And here is your outsourcing nightmare come home to roost....
Chinese counterfeit electronic parts 'are putting U.S. military at risk' | Mail Online
China is dumping counterfeit electronic parts into the Pentagon's supply chain, two senior lawmakers alleged on Monday.
Two Senators, John McCain, Republican-Arizona, and Carl Levin, Democrat-Michigan, said the counterfeits are putting U.S. troops at risk and undercutting the American economy.
One day before a Senate Armed Services Committee hearing on the issue, the Senators offered details of the panel's ongoing investigation.....
They found about 1,800 cases of suspect counterfeit electronics being sold to the Pentagon.
The total number of parts in these cases topped one million.
The committee hearing will examine three cases in which suspect counterfeit parts from China were installed in military systems made by Raytheon, L-3 Communications and Boeing.
Levin, the committee chairman, told reporters at a Capitol Hill news conference: 'Now, a million parts is surely a huge number.
'But I want to just repeat this: We've only looked at a portion of the defense supply chain. So those 1,800 cases are just the tip of the iceberg.'
The investigators found that counterfeit or suspect electronic parts were installed or delivered to the military for several weapons systems.
They include military aircraft such as the Air Force's C-17 and the Marine Corps' CH-46 helicopter, as well as the Army's Theatre High-Altitude Area Defence (THAAD) missile defense system....
Investigators traced more than 70 per cent of the cases to China.
Nearly 20 per cent led to the United Kingdom and Canada, the lawmakers said.
In March 1988, the Torrington Company filed a petition with the Department of Commerce alleging dumping by bearing firms from nine countries an unfair subsidization of bearing imports from two countries. This caused price rises almost immediately.(8) Commerce ruled in Torrington's favor (i.e. found dumping) in all six product categories under review, however, the International Trade Commission determined in May 1989, that injury to the U.S. bearing industry occurred in only three categories - ball bearings, cylindrical roller bearings and spherical plain. Therefore, although dumping was identified in the other three product categories (needle bearings, slew rings and spherical roller bearings), antidumping duties were not imposed in light of the negative injury determination. Countervailing duty charges alleging export subsidies by the Governments of Thailand and Singapore were also verified. In addition, antidumping duties were instituted against tapered roller bearings from Hungary, Italy, Japan, the PRC and Romania.
The antidumping margins were large, and provided an immediate impetus for the major foreign companies to accelerate investment in their U.S. operations. In addition, a worldwide demand surge that began in the second half of 1987 and held through 1989 helped sustain the higher prices that the dumping margins generated. (9)
(8) Torrington's petition covered all antifriction bearings (except tapered roller bearings covered under an earlier petition submitted by Timken) and a plain bearing called spherical plain bearings (rod ends). The antidumping petition named West Germany, France, Italy, Japan, Romania, Singapore, Thailand and the United Kingdom. The countervailing duty (unfair subsidy) petition named Thailand and Singapore.
(9) Between 1987-1989, imported ball bearing prices (which were most affected by dumping duties) rose by one-third, while overall imported bearing prices rose 18 percent.
National Security Assessment of the Antifriction Bearings Industry
U.S. Department of Commerce
Bureau of Export Administration
Office of Industrial Resource Administration
Strategic Analysis Division
Just in case you don't understand, an entire military runs on bearings.
And some more....
"Ever since the Global War on Terror began in 2001, one of the key weapons in the U.S. arsenal has been the Joint Direct Attack Munition (JDAM) - the remarkably accurate high - altitude, guided bomb that allows a precision attack on a specific target with minimum chance of collateral damage.
Thousands of JDAMs have been used in Afghanistan and Iraq over the course of the last three years. Some of the Special Operations troops who participated in Operation Enduring Freedom maintain that the Taliban might still control Kabul if it weren't for the JDAMs delivered in support of their ground campaign....
Unfortunately, a crucial component of the JDAM was manufactured by a Swiss company, Micro Crystal. Because the Swiss opposed the war in Iraq, the government in Berne ordered the company to stop shipment of any more JDAM elements.
It took several months for the Defense Department to find alternative sources for the critical parts."
U.S. Senator Byron Dorgan
Take This Job And Ship It, 2006
"Despite Jiang Zemin and company's toothy smiles, the PRC's Communist government continues to refer to the U.S. in its public and military indoctrination as "Number One Enemy." In 1995, a top PLA strategist threatened using nuclear weapons to vaporize Los Angeles if the U.S. interfered in a Red Chinese attack on Taiwan.
In 1999, the PLA published - Unrestricted Warfare - considered one of the PRC's seminal books on military doctrine, by Senior Colonels Qiao Liang and Wang Xiangsui. The book makes very clear that the U.S. and the West are Beijings enemies. Last year that opus' two authors wrote an article explaining the long-term, patient strategy behind Red China's dealings with the West. "Forbearance is the mark of great virtue," the colonels noted. "Such is the goal of Chinese statecraft."
Chinagate All Over Again
The New American, March 10, 2003
"War [with the United States] is inevitable; we cannot avoid it," said Chinese Defense Minister Gen. Chi Haotian in 2000. "The issue is that the Chinese armed forces must control the initiative in this war."
"My good friends, this is the second time in our history that there has come back from Germany to Downing Street peace with honour. I believe it is peace for our time. We thank you from the bottom of our hearts. And now I recommend you to go home and sleep quietly in your beds."
September 30, 1938
You are the best friend that the Communist Chinese could possibly have in this country.
I know people find it hard to understand when I say tariffs "damage the economy". You might say "prove it" or "how much?" I am making an empty claim. Where is the logic?
Here is a simple example to give you an idea of the damage a tariff does.
To take my example above of our tariff on forgings, in some cases 5%. Doesn't seem like much does it.
Let's imagine there is a US company that makes forgings that have a 5% tariff on them. Suppose this company sells 300,000 forgings at $100 each every year for total sales of $30 million. Let's imagine their piece cost is $85 so they make $15 in profit on each forging for a total annual profit of $4.5 million dollars. Their foreign competition does exactly the same: sells 300,000 pieces at $100 each, so the total US market is 600,000 pieces at $100 each for this type of forging.
Now, lets imagine we eliminate the tariff. What happens? The foreign competition drops their price to $95 and the US company matches them. The first outcome is that more forgings will be sold since they are now cheaper, so let's suppose total sales increase from 600,000 to 650,000 units, once again split between the foreign importer and the US company.
