, the United States’ trade deficit in goods with China fell by approximately $108 billion (or more than 25%), from $419 billion in 2018 to $311 billion in 2020.  And President Trump achieved this result almost single-handedly, by executive action, and against substantial resistance from the establishments of both major American political parties.  Although most of the manufacturing removed from China during 2018-2020 was moved to other Asian nations (and thus the net benefit to the U.S. economy was smaller than it should have been, the significantly higher economic growth achieved by President Trump during the two years his policies were in effect before the COVID-19 pandemic hit (2018-2019) are another indicator that a longer-term and more systematic reform of U.S. trade policy would have even more beneficial effects.    

Although some of the details of trade policy are complex, it is not all that difficult (especially given the magnitude of America’s current trade policy failures) to outline some initial steps toward the formulation of a trade policy that is likely to have much better outcomes for all Americans over the long term.  Specifically:

1)      Combine the two federal government agencies that currently deal with trade policy (the Department of Commerce and the Office of the U.S. Trade Representative) into a single Department of Commerce and Trade.  This has long been proposed by advocates of greater efficiency in government, and would also eliminate any possibility of dual and conflicting authority over trade policy.

2)      Require the new Department of Commerce and Trade to publish an annual report (with quarterly updates) analyzing the U.S. trade deficit or surplus, by country and by the major items traded with each country.   (In other words, it is the responsibility of the U.S. government to educate its citizens about the facts relating to U.S. trade policy, rather than obscuring those facts because it is in the interests of the donor class to do so.)

3)      The U.S. Securities and Exchange Commission (“SEC”) should consider requiring all publicly traded companies that are registered on any U.S. stock exchange to report their sales, operating income, net income, and changes in employment annually on either a country-specific or region-specific basis (i.e., USA, Canada, European Union, PRC, Rest of Asia, Central America, South America, etc.) as part of their routine annual reporting that is required on Form 10-K.  This would help educate the American people on how the globalized economy really works, and as such, is likely to yield some surprising and very instructive results.  For example, Dow Jones recently reported that during 2018, American companies earned a total of $284 billion in Europe (up 7% from 2017), but a total of only $13.3 billion (down 1.1% from 2017) in the PRC.[32]  In other words, despite the narrative that both big business and the mainstream media have been pushing about the need for U.S. companies to invest more in the PRC, total U.S. corporate earnings within the PRC  during 2018 were less than 5% of their earnings from Europe.  This data rather strongly suggests that American companies are likely to prosper much more in an environment like Europe (where wages, worker health and safety standards, environmental standards, intellectual property rules, trading rules, and the rule of law in general) are broadly similar to those in the United States and well-enforced, rather than in an environment like the PRC where all of those standards are much weaker.  And if similar data were available for the rest of Asia, it would likely further reinforce this point, by showing that in the rest of Asia, American companies earn larger amounts of money than in the PRC (or at least significantly larger profit margins), even though the other Asian markets are much smaller than the PRC.

4)      The U.S. government should also undertake an official study of measures that can be taken to reduce America’s trade deficit over time, with the goal of reducing America’s trade deficit by at least 80% within a period of no more than 5 years.  An initial version of this study should be released to Congress (and the American public) within a year after it is authorized.  The key topics covered in this study should include:

  1. For every country with which America had a trade deficit in goods of $15 billion per year or more as of 2020 (which includes the PRC, the European Union, Mexico, Japan, Vietnam, Malaysia, South Korea, Taiwan, and Canada, as shown on Exhibit T-3 earlier in this section), there should be a country-by-country review of the major items traded with each country, and the major factors that have contributed to America’s trade deficit, including both tariff and non-tariff barriers to trade.  Both the foreign nations’ policies that have contributed to their current trade surplus with the United States, and possible American policies that might reduce America’s trade deficit should be reviewed on a country-specific basis.  The overall objectives of the country- specific part of the study should be to accurately and objectively describe America’s current trade situation, and to begin developing American policies that could either mirror (or otherwise effectively counter) the trade policies of each of America’s key trading partners on a country-specific basis in order to substantially reduce America’s trade deficit over time.
  1. Since America’s trade deficits in goods with Japan and South Korea consist almost exclusively of automobiles and auto parts (and these also account for a significant portion of America’s trade deficit with the European Union) an industry-specific review of how U.S. trade policy (and government policy in general) can more effectively support the American automobile industry is also necessary.  At a minimum (unless other more general policies such as the Import Permit System discussed below can produce better results), gradually escalating domestic content requirements for automobiles sold within the United States may be necessary.   (For example, such a policy might require that by certain dates, 60%, 70%, or 80% of the value of each automobile sold within the United States must be manufactured within the United States.)  This would have the effect of gradually bringing more of the jobs and skills associated with automobile manufacture back to the United States (rather than letting our manufacturing capabilities continue to erode over time, as is currently the case.)   It also seems appropriate to review whether the other major government policies relating to the auto industry (such as subsidies for either fully electric or hybrid cars, the level and timing of fuel economy requirements for both sedans and SUV’s, and any major changes in safety requirements) help or hurt the global competitiveness of the U.S. auto industry, and how these and other policies might be modified to support the U.S. auto industry in a more strategic and holistic way.
  1. In addition to the country-specific and industry-specific reviews of American trade policy discussed above, it is also necessary to consider ways in which America’s overall trade policy might be modified to reduce America’s trade deficit in a way that applies systematically, consistently, and fairly to many different trading partners.  One such alternative trade policy, which will be referred to here as the Import Permit System, was first publicly proposed by Warren Buffett in a Fortune magazine article in 2003, and later updated in 2016.[33]   This system would work very simply, by creating a defined number of import permits based on the total value of American exports.  For example, in 2018 American companies exported a total of approximately $1.7 trillion worth of goods, and imported about $2.6 trillion worth of goods.  So if we wanted to instantaneously reduce the trade deficit in goods to zero (which is probably not a good idea due to the amount of short-term economic disruption it would cause), then a total of 1.7 trillion import permits (each of which gives an importer permission to import $1 worth of goods) would be made available for importing companies to purchase.  If we wanted to keep the trade deficit the same as it currently is (which is also not a good idea) then a total of 2.6 trillion import permits would be issued (or a ratio of approximately 1.53 import permits for every dollar worth of goods exported) would be issued.  And if we wanted to gradually ratchet down the trade deficit over time (which is what is proposed here), then a gradually declining number of import permits would be issued each year until the overall goal of reducing the trade deficit by at least 80% within no more than five years was reached.    In other words, a tradeable market in the import permits would be established.  The prices paid for the import permits (which would gradually rise over time as number of import permits available declined over time) would function somewhat similarly to a tariff, but would have the advantage of applying equally, fairly, and transparently to all imports.  It should be noted that what is proposed here differs from Mr. Buffett’s proposal in one important respect.  Rather than having the import permits issued to exporting companies (as Mr. Buffett proposes), what is proposed here is that the U.S. government should sell the import permits to the importing companies, in a publicly traded market.  In combination with another key feature of Mr. Buffett’s proposal (which is that the import permits should only be valid for a relatively short period of time, thus discouraging speculators from hoarding them), having the U.S. government sell the import permits would ensure that the government kept the bulk of the profits from trading in the import permits.  This would achieve two important strategic objectives at the same time (reducing imports, and reducing the federal government’s budget deficit.)  Additionally, since Mr. Buffett is known to have been a supporter of Hillary Clinton during the 2016 election, the process of implementing the trade policy he has recommended would start with at least some degree of bipartisan political support.
  1. Another alternative overall trade policy that should be considered is what the book Free Trade Doesn’t Work:  What Should Replace It and Why refers to as a “Natural Strategic Tariff.”  This means a tariff that is set high enough to encourage strategic industries to return to the United States, but not high enough to absolutely preclude international competition.  Chapter 11 of this book makes the case that a flat tariff somewhere in the range of 25 to 35 percent, uniformly applied to all imports, would achieve this goal, while also minimizing the complexity of the tariff system and the political opportunity for individual countries or industries to manipulate the system.  A tariff at this level might not be enough to incentivize industries that are particularly labor-intensive to fully relocate to the United States, but it would benefit all domestic industries to some degree, and create a substantial incentive for higher-technology industries to relocate to the United States.  It would likely also cut down significantly on the flow of cheap counterfeit goods from the PRC into the United States.   (This is because the counterfeiting industries can exist on a large scale only with the implicit or explicit cooperation of the host government, and the entire reason for these industries to exist is to out-compete luxury brand-name goods on price.)  As with the Import Permit System, it would likely be necessary to phase in the Natural Strategic Tariff in stages over a period of several years, in order to minimize short-term economic disruption and give both domestic and international manufacturers time to adjust to the new system.  And another similarity between the Import Permit System and the Natural Strategic Tariff is that both of these proposals would start out with a significant measure of bipartisan political support.  The 2011 edition of Free Trade Doesn’t Work:  What Should Replace It and Why was published by the Coalition for a Prosperous America, an organization which includes both business and labor leaders, and advertises the bipartisan nature of its leadership.
  1. Another change in overall policy that should be considered is the possibility of compensating American manufacturers for relocating factories from the PRC to the U.S.  Just as a hypothetical example to illustrate how this concept might work, this policy might reimburse U.S.-owned companies 65 cents for every dollar they have invested in a specific manufacturing facility or joint venture within the PRC, provided that the U.S. company agrees to relocate its share of those manufacturing facilities within the United States before a specified deadline.  The intent of this policy would be to incentivize U.S. companies to relocate factories from the PRC to the U.S., while still holding them partially responsible for having made what a large majority of American voters from both parties are likely to see as bad investments within the PRC.  This type of policy might be needed as a contingency plan if the PRC responded to U.S. demands for a more balanced trading relationship by attempting to expropriate U.S.-owned assets within the PRC.  But it should also be evaluated on a stand-alone basis.  The total foreign direct investment (“FDI”) by U.S. companies or individuals within the PRC between 1990 and 2017 was about $256 billion, and the rate at which U.S. FDI in China is increasing is currently about $40 billion per year. [34]   Thus, even in a worst-case scenario in which every penny of U.S. FDI had to be removed from the PRC (with 2018 and 2019 investments included) reimbursing 65 cents for every dollar invested in the PRC would cost the U.S. government  a total of approximately $220 billion as of the end of 2019.  And although a sudden and complete repatriation of U.S. investments from the PRC (if such a contingency were to occur) would be very disruptive in the short run, it would also be enormously beneficial to America’s trade balance (and to the overall performance of America’s economy) in the long run. 

