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posted on 01 April 2017

There Is No Such Thing As Fair Trade

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I smile at much of the doo-doo I read on free or fair