The US company's profit per piece drops from $15 to $10 and its total profit drops from $4.5 million to $3.25 million. Ouch, time to send a lobbyist to Washington.
Ok, what about the consumer, the businesses who buy this forging? They realize a savings of $5 on 625,000 pieces or $3.25 million dollars. Let's say they pocket the savings as profit.
In other words the producer of the forging loses $1.25 million in profit, but the consumer businesses gain a profit of $3.25 million, almost triple the losses of the producer. In other words the removal of this "small" tariff of 5% results in a net gain of more than 200% in profit for Americans.
If you extrapolate this example to every protected business in the country and realize that we import over a trillion in goods you see the scope of the loss. We are losing possibly as much as $1 TRILLION dollars in lost GDP every year to tariffs.
This is simple math. It is the 2+2 of economics. Adam Smith did analyses exactly like this way back in the 1770s and his analyses are just as valid now as they were then.
You just don't read do you?
Originally Posted by jscpm
Again, I think, as Mr. Hartquist said, you have an historical situation that goes back 50, 60 years. At the time, obviously, the inverted tariff was the reflection of a need to encourage the capital investment, the large capital investment, that was necessary for purposes of tube and glass investment. That was big, big investment, and I think the historical reason for the inverted tariff, which, again, is contrary to the typical situation where you're trying to encourage value added at the labor end, in that situation there was a desire to encourage the capital investment, and the way to do that in glass and picture tube was to establish a 15 percent tariff. That was the historical foundation on this. What I was referring to, and this goes to your point in terms of the policy aspect, and really this is a policy issue, I think if you look at the history of some of the trends in this industry and, particularly, some of the trade litigation that has occurred here, I think it's very telling.
In the late seventies, early eighties, there were dumping orders in effect on TVs from Japan, Korea, and Taiwan. As a result of that, those orders were very successful. What happened, Korean and Japanese producers set up assembly operations in the United States.
What then happened was a massive inflow of color picture tubes. Regardless of the 15 percent tariff, color picture tubes came surging into this country. A case was brought by the color picture tube producers. The case was successful. Antidumping duty orders were imposed on color picture tubes.
A result of that was the building of new color picture tube plants by companies like Matsushita. One of the great ironies -- I recall saying this at another time -- is that the day the Commission voted affirmatively on the color picture tube case, the president of Matsushusta stood up in Tokyo and announced that he was going to build the largest color picture tube plant in the United States in Troy, Ohio.
You can spew "logic" and "Adam Smith - 1776" all day long and I will state historical FACTS.
Isn't this fun?
And here are the hidden costs of those "cheap imports" that people like you bury under your free trade rug....
HUFFY BICYCLES: REMOVE THE AMERICAN FLAG BEFORE YOU GO
It was the last day of work at the Huffy bicycle plant in Celina, Ohio. The century-old company had terminated all of its eighteen hundred workers from plants in Ohio, Missouri, and Mississippi.
More than nine hundred employees at the Celina, Ohio, plant got their walking papers. Their jobs were going to a factory in China, whose workers are paid thirty-three cents an hour to work twelve to fifteen hours a day, seven days a week. At the plant in Shenzhen they are housed in crowded barracks and fed only two meals a day. These workers have no health benefits. (Like more than 40 million other Americans.) When they get sick they lose their jobs.
The new Huffy plant is located in the very same Chinese city where Wal-Mart held its annual board meeting recently. That is ironic, since it is alleged that it was Wal-Mart who instigated the move by demanding cheaper and cheaper bikes from Huffy, and as the number one bike seller in the country, Wal-Mart had the clout to make that demand stick.
One laid-off employee told me that he had worked for Huffy for ten years. “I was proud of the work we do here,” he said. “I was proud to build American-made Huffy bikes.” Many employees worked there for a lifetime, just as their parents had before them. These were considered good, stable jobs in the community. This was a good American company producing quality bicycles for more than a century. At one point they were making more than nineteen thousand bicycles a day!
It was an American company with a proud history, and most folks were working for less than $25,000 a year. The pride the employees had in American workmanship was evident in the small American flag decal between the handlebars and the front wheel of every bike.
While all of the workers at Huffy were sent packing, the CEO was paid $871,000 for that year.
“We made about $11 an hour plus benefits,” sixty-four-year-old Ruth Schumacher said in an interview in the local paper after the layoff. “We weren't getting rich, but they were good jobs.”
Ruth Schumacher did what she had to do after she lost her job at Huffy. “Now I earn $7 an hour in a part-time job tending the breakfast bar at the Holiday Inn, and I have trouble making ends meet,” she said.
Her story illustrates the reality behind the facts and figures of unemployment and job creation. When some workers run out of unemployment benefits or just give up trying to find a job, they are no longer included in unemployment statistics. For instance, the official June 2005 unemployment rate in the United States was 5 percent. But 1.6 million people – and that's up one hundred thousand over 2004 – who wanted to work but could not find a job were not included in that 5 percent. The actual unemployment rate was 6.1 percent – that's more than 9 million Americans out of work.
Here's the scary part. Manufacturing jobs, which have long been a barometer of economic health, fell by twenty-four thousand in June 2005 alone. The manufacturing sector to that point had lost jobs in twenty-five of the last twenty-nine months. That is not a trend. It is a crisis. Yet it does not even appear on the Bush administration's radar screen. The manufacturing sector alone has lost nearly 3 million jobs under this president.
If Ruth had been able to find a job making hamburgers at McDonalds, the Bush administration would have counted her as working in a manufacturing job. That's right. The Bush administration 2004 Economic Report of the President thinks that flipping hamburgers might be “manufacturing”.
So that's how they concluded that another 2.6 million jobs would be created in the next year? It sounds humorous to all but those people whose lives are turned upside down by the pink slips that tell them their real manufacturing jobs are gone.
How did things work out for Ruth Schumacher, who took a 37 percent pay cut after Huffy left town? She died of cancer sometime later. Her daughter is convinced that the stress of losing her job contributed to her early death.
The last job these Huffy workers had to do was the ultimate indignity. They had to take the American flag decal off the bike and replace it with a decal of the globe. If ever there is a metaphor for these times, that is it.
Here's another. As I pointed out in chapter 1, a former employee told me that on the last day of work for the fired Huffy employees, as they drove out of the plant parking lot, every employee left a pair of shoes sitting in their now-empty parking space. It was a poignant message from the employees, telling the company, “You can move our jobs to China, but you're not going to be able to fill our shoes.”