Despite the need to plan for various contingencies, I think it is most likely that the necessary reform of America’s trade policy can be accomplished without serious economic disruption, even in the short term.  And the reason for this is simple.  Despite what they may say in public, I think most of the political and economic policymakers within the governments of America’s major trading partners privately realize that the massive trading imbalances between America and the rest of the world cannot continue indefinitely, because they know that their own economies could never tolerate imbalances of such magnitude.  And therefore I think they will privately welcome a gradual and well-considered plan for reducing or eliminating these imbalances, in preference to the sudden and disruptive change that is likely to occur at some point within the next 15-20 years if the U.S. continues to pursue a policy of “unmanaged and unrestricted” free trade to the point of complete failure.

I also believe that gradual implementation of the “Import Permit System” discussed above offers the best chance to substantially reduce America’s trade deficit over a reasonably short period of time, with a minimum of economic disruption and a maximum of flexibility, simplicity, and transparency.  However, at the start of the process for any major change in policy, it is important to consider a wide range of alternatives, so that the pros and cons of each are better understood, and so that a range of policy alternatives are readily available as needed to solve specific problems.

In order for both policymakers and the voting public in the United States to become comfortable with the idea of using tariffs (or similar policies) to improve America’s trade balance, however, it is essential that both groups should have a better understanding of the true relationship between tariffs and economic growth in the U.S. throughout America’s history.  The following points should help:

  • It is a myth that tariffs are likely to reduce America’s economic growth.  Especially in America’s current trade situation (with the PRC working very hard to maintain a wide range of discriminatory economic policies against the U.S. for as long as possible) it is in fact very likely that tariffs would substantially increase American economic growth.  This is true for at least two structural reasons (because tariffs would reduce the redistributionary effects that are currently associated with America’s large trade deficits, and while simultaneously increasing the “multiplier effect” of manufacturing on our domestic economic growth), and also appears to be further confirmed by the historical data.  As noted earlier in this section, between 1930-2000 (before the PRC’s entry into the WTO), real growth in America’s GDP averaged 3.6% per year.  During 2001-2018 (the entire WTO era to date) the average was only 2.0%.  The history of trade in the U.S. (and selected other nations) before 1930 is discussed at some length in chapter 6 of Free Trade Doesn’t Work:  What Should Replace It and Why, but for a high-level summary see the following quote from Wikipedia:  “Tariffs have historically served a key role in the nation's foreign trade policy and as a source of federal income. Tariffs were the greatest (approaching 95% at times) source of federal revenue until the Federal income tax began after 1913. For well over a century the federal government was largely financed by tariffs averaging about 20% on foreign imports.”[35]  And although data for the annual growth in the real GDP of the United States before 1930 was not readily available online, it is likely that the annual average growth rates for most of the history of the United States before 1930 equaled or exceeded the average for the 1930-2000 period.
  • It is also a myth that the Smoot-Hawley Tariff of 1930 caused (or even significantly worsened) the Great Depression.  To quote again from chapter 6 of Free Trade Doesn’t Work:  What Should Replace It and Why, the Smoot-Hawley Tariff “did not affect enough trade, or raise the tariff by enough to have [a significant] effect.  For a start, it only applied to about one-third of America’s trade, about 1.3% of our GDP.  Our average duty on dutiable goods went from 44.6 to 53.2 percent – hardly a radical change.  Tariffs as a percentage of total imports were higher in almost every year from 1821 to 1914.  America’s tariffs went up in 1861, 1864, 1890, and 1922 without producing global depressions, and the recessions of 1873 and 1893 managed to spread worldwide without tariff increases.”  And further, “it was proved by the economist Milton Friedman (at least to the satisfaction of the Nobel Prize committee) that the [Great] Depression’s cause was monetary.”   In other words, the Great Depression was primarily a financial crisis rather than a trade-driven or tariff-driven crisis.
  • Tariffs acknowledge that there is some degree of social cost (which includes, at a minimum, economic, environmental, and national security components) to having goods of any description manufactured overseas, rather than pretending that all of these costs add up to zero, as the failed free trade model does.
  • Tariffs are essentially a tax on consumption.  Therefore, from a structural perspective tariffs would affect the U.S. economy in ways that are similar to the effects of other types of taxes on consumption (such as a national sales tax.)  Among other things, this means tariffs can potentially raise a given amount of revenue in a way that is much fairer, more transparent, and more efficient than income taxes.  As discussed in detail in the Role of Government section of this site, under the current system of federal income taxation in the United States, approximately the bottom 45% of U.S. households pay no income tax at all, while the remaining 55% of households pay effective rates of income tax that are about half of the statutory rate.  By contrast, when consumption is taxed, a relatively small increase in consumer prices would apply very nearly evenly to all of the households in the United States.  Thus, the tariffs themselves would reduce economic growth by a lesser amount than would be necessary to raise the same amount of revenue using income taxes, and the small negative effect of the tariffs themselves would be more than offset by the large positive economic impact of bringing more manufacturing back to the United States.
  • In addition to being fairer and more transparent from the perspective of each individual American citizen (i.e., treating everyone more equally), increasing taxes on consumption would also produce a better outcome for the nation as a whole by facilitating a more honest discussion of how to strike the right balance between the taxes we all pay and the government services we all need.  
  • As also discussed in more detail in the Role of Government section of this site, the combination of the inherent inefficiency of the income tax code and the fact that any increase in income tax rates would likely only apply to a relatively small number of households mean that it is almost certainly impossible to raise enough revenue to meaningfully reduce America’s budget deficit via increases in income tax rates.  And therefore, it is likely that the only way to eliminate (or even significantly reduce) the federal government’s budget deficit over time is by a combination of reductions in government spending, a Balanced Budget Amendment to the U.S. Constitution, and various taxes on consumption.  Europe’s experience tends to empirically confirm this.  The much higher tax burden that applies in Europe – an average of 39.5% for European citizens during 1994-2014 versus an average of only 26.5% in the United States during the same period – can only be achieved by adding a fairly large tax on consumption (Value Added Tax rates averaging about 19% across the EU-28 as of 2018) to an income tax system broadly similar to that in the United States.  And obviously, a strategic application of tariffs or other similar policies in the United States would correspondingly reduce the need to impose other taxes on consumption.
  • In a strategic sense, tariffs are actually likely to be more effective than any other form of taxation, because they will help accomplish two important objectives at once:  bringing ng manufacturing back to the to the United States while also raising additional revenue as fairly and efficiently as possible.

