Wednesday, May 30, 2007

Free Trade? Fair Trade?

We've gone around on this before, most notably here.

I've struggled to articulate what, exactly, I've been meaning in most of these discussions. But, I read something today and I realized where I've been lacking: real-world examples. Short of finding someone who'll share doing-business-in-China horror stories with us, let me share the following.

An investment bank I know of publishes a quarterly journal highlighting research and analysis by their practice groups. One group focused its contribution on China, from which I quote:

"Among the most significant risks in implementing a successful market entry strategy are:

- A partially privatized business environment which allows unfair trade practices. For example, in many large industries such as steel and mining, banks (which are quasi-governmental agencies) provide below-market rate loans to State Owned Enterprises ('SOEs')." (emphasis mine)

And later…

"- A legal system, despite its current transition to full World Trade Organization compliance, which fails to adequately protect intellectual property and contractual arrangements. The inadequate protection results from both/either insufficient codification of rules and business principals (sic) and/or lack of enforcement. Many companies which have developed sources in China have been surprised by the quickness with which knock-offs are developed (e.g. gear and apparel by The North Face)."

When one hears politicians tossing around terms like "fair trade" or "free trade" it is wise to sit up and take note. Large is the answer to the question: what is the opportunity for mischief? Yet, there remains a fundamental challenge in trade relations when one party respects property rights and the rule of law, and the other party doesn't.

The hard truth is this: as a country, we want cheap stuff more than we want liberty for other people. Democratic societies won't be able to provide us that dirt-cheap labor needed to manufacture our stuff as cheaply as possible, so until 1) we change or 2) our trading partners become free societies, we're going to be facing this dilemma.

Which I would guess would be a long time.

I'll try and see if I can get some stories of how the social/political risk of doing business in China has hurt some companies, and will try to remember that my points would be so much more effective if they had facts to support 'em!


michael hargis said...

When pols start tossing around terms like "fair trade" what they usually mean is "I have some rich constituents who don't want to have to compete with (insert evil foreign entity here)." Unfortunately, protectionism renders trade neither free nor fair. A few benefit at the expense of the American consumer.

Apart from issues of national security, which as I've stated before better be clear and provable, who is in a better position to determine the best course of action for a business trying to trade with China, a politician or the businessman in question? If we take the stance that the businessman will sell his country down the road at the first money-making opportunity (and a pol won't?), then what does that say about our commitment to individual liberty?

I'm not trying to downplay the risks associated with trading with China, but rather that the companies in question are in a better position to assess those risks. To rephrase my original question: If the Chicoms do these things to their people, how does it benefit anyone, especially the American people, for our government to put similar shackles on us?

Free markets tend to solve economic problems with more creativity and efficiency than government fiat, which is not to say that our free market can solve China's problems, but that it probably can solve the problem of dealing with a country like that.

The Monarchist said...

Unless of course the people getting screwed aren't rich constituents, but the American working man or woman.

I'm also not sure I'd ordain the American consumer as the final arbiter of what appropriate trade policy should be. I know some American consumers, and trust me: they're not to be trusted.

At any rate, I respect where you come from on this topic. A lot, which is probably why I take such enjoyment out of turning it over and over (and over...).


Daniel Webster said...

Okay, this is becoming one of my favorite topics...for some strange reason. I have a couple of concerns, er, thoughts...

First, how are issues of national security ever to be "clear and provable?" If I'm a professional football coach and I have (or I think I have) a pretty sound post-season strategy for getting to the Super Bowl, I ain't gonna announce it to my competition. And in our case sharing it with the "team" would essentially be sharing it with the opponents...'cause they're loose with the lips, don't ya know.

Second, in essence we are ordaining the American consumer as the final arbiter in trade negotiations. That's because the American consumer is also the American voter. On the one hand you have pols elected to take Hargis's position. On the other you have pols elected to take Hamilton's position. Either way it amounts to the same thing.

The Monarchist said...

Good point, DW. I'm just thinking of those consumers who rail about price gouging and companies making too much profit and I think... well, that's people for you.


michael hargis said...


There will be certain points in your Super Bowl strategery that other teams, as well as the fans, will know no matter how secret you try to keep them. For example, you probably won't punt on first down, or throw a pass directly to a cornerback, or hand off to a blitzing safety, or take the field wearing patent leather pumps.

I wouldn't have any problem with certain areas being off-limits to trade. There's nothing difficult about clearly proving that weapons and satellite technology are directly related to national security, and saying so doesn't give away any secrets.

Consider: Ferrari, the 500 pound gorilla of Formula 1, maintains a brisk trade with its competitors in engine and suspension technology...last year's, that is, which is the equivalent of saying "obsolete." So if the Chicoms wanted a deal on flintlock muskets and broadswords, we could make a few shekels without compromising ourselves too badly, I think. ;)


I would only say that the American consumer/voter is ultimately the final arbiter on pretty much everything. Whether that's good or bad depends on the thing in question, and in most cases that's at least debateable.

Daniel Webster said...

A.H., "price gouging," "too much profit," "railing (until the government does something) about it" - don't make me laugh!!!

Hargis, good point(s).