The epilogue to this story is that Huffy has now announced to its former employees in the United States that it has filed for bankruptcy and reneged on its pension obligations. The former employees received a letter telling them that the Pension Benefit Guarantee Corporation will now assume the payment of the pension. In other words, the company is going to get Uncle Sam (us taxpayers) to pick up the tab for the pensions that they had promised their former workers. Suddenly, that Huffy bike at those low Wal-Mart prices doesn't seem like much of a bargain, does it?
U.S. Senator Byron L. Dorgan
Take This Job And Ship It, 2006
Originally Posted by jscpm
You're just a regular douche troll ain't ya!
You like the straight linear extrapolation to suit your idiotic claims he?
Just where do you get any examples where a company could - or would - reduce it's net profits from the already bottomfeeder 15% to 10%?
What makes you think that said company just doesn't pick up and leave for the foreign country and start production there instead?
But then again, I guess it's all the better for you because they now can reduce their operating costs and still sell with the 15% profit.
They remain at their standard profit margin, the customer sees a reduction in price, the market still gains some 9% increase in volume .......No more mass hysteria, dogs and cats no longer living together!
What a panacea! You're a genius! You're a Genius Troll!
With that, I'll let some other dumbass here feed your needs 'cos I'm done with 'ya!
I can't believe you take this nonsense seriously. "The Defender", the rag of the so-called American Protective Tariff League is the most jaded, self-interested bunch of economic propaganda ever published. You know who the chairman of the League was? A guy by the name of LeGrand Bouton Canon, a filthy rich French-Huguenot New York banker from exactly the same ethnic and class background as JP Morgan.
Originally Posted by machinehead61
Responding to this absurd anecdote is almost silly, but just so you understand the situation I will.
First of all axes were then, as now, of all different prices. Axes could easily be had for less than $2. In fact, the government contract rate for axes in 1833 was $1.50. That is all by the by, however.
The protecting of the iron mongers in early American history was a shameful and damaging practice which was a subject of constant propaganda.
In the 1820s and 1830s the situation was that England exported cheap wrought iron axes made from coal steel. The American iron mongers made axes from imported Swedish crucible steel, a much higher quality product, but much more expensive, made more so by tariffs on the steel. The iron mongers were constantly agitating to have the English axes excluded so they could sell more of their crucible axes. They were constantly making up all kinds of reasons why English axes should be banned/taxed/etc: the axes were cheap, they fell apart when used, they were "price fixing", they would cheaper still if we banned them (figure that out), they would charge us more for other things so we were actually LOSING money by allowing them to import the axes, and so on.
You could probably write a list of 30 separate justifications from different congressional hearings why we needed to ban the import of cheap wrought iron axes.
All of these song and dances by the iron mongers came to the same thing: trying to enrich a few wealthy iron mongers at the expense of the general public.
To respond to some of the posts above concerning "encouraging investment". This is a common argument for tariffs and there are many different versions. For example, one claim is that we can force foreigners to manufacture things domestically using tariffs. Another is that we need an "economy of scale" so the tariff gives domestic producers undeserved profits until they grow large enough to become truly profitable.
All of these arguments are incorrect and only useful against people who are inexperienced in the subject and do not think about or study the problem.
For example, take the "axe" example from the 1830s. American tool makers repeatedly and successfully petitioned to congress to tariff cheap English wrought iron axes. One of their (many) arguments was they were "too small", like babies that needed to protected until their businesses were big enough to take on the so-called English tool monopolies. This claim was absurd. There was no significant scaling aspect to making the crucible axes the Americans were making. The critical factor was the price of the steel, which in the American case was expensive Swedish tool steel. This made their axes always more expensive than the wrought iron versions.
In general if a company needs to make a large investment to make a profit, it will do so.
In nearly all cases a manufacturing company has its maximum profitability when it is small because it can cherry pick customers and applications. If a company is inefficient when it is small it will not become efficient when it grows. Manufacturers generally become LESS efficient when they grow.
Let's take an ultra typical example of a protected company: Mabe. This is a Mexican appliance company. By Mexican standards it is top notch company, highly efficient and profitable. Nevertheless, by global standards Mabe sucks. They could never compete in head to head competition with GE or Phillips. The only reason Mabe exists is because it is protected by Mexican tariffs that prevent GE and Phillips and other superior appliance companies from selling their products in Mexico. Mexico is accomplishing NOTHING by protecting this company. All they are doing is enriching a few fat cats by forcing Mexicans to buy overpriced, underperforming appliances. There is no economy of scale, there is no "baby" industry. It is just sheer waste and lost GDP to the tune of hundreds of millions of pesos.
The whole "we have to protect this industry until it grows up" is just a lot of crap with no real foundation. When is Mabe going to "grow up"? Never. The best thing that could happen is that Mexico could remove the tariff, Mabe would disappear and Mexicans would actually have more money and better appliances.
Sorry, not read but only the first paragraph of this thread, but I have seen and heard time and time aggin about China "subsidising" this and that manufacturing market - likely with intent on undermining the US's as well as other "western" markets manufacturing base. And I have no issues with understanding the desire there, but the one question that I have is:
What highly profitable market does China have that is spilling all the profits over to these industries as "subsidies"?
IMO - I think they are just able to make shit cheap. And apparently a LOT cheaper than we have been paying for it, otherwise they wouldn't have the $ to re-invest in our treasury notes.
So - does anyone have any info on where this mystery money is comming from?
Think Snow Eh!
The Chinese government has a budget for giving loan guarantees and grants to businesses which it thinks are poised to do well. The companies probably have to give up some equity to the government to get the benefits.
Originally Posted by Ox
The Chinese government has well over a trillion dollars in savings because it takes in more money in tax revenue then it spends. In other words it has a balanced budget.
I don't think that answers me question. ???
To "subsidise" something, profits from somewhere else are funnelled to a loser.
This means that manufacturing is the loser.
What is the profitable industry?
"Tax" is not a profit center.
It is scraped off of the profits.
Your answer sounds like over taxing with give-back programs. Not unlike we have here. (much to my dispise!)
If I charge you $10 for the privilage of dooing business in my Kingdom, and I give you back $5 in the name of incentives, is that a subsidy?