In conclusion, I think it is appropriate to revert one more time from the big picture back to the small one.  The English word “economics” is derived from the Greek word 'oikonomia,' which means “household management.”  And although there are some differences in detail between the macroeconomics of managing the entire U.S. economy as compared to the microeconomics of managing an individual household (largely due to the size of the U.S. economy), the essential principles are the same.  And therefore, America’s household will not be in order until America’s trade policy is substantially reformed.



[1] For example, see “THE MANUFACTURING FOOTPRINT AND THE IMPORTANCE OF U.S. MANUFACTURING JOBS,” Economic Policy Institute, 2015 (briefing paper #388).  According to this study, during 2012 and 2013 the average wage premium for workers without a college degree who have manufacturing jobs was $1.78 per hour (or 10.6%) over non-manufacturing jobs.  And for high-tech or capital-intensive industries such as aircraft, autos, and refined petroleum products, the wage premium can be much higher (typically ranging from 18%-24% above the wages paid for non-manufacturing jobs -- see pages 8-9.)

[2] Some defenders of the current free trade agreements have tried to argue that the harm to the middle class caused by reduced manufacturing employment is offset by the increased availability of low-cost consumer goods imported from overseas.  But this argument does not stand up to much scrutiny.  Saying, “we’re going to take away several million manufacturing jobs, and in return you can buy a $10.00 T-shirt at Wal-Mart” (which is what this argument boils down to) would likely strike most people as a bad trade (even without the further analysis later in this section that proves that point.)  And that is especially true for the people most directly concerned, who have actually lost manufacturing jobs.  And the alleged “benefit” of free trade is further eroded when one considers the lower quality standards that price pressure from Chinese goods has forced other manufacturers of clothing and other lower-priced consumer goods worldwide to adopt.  Today’s $10.00 T-shirt is likely to be pretty ratty-looking within a couple of years, whereas goods manufactured in earlier years often lasted longer.  The British used to say, “I’m not wealthy enough to buy cheap goods.”  But America as a nation has forgotten that.

[3] Unrestricted immigration is actually much more regressive than unrestricted free trade, because whereas unrestricted free trade disproportionately benefits the upper 10% of society at the expense of the middle class, unrestricted immigration benefits only a tiny elite, at the expense of all of the rest of society.  See the Immigration section of this site for a much fuller discussion of American immigration policy.

[4] “Real,” or constant-dollar, economic performance refers to the growth in economic output at constant prices (or in other words, after inflation has been “netted out” of the numbers.)

[5] The precise figures are:  real GDP grew by a total of about 54.4% between 1988 and 2000 (or an average of about 3.40%/year), while real manufacturing output grew by a total of about 47.7% over the same period (or an average of about 3.05%/year.)  And therefore real manufacturing output grew at a ratio of about 3.05%/3.40% or 0.897 times as fast as real GDP.   

[6] The 44.0% estimated increase in labor productivity in the manufacturing sector between 2000 and 2018 consists of:  a) the 42.2% increase between 2000 and 2016 that was actually reported in the St. Louis Federal Reserve’s index, and b) additional estimated increases of 0.62%/year during 2017 and 2018 (based on the historical average rate of increase during the most recent decade:  2007-2016.)

[7] Number of households in the U.S. from U.S. Census Bureau, Table HH-1.  Poverty rate data from https://www.census.gov/library/publications/2020/demo/p60-270.html (official) and https://www.census.gov/library/publications/2020/demo/p60-272.html (supplemental.)

 

 

[8] Note that the 2018 trade data used throughout this section is estimated by annualizing January-September 2018 data.

[9] Excluding the 3.3% estimated growth for 2018 (based on BEA data for the first three quarters) would drop the WTO-era growth rate even further, to an average of only 1.8%/year for 2001-2017.  Thus, even a single year of President Trump’s tax and regulatory policies have had a significant positive effect on the U.S. economy.

[10] See “The Competitive Edge: Manufacturing's Multiplier Effect -- It's Bigger Than You Think,” Industry Week, Sept. 2, 2014.

[13] The real GDP comparison shown here is 2016 data, available from the OECD at https://stats.oecd.org/index.aspx?queryid=60702.  This data is the latest available from the PRC at the time of writing (March 2019.)

[14] The automobile tariffs are documented in https://asia.nikkei.com/Economy/Trade-war/China-to-lower-tariffs-on-US-made-cars-for-3-months.  The other data in this paragraph is from WTO, Tariff Profile 2017.  