I don't think so. I would say that you already were a profitable business, and I am manipulating your money. I am NOT taking profits from someone elses business to bankroll yours.
Get this strait - don't have any clue as to how this all works, but I have heard the "subsidy" werd thrown around way too much in the last 10 yrs to think that it is real. I think they are just cheaper - period. How they shuffle the money internally is their own business, but they seem to be making money dooing it.
Think Snow Eh!
China has many successful industries that generate income for the PRC. First of all there is the Hong Kong complex. Outside of Hong Kong, in the China mainland (Hong Kong is an Island), is a huge warren of small businesses that service the city, doing everything from washing laundry to weaving fabric and creating other basic materials.
Along the coast China has multiple megaplex industrial cities that manufacture goods for export. Often these enterprises are conceived of with a Taiwan partner. One large sector of profitability is electronic goods and things like computer and video monitors, keyboards and mice.
Another area of profit are numerous "assembly" related businesses that require cheap labor. Examples would be the toy market where you require many small parts to be fitted together by hand.
Simple non-precision machining, forging and casting is another important profit center. Chinese make things like common valves and pipe fittings.
Another area is things that are dangerous or unhealthy, like metal finishing and plating. Along the same lines some chemical production for commodity products is based in China. For example, China is rapidly becoming one of the largest producers of MBTE, a gasoline softener, because its use is banned in the US and Europe. China supplies MBTE to poor countries all over the world.
One way the PRC collects revenue is by currency exchange and capital controls. By law any foreign currency such as dollars a Chinese company receives for its product must be deposited in a Chinese bank in return for Yuan at a government-controlled exchange rate. By dictating this exchange rate the PRC can effectively tax any exporting company however much it likes without charging them any real direct taxes.
China knows what every whore on second avenue knows - rules are made to be broken. When you don't care what people think of your moral turpitude you get rich. I wish to hell our government had their pair. If we're going to beat them it's going to be in these gutters, not in the castle on the hill.
Maybe I should not say this but US morals are not highly regarded outside the USA
I have seen much propoganda that our military attempts to employ as much as possible, but what morals does US business and politics have?
I am Ox and I approve this h'yah post!
I would request that machinehead61 use his considerable research skills to investigate this:
"The Tariff of 1828- called the "Black Tariff" or the "Tariff of Abominations, or the 'Yankee' tariff"
Tariff of 1833 - Wikipedia, the free encyclopedia
Considered by some to be root and branch of the War of Northern Aggression, 1860-1865.
Adam Smith - Wealth of Nations - 1776.
Originally Posted by jscpm
David Ricardo - "On the Principles of Political Economy and Taxation" - 1817.
You are two centuries behind the times. Economies are incredibly different now than they were back then. They were dominated by agriculture.
Historical mythology perpetrated by free trade dogmatists who wouldn't know the difference between a "DUTIABLE" and a "FREE AND DUTIABLE" tariff rate if it slapped them in the head......
Originally Posted by jscpm
"The United States had tariffs throughout the the nineteenth century and they were raised still higher in the twentieth century,especially by the Smoot-Hawley tariff bill of 1930, which some scholars regard as partly responsible for the severity of the subsequent depression. Tariffs have since been reduced by repeated international agreements, but they remain high, probably higher than in the nineteenth century, though the vast changes in the kinds of items entering international trade make a precise comparison impossible."
Free To Choose, 1980
"PROBABLY HIGHER" ?
It would appear that this was one Nobel laureate that was too lazy to check his tariff history - or didn't know the difference between DUTIABLE and FREE AND DUTIABLE tariff rates.
The two volume series published by the U.S. Bureau of the Census entitled "The Historical Statistics of the United States, Colonial Times to 1970, Bicentennial Edition" proves Milton Friedman to be a complete liar. Not only is it on the internet, it can be found in every public library I've been in. In the second volume page 888 there is a series U 207-212 and there in black and white is what I couldn't find in over 300 pages of Friedman's rantings.
In the Historical Abstract is printed both the FREE AND DUTIABLE TARIFF RATE as opposed to the DUTIABLE TARIFF RATE. The difference between the two is that the dutiable does not include the imports never taxed, the free and dutiable does, making the free and dutiable by far the most accurate description of the overall tariff level. In 1933 a whopping 63 % of imports never got taxed. The free and dutiable tariff rate in 1933 was 19.8 %, the dutiable rate in 1932 was 59.1 % - the second highest in U.S. history only surpassed in 1830 at 61.7 %. The Smoot-Hawley free and dutiable tariff peak of 19.8 % is far less than the 29.7 % which the U.S. AVERAGED from 1821 thru 1900.
U.S. TARIFF HISTORY 1821-2000
YEARS……………..AVERAGE EFFECTIVE TARIFF (% tax on all imports)
The United States had and even larger tariff increase after WW I than during Smoot-Hawley and our economy did not go into a depression - we had the roaring 1920s':
YEAR....................FREE AND DUTIABLE TARIFF RATE
From 1920 to 1923 the tariff rate increased from 6.38% to 15.18% - that is and increase of 138% .
The Smoot-Hawley increase from 13.5% to 19.8% is only a 46.6% increase.
And I might add that one reason that the Great Depression was so severe was because we had the greatest concentration of wealth ever recorded up to that time.
“Specifically, when income is equitably distributed, there is little question as to its ultimate disposition. It is spent or it is saved, invested and thus spent. There are no large pools of funds that are held in idleness because no one, or not many, have sufficient income to support such accumulations.
The United States in recent times has had both an unequal and an increasingly unequal distribution of income. Paul Krugman has estimated that in the 1980s “70 percent of the rise in average family income [went] to the top 1 percent of families....The 1 percent of families with the highest incomes received about 12 percent of overall pretax income, while the wealthiest 1 percent of families had some 39 percent of net worth.”
The counterpart of this concentration of income and wealth was a damaging unreliability as to its use. In established and orthodox economics, savings are invested and spent no less reliably than the money that goes to the supermarket. In real life, if money goes to individuals in very large chunks, it may be neither spent nor invested. It may be held in liquid form; some of it, as in the 1980s, may be absorbed by functionless debt creation, such as that which financed the mergers and acquisitions and the leveraged buyouts....
The poor spend what they receive in good times and bad. So, on the whole, do those with middle class incomes. The rich have a choice. When they neither spend nor invest, a new equilibrium is set by the reduced demand....
There is, as I've said, a social case for equitably distributed income, but the latter, to repeat, is also functionally necessary for the effective operation of the modern market economy. That the recession cum depression of the 1990s came first to the United States and spread out to the world from here should surprise no one;
as to widely distributed and therefore reliably expended income – the first essential of modern capitalism – we are far from the best case.”
John Kenneth Galbraith
A Journey Through Economic Time, 1994
And why the Great Depression lasted as long as it did....
“From 1933 on, the American economy gradually – very gradually – recovered. Unemployment, which had reached a peak of 25 percent of the civilian labor force in 1933, was down to a towering 17 percent in 1936. It was only an appalling 14.3 percent the following year. In 1936, production – Gross National Product in real terms – reached the 1929 level for the first time in the depression years. The sound men in the Roosevelt Administration, those of accredited financial acumen, said it was now time to assert the ancient principles and truths.
Conservative finance should again be the order of the day. Accordingly, the Federal Reserve raised bank reserve requirements, tightened up on bank lending and allowed interest rates to rise. Steps were taken to reduce the federal deficit – from $4.4 billion in the fiscal year ending June 30, 1936, to $2.8 billion the following year and to $1.2 billion in fiscal 1938.
It was a conservative and anti-Keynesian triumph, and would have been so celebrated except that the economy went into another ghastly slump. Within the depression there was now a recession – a new term.”
John Kenneth Galbraith
A Life in Our Times, 1981
If you want to see the fruits of free trade, history has some very ugly examples.
Here is the ugly side of free trade that conservatives ignore.....
Ireland And Free Trade
"The only country in the world I know of that has thoroughly free trade forced upon her by compulsory process is that most distracted and unfortunate land, Ireland. Before the union her manufacturing industries were protected against England by duties on woolens, silks, cotton, yarn, and twist, and cotton manufactured goods. Her calicoes and muslins were protected by a duty almost prohibitory, and Ireland was rapidly becoming a successful manufacturing country. Her people were happy, contented, industrious, and prosperous. There was a loom in almost every house, and with it comfort came, too. Her linens were known and appreciated all over the world, and her silks were gaining a ready market.
There were in 1800, as appears by an imperfect census then taken, over 8,000 weavers employed in Cork alone, over 5,000 manufacturing woolen goods in Dublin, 3,000 making blankets in Balbrigan, 2,000 weaving calicoes in Wicklow, 1,000 making flannels, while the numbers engaged in linen work were immense.
This linen trade was encouraged by subsidies, but they were gradually withdrawn until all protection ceased in 1826. In 1825 more than thirteen million of dollars were expended in the purchase of coarse, unbleached, home-made webs of linen. "What a power of good, of comfort, and of happiness, those home-made webs revealed.
England, not content with destroying Ireland's navigation, with crushing out, in the earlier days, her manufacture of woolens, greedy to manufacture for the world, determined that the rest of mankind should raise the raw materials to feed her hungry looms, as the South wanted us to feed their slaves, beguiled poor Ireland into assenting to the act of the union, under the terms of which every duty was repealed—some gradually, to be sure, but certainly. The act continued the tariff on woolens for twenty years, terminated it on calicoes and muslins in 1821, on cotton yarn and twist in 1816, withdrew all subsidies in 1826, and Ireland enjoyed the benefit of absolute free trade.
What was the result? England held both ends of the bargain. Ireland could raise in her fertile soil the raw material. England could make it into goods cheaper than she could, but Ireland had no voice in the price to be paid for either.
In 1840, another census was taken, and there were 500 blanket-makers in Kilkenny, 200 silk- weavers in Dublin, no carpet makers in all Ireland, no linen- weavers in Cork, 300 operatives in that city in all the manufacturing industries, where fifteen years before there were 8,000 weavers alone.
Free trade had done its work and Ireland was starving. She is the only absolutely free trade country in the world today, the only land enjoying its rare privileges in complete fullness, and what a commentary it affords with a good climate, a fertile soil, great rivers, splendid water-power, broad, safe bays and harbors, an abundance of minerals, an industriously-inclined people, it is the most terribly vexed, troubled, suffering, distracted, impoverished, starving country in the world.
Irishmen, loving their land earnestly and with more unbounded enthusiasm than the men of any other country, have been driven into exile by the millions. Now, I do not blindly charge all of her woes to free trade alone; land tenure has to answer for a portion, not for more than half. Give her a parliament of her own, and the first act passed would be a protective tariff, and in twenty years from now the exiled Irishman would return to the land he loves and find it peaceful, contented, and prosperous. England, for her own selfish purposes, fastened these two fearful leeches upon her, and they have been fattening on her blood."
Senator William Pierce Frye
Speech in the United States Senate, February 10,1882
By the time the potato famine hit, the Irish peasantry were so poor they couldn't afford to import food to prevent the worst famine in European history.
Note: Sir Charles Edward Trevelyan was assistant secretary to HM Treasury from 1840–1859, during both the Irish famine and the Highland Potato Famine of 1846-1857. In Ireland he was responsible for administering famine relief.
"The influence of laissez faire on the treatment of Ireland during the famine is impossible to exaggerate. Almost without exception the high officials and politicians responsible for Ireland were fervent believers in non-interference by Government, and the behavior of the British authorities only becomes explicable when their fanatical belief in private enterprise and their suspicions of any action which might be considered Government intervention are borne in mind.
The loss of the potato crop was therefore to be made good, without Government interference, by the operations of private enterprise and private firms, using the normal channels of commerce. The Government was not to appear in food markets as a buyer, there was to be "no disturbance of the ordinary course of trade" and "no complaints from private traders" on account of Government competition.
The flaw in the plan was the underdeveloped state of the food and provision trade in a great part of Ireland. Large numbers of people, especially in the west and south-west, hardly purchased food at all; they grew potatoes and lived on them. Shops and organizations for importing foodstuffs and distributing them on the English model were generally found only in more prosperous districts in north-east Ulster, Dublin, some places in Eastern Ireland, and the larger towns, like Cork. Where relief would be most needed, the means by which it was to be supplied seldom existed."
The Great Hunger, 1962
Second, the Government would not import or supply any grain food. There were to be no Government depots to sell meal at a low cost or, in urgent cases, to make free issues, as had been done during last season's failure. No orders were to be sent abroad, nor would any purchase be made by Government in local markets. It was held that the reason why dealers and import merchants had so signally failed to provide food to replace the potato last season had been the Government's purchases. Trade, said Trevelyan, had been "paralysed" on account of these purchases, which interfered with private enterprise and the legitimate profits of private enterprise; and how, he asked, could dealers be expected to invest in the very large stocks necessary to meet this year's total failure of the potato if at any moment Government might step in with supplies - sold at low cost - which would deprive dealers of their profit and "make their outlay so much loss?"
The Great Hunger, 1962
"The Irish peasant was told to replace the potato by eating his grain, but Trevelyan once again refused to take any steps to curb the export of food from Ireland. "Do not encourage the idea of PROHIBITING exports," he wrote, on September 3, (1846) "PERFECT FREE TRADE IS THE RIGHT COURSE".
The Great Hunger, 1962
"Routh disagreed, a rare occurrence. He considered exports to be a "serious evil" and estimated, on September 29, (1846) that by the end of the harvest, of oats alone, apart from other produce, "60,000 tons" would have left the country. Trevelyan would not be moved; according to FREE TRADE DOCTRINES the sale, by export outside Ireland, of grain and other produce which commanded a high price should provide Irish merchants with money to purchase and import low-priced foods, to replace the loss of the potato."
The Great Hunger, 1962
“On August 7, 1846, Father Mathew, the “apostle of Temperance,” wrote in agitation to Trevelyan: he had heard rumours that “the capitalists in the corn and flour trade are endeavouring to induce government not to protect the people from famine but to leave them at their mercy,”.......
The Great Hunger, 1962
“To people desperate with hunger the sight of food streaming out of the country was once more unbearable, and serious riots took place – more serious than any riots of the previous year (1845). At Youghal, near Cork, a small port much used for export, an outbreak took place on September 25. A large crowd of country people, described by the police as “enraged,”attempted to hold up a boat laden with export oats – the police sent for troops, and the crowd was checked, with difficulty, at Youghal bridge.........A riot, with loss of life, occurred at Dungarvan, County Waterford, on September 29. A crowd of starving unemployed entered the town, threatened merchants and shopkeepers, ordering them not to export grain, and plundered shops. The Resident Magistrate had the ringleaders arrested and put in the lock-up, upon which the crowd declared they would not go home until the prisoners were released.
After the police had tried, in vain, to clear the streets, the 1st Royal Dragoons were called out; the crowd began to pelt them with stones and the Riot Act was read. But as stone-throwing continued the officer commanding the Dragoons, Captain Sibthorp, gave the order to fire, and twenty-six shots were fired into the crowd, which then retreated. Several men were wounded and two were left lying on the ground, dead.”
The Great Hunger, 1962
At least one million Irish poor starved to death. Actual numbers will never be known for accurate census data was impossible to compile in the remote areas of Ireland.
Comparative advantage was the fantasy of David Ricardo which he introduced in his book, "On the Principles of Political Economy and Taxation" published in 1817.
Ricardo died in 1823 and so was never able to witness his "comparative advantage" and what wonderful fruits it brought to his own country, England.
"We give to our rivals a free market of 43,000,000 persons in the United Kingdom to add to their own free market. Thus the United States possess an open market of 82,000,000 persons in the United States, plus an open market of 43,000,000 persons in Great Britain, making, altogether, 125,000,000. Similarly, Germany possesses an open market of 43,000,000 in Great Britain. As against this, we posses only such residule of our open market of 43,000,000 as the unrestricted competition of foreign nations leaves unimpaired…We call ourselves Free Traders, but we have never secured Free Trade for ourselves; we have merely succeeded in enlarging the area within which our Protectionist competitors enjoy Free Trade."
John Stuart Mill
"The Op-Ed History of America"
Even the rabid Free-Trader, John Maynard Keynes, had to back track on his free trade religion after he witnessed the whole sale gutting of Britains’ economy by free trade:
"Defense of free trade theory is, I submit, the result of pure intellectual error, due to a complete misunderstanding of the theory of equilibrium in international trade - an error which it is worthwhile to extirpate if one can, because it is shared, I fancy, by a multitude of less eminent free traders. Does he (William Beveridge-London School of Economics) believe that it makes no difference to the amount of employment in this country if I decide to buy a British car instead of an American car?"
The Collected Writings of John Maynard Keynes
vol. 20 p. 508
Pennsylvania steel manufacturer Joseph Wharton argued that imported steel rails from England had cost $165 in gold per ton in 1864; five years later, behind a protective tariff, a U.S. steel industry was producing all of America’s needs for $80 per ton.
By 1880, the United States behind a protective tariff, was second only to Great Britain in its share of world manufacturing output, with the U.S. producing 14.7 % compared to Britain’s 22.9%. By 1913, the United States was producing 32% of the world’s output compared to Germany at 14.8% and a sinking, free trade Britain at 13.6%. "We lead all nations in agriculture; we lead all nations in mining; we lead all nations in manufacturing," President McKinley declared. "These are the trophies we bring after twenty-nine years of a protective tariff".
From 1869 to 1900, the gross national product quadrupled.
The United States ran budget surpluses every year from 1866 to 1893.
The national debt was reduced by two-thirds; by 1900 it was less than 7% of the GNP.
Customs duties provided 58% of all federal revenue from 1869 to 1900.
There was no income tax - save Lincoln’s wartime tax and Cleveland’s brief 2% flat tax on the rich, which was declared unconstitutional.
Between 1870 and 1900, commodity prices fell 58%.
Real wages, despite a doubling of the U.S. population, rose 53 percent.
Annual growth of the U.S. economy averaged more than 4% a year from 1870 to 1913.
From 1870 to 1913, U.S. industrial production rose 4.7% a year, compared with 2.1% a year in free trade Britain.
American exports grew by almost 5% a year from 1870 to 1913, while free trade Britain’s grew less than 3%.
Protectionist America’s share of world exports rose from 7.9% in 1870 to 12.9% in 1913 - while free trade Britain’s fell from 18.9% to 13.9%.
Between 1869 and 1910, merchandise imports fell from 8% of the GNP to 4%.
The United States began the era with half of Britain’s production and ended it with more than double Britain’s.
By 1885, the United States had surpassed Great Britain, then considered the world’s major industrial power, in manufacturing output. By the turn of the century, it was consuming more energy than Germany, France, Austria-Hungary, Russia, Japan, and Italy combined. Between the 1865 and 1900, American coal production rose by 800%, steel rails by 523%, railway track mileage by 567%, and wheat production by 256%.
And worst of all, after Britain repealed her corn laws, she became so dependent on American grain for food that when World War I came she nearly starved from German U-boat blockade. Between 1846 and 1910 British imports of wheat grew 1,000 percent. On the eve of WW I, once self-sufficient Britain could only grow enough wheat to feed a fourth of her population.
Rear Admiral William S. Sims, in some ways a Rickover type, loquacious and nonconforming, but withal a very handsome sailor, was already on his way to London for a reconnaissance; he reported to the Admiralty three days after the United States entered the war. Admiral Jellicoe, now the First Sea Lord, showed him the figures on the U-boat sinkings. The Allies had started the war with twenty-one million tons of shipping, or about six million tons more than was essential to feed Britain and keep the deployed armies supplied. The shipbuilding program had not quite stayed apace with the loss rate. Now, according to Jellicoe's figures, the U-boats had wiped out one third of the six-million margin in two months. The March (1917) losses had been 500,000 tons; April losses would pass 800,000. Said Sims: "Looks as if the Germans are winning the war."
"They will unless we stop those losses," replied Jellicoe.
The American Heritage History of World War I
Beyond ideology, another concern impelled America to throw open her markets in the postwar era. The United States needed allies in the Cold War and hoped to help Europe and Japan revive and prosper by letting them feed off America's markets, even if our own industries had to suffer. We adopted what one historian calls a "Marshall Plan mentality."
In the early fifties few were alarmed by America's unilateral trade concessions. Imports amounted to but 4% of the GNP, and the notion that America might lose domestic market share was thought preposterous. Truman's Public Advisory Board for Mutual Security in 1953 urged the United States to eliminate "unnecessary" tariffs on automobiles, machinery, and consumer electronics like radios and televisions. These industries had developed such "highly efficient methods of production," said the report, that this country had nothing to fear.
"These are types of goods for which American industry needs no protection, or very little protection."
American consul offices were instructed to devote as much attention to servicing foreign exporters as to Americans trying to do business abroad. Under Eisenhower the pressure to open U.S. markets was ratcheted up.
"All problems of local industry pale into insignificance in relation to the world crisis."
Ike admonished his congressional leaders in 1953. The President was especially worried about Japan:
"Japan cannot live, and Japan cannot remain in the free world unless something is done to allow her to make a living,"
he told newspaper editors on June 22, 1954.
"Now if we will not give her money, if we will not trade with her, if we will not allow her to trade with the Reds, if we will not try to defend in any way the southeast Asian region where she has a partial trade opportunity, what is to happen to Japan? It is going to the Communists."
A soldier and America's preeminent Cold War leader, Dwight Eidsenhower had no patience with petty pleas to protect U.S. industry. Such ideas, said the conqueror of Hitler's Reich, representd "shortsightedness bordering upon trajic stupidity." Secretary of State John Foster Dulles was Ike's echo. When the U.S. Tariff Commission unanimously ruled that American mining interests had been seriously injured by tariff concessions to Mexico, Canada, Bolivia, and Peru --- and urged corrective relief --- the secretary of state vented his exasperations with such small-mindedness. Restoring tariffs to lead, and zinc, warned Dulles, could have "grave consequences."
"There would be strong popular resentment in Canada and Mexico, which will make our borders much less secure. The great opportunity to combat Communism in this hemisphere won by the successs of Guatemala, would be more than canceled out. Soviet Communist leaders would be elated and would redouble their efforts to divide the free world."
When New England fisherman protested that tons of imports from Canada, Iceland, and Norway were swamping their market, the Tariff Commisiion agreed. But State did not. Any restrictions on imported fish would have "adverse effects on vital United States political, economic and security interests in Canada, Iceland and Norway ." An advisory body warned that a 50% duty on fish would strengthen "those elements in Iceland which wish to drive out U.S. NATO troops. "As fish goes so goes Iceland."
The threat worked. No duties were imposed. Iceland was saved for NATO, and New England's fishing industry paid the price. Before World war II, groundfish fillets from Canada, Iceland, and Norway had a near-zero share of the U.S. market. By 1952 their share was 20%. By the Reagan era it was 80%. The New England fishing industry had been sacrificed on the altar of allied solidarity in the Cold War.
Most Republicans yet recalled their tradition as the party that protrected U.S. industries and american jobs. Some began to protest. Former president Herbert Hoover warned in 1954 of the ultimate consequences of throwing open U.S. markets:
"Thousands of villages and towns would be deprived of their employment. Their schools, churches and skills would be greatly decimated."
Trade historian Alfred E. Eckes, Jr. reports that notes of a cabinet meeting reveal that behind closed doors, Treasury Secretary George Humphry "went completely Neanderthal" and "roared about the trade program." Humphry said that "not only should there be no tariff reduction for Japan but that the existing tariffs should be raised." Behind his outburst lay Humphrey's belief that:
"We were protectionists by history and had been living under a greatly lowered schedule of tariffs in a false sense of security because the world was not in competition. That has changed now and the great wave of world competition from plants we had built for other nations was going to bring vast unemployment to our country."
Humphrey had found an ally in Connecticut's freshman senator, Prescott Bush:
"I never was a free trader. I never felt that we could abolish tariffs and do away with all protective devices, because we would have been flooded with imports which would have hurt our economy, hurt our defense posture, and I felt that these things had to be done gradually, selectively."
TOKYO PLAYS HARDBALL
Republicans lost both houses of Congresss in 1954, but Ike was still determined to grant even greater concessions to Japan. The State Department proposed unilateral U.S. concessions on 56% of Japanese imports --- including glassware, chinaware, optical goods, automobiles, sewing machines, surgical instruments, cameras, and footwear. When the Departments of Agriculture, Commerce, and Labor rose in rebellion, State, with a nod from the Oval Office, played its trump: "the overriding interest of the United States is to strengthen security by taking the first step toward binding Japan to the Free World."
National security bacame the "ultima ratio", the final argument, in every trade dispute. As the free world leader, Amercia needed allies in the Cold War. The way to bind those allies to the United States and strengthen them for the struggle was through "trade, not aid."
In truth, President Eisenhower had his priorities straight. National security was a compelling --- indeed a conclusive --- argument in the early years of the Cold War. But our European and Asian allies did not need to be bribed to enlist in America's cause. They were in far greater and more immediate danger than we were from Communist aggression or subversion. And the trade concessions did not stop when America's allies were back on their feet, they were competitiors and rivals again. A policy pursued out of Cold War necessity would be perpetuated out of peactime habit. As for the strain on U.S. industries and the discrimination against U.S. exporters, our diplomats could not concern themselves with that. It was not their beat. Their job was to win the Cold War. In every great conflict there must be casualties. If the greatest American industries had to take it, so be it.
In 1955 the United States undertook across-the-board negotiations with Japan. The U.S. delegation was led by C. Thayer White, the Japanese by one K. Otabe; the two spoke right past each other. As Japan could never compete with the U.S. auto and machine-tool industry, white said, Tokyo should forgo any effort to build up such industries, buy autos and machine tools from the United States, and focus on what Japan might produce more efficiently. Otabe shot back:
"If the theory of international trade were pursued to its ultimate conclusion, the United States would specialize in the production of automobiles and Japan in the production of tuna; such a division does not take place...because each government encourages and protects those industries which it believes important for reasons of national policy."
Pressed by White to reduce Japan's tariffs on optical equipment, Otabe replied that his government "wished to advance the development of the Japanese optical industry." What about electrical equipment? "The Japanese Government believes that an electronics industry is essential to the development of the Japanese economy, the communications industry and national defense." When the American side asked about tractors, heavy machinery, and petro-chemicals, Otabe fired back the same answer and reminded the Americans how the United States had become a mighty industrial nation:
"A protective tariff had contributed to the development of new industries in the early history of the United States and...that similarly a protective tariff could promote the development of the petrochemical, heavy machinery and other promising industries in Japan."
Japan emerged triumphant.
While U.S. exports to Japan rose 95% between 1954 and 1960, most of the growth was in crude materials: mineral fuels and animal and vegetable products. Japan's exports to the United States, however, tripled, with Tokyo's share of America's imported manufactured goods more than doubling --- to 15%. Unilateral American concessions had laid the cornerstone of Japan, Inc. As one American scholar writes, in the 1960s Japan "was more a trading company than a nation-state."
"The government...fostered stategic industries such as steel and computers by using heavy bureaucratic guidance as well as tariffs, quotas, and informal import prevention policies. And while Japan kept many of its markets shut to imports, the United States, as part of the Cold War bargain, kept world markets open to Japanese products; exports became an engine for Japan's growth."
By 1967 Japan's per capita income was twice what it had been in 1960. Protectionism had created one of the greatest "economic miracles" the world had ever seen. And to what does the Japanese scholar Kozo Yamamura attribute his nation's spectacular strides?
"Protection from foreign competition was probably the most important incentive to domestic development that the Japanese governemnt provived. The stronger the home market cushion....the smaller the risk and the more likely the Japanese competitor was to increase capacity boldly in anticipation of demand growth. This can give the firm a strategic as well as a cost advantage over a foreign competitor operating in a different environment who must be more cautious."
Norwegian historian, Geir Lundestad stated:
"The United States is organizing its own decline."
"The Great Betrayal"
If you want a perfect example of mercantilism building a Japanese industry, go here....
JAPANESE AUTO HISTORY
Quite a lot of material that it is difficult to respond to it cogently. Here are three comments that address what seems to be main thrust of the posts:
(1) I don't regard as Smith and Ricardo as obsolete, nor do I think increased mechanization has changed the nature of economics. As I stated clearly in my post I regard most of their theories and worked examples as valid today as they were when they wrote them. Not that I (or anyone) agrees with everything those economists wrote. The main point is that clearly demonstrated the advantage of free trade in compelling analysis which are still valid. I think the majority of professional economists would agree with me on these points.
(2) Citing of Ireland between 1810-1850 as some kind of refutation of the advantage of free trade is crazy. Ireland, especially during this period, was the most heavily controlled economy in history, with the possible exception of modern examples such as the Soviet Union and North Korea. To legally deal or manufacture ANY good in Ireland you had to get a license from Englishmen. This license specified exactly how many of such item you could make. In addition to the insane crazy quilt of import/export regulations, the English had an "excise" tax that functioned much like a tariff. These "excises" were systematically higher on Ireland and Scotland than they were on England proper. The so-called "free trade" laws of Ireland in your anecdote referred to tiny EXCEPTIONS in these laws, exceptions which were practically meaningless given the layers and layers of English control and oppression over the Irish economy, all designed to exploit Ireland to English benefit.
Concerning the linen trade, the importation of flax (and virtually all other aspects of this trade) were controlled by a "Linen Board" which by regulation effectively banned the import of flax into Ireland. This means English could always produce linen more cheaply than the Irish because they could import foreign flax. The actual complete destruction of the industry, to which your example refers, was due to import of cheap American cotton into England where mechanized looms produced clothing for export to Ireland and other places at prices linen could never meet, even if they could have imported flax. Both the importation of mill machinery and raw cotton into Ireland was strictly banned, and the English constantly policed the island to thwart smuggling.
Virtually the entire economy of Ireland until the Free State in 1916 was a black market. Even today Irish, along with the Lebanese, are the best smugglers in the world.
(3) Your point that tariffs were higher in the 1800s than they were in the 1930s. Yes, I said that too. The steep decline in world trade in the 1930s was due to a combination of factors, of which tariffs were only one. The US had a much larger economy in 1930 than it did in 1910. Also, it was a creditor nation, rather than a debtor nation, due to WWI loans. Because of these loans, American tariffs had a critical effect because they made it much harder and more expensive for Europeans to pay back these loans. In 1910 high American tariffs were less of an issue for the Europeans because they did not owe the US any money. The Smoot Hawley Act triggered retaliatory tariffs and other actions.
Personally I consider the major cause in the Depression to be increases in taxation. I consider the effects of the Smoot Hawley Act to be second in importance to this.
It is easy to formulate arguments against free trade. In fact, you could go through the pages of "The Defender" and assemble literally an encyclopedia of examples and rationales against free trade.
Sober analysis, such as the worked example of a company selling forgings, as I provided above, show simply and clearly both the nature and magnitude of the harm of tariffs and other barriers to trade.
What I find particularly vexing with the problem of tariffs is the extent to which the average person can be convinced of their value. Naturally, I expect a few self-centered business owners, capitalists and investors to argue for tariffs, but when I see wage earners and salarymen agitating for tariffs it is frustrating because these are the people that suffer most by them, even more so than the poor do.