[15] The IP Commission is an independent, bipartisan organization that has been in existence since 2013.

[16] Popular Mechanics, Sept. 19, 2018.

[17] “How Xi Jinping lords it over American CEOs,” by Rick Newman, Yahoo Finance, 9/22/2015.

[24] As noted earlier, since this site is focused on political issues, it focuses primarily on applying principles of Biblical morality to political issues (i.e., on how we should treat one another), and leaves detailed discussion of theology (our relationship with and duties to God) to the church, synagogue, or mosque (and/or to each individual’s conscience.)

[25] The right of self-determination was one of the principal points in the Atlantic Charter, which was signed in August 1941  by the governments of the United States and the United Kingdom (i.e, during wartime for the United Kingdom, and only four months prior to America’s entry into World War II) as a general statement of the policies and principles which both governments hoped to follow after the war.  The Atlantic Charter was an important precursor to the United Nations charter.

[26] As anyone who has given even a few minutes study to the legislative history of the U.S. Constitution should know, the “Blessings of Liberty” referenced in the Preamble to the U.S. Constitution are those “Blessings of Liberty” defined in the Declaration of Independence (which are explicitly spiritual, even if not those of any specific religion.)  This is why the “free exercise of religion” is the first freedom explicitly protected in the U.S. Constitution, and why it is referenced separately from the more general protection of “freedom of speech” that occurs later in the First Amendment.   In other words, by the explicit wording of the U.S. Constitution, the “free exercise of religion” was intended to be protected separately (and thus arguably even more) than the more generic “freedom of speech,”  rather than frequently being disregarded or discriminated against by both the courts and the legislatures as is often the case today.

 

[27] In practical terms, this means that all moral, religious, or political viewpoints should be treated equally under the laws of the United States, and should be regulated only to the minimum extent necessary to preserve public order.  A resort to violence to settle disputes (regardless of any ideological context, or the lack thereof) is almost always wrong, and must be heavily regulated by the government (with the only major exception being the right of self-defense.)  But with the exception of largely prohibiting violence, the government should regulate free speech very lightly (if at all.)  This is already the case for secular speech.

 

[28] Scale of representation for European Parliament:  751 Members of the European Parliament for about 500 million citizens =  1 MEP for every 666,000 citizens.  Scale of representation for the U.S. House of Representatives:  435 Representatives for about 329 million people (as of late 2018):  1 Representative for every 756,000 citizens. 

[29] Freedom House is a U.S.-based non-governmental organization which has created a ranking system for classifying 195 countries on a scale from 0 (completely unfree) to 100 (completely free.)  See www.freedomhouse.org.  The statistics in this paragraph are taken from Freedom House’s “Freedom in the World 2018” report.

[30] As discussed in the Role of Government section of this site, between 1992 and 2014 the total tax burden in the U.S. averaged 26%, compared with an average of 39.5% in the EU-15 (western Europe.)

[31] See the “Role of Government” section of this site for a more extensive discussion of the Biblical principles of governance.

[32] “Why A European Slowdown Poses A Bigger Risk To The Stock Market Than China Trade,” by Chris Matthews, MarketWatch/Dow Jones Newswires, 4/4/2019.

[33] Fortune magazine, “America’s Growing Trade Deficit Is Selling The Nation Out From Under Us,” November 2003, and “Warren Buffett:  Here’s How I Would Solve The Trade Problem,” April 29, 2016.

[34] See the U.S.-China FDI Project website at https://www.us-china-fdi.com/


[1] Unless otherwise noted, all of the trade data in this section is from the U.S. Bureau of the Census.  https://www.census.gov/foreign-trade/balance/index.html  The GDP data is from https://fred.stlouisfed.org/series/GDP#0.  .

[2] The North American Free Trade Agreement (“NAFTA”) between the United States, Canada, and Mexico went into effect on January 1, 1994.  China joined the World Trade Organization (“WTO”) effective December 11, 2001, thus essentially beginning the current era of U.S. trade policy at that point.  For simplicity in the rest of this discussion, the 1994-2000 period is referred to as “the NAFTA era” of U.S. trade policy, the 2001-2018 (or 2001-present) period is referred to as “the WTO era,” and the 1994-present period as a whole is referred to as the “NAFTA/WTO era.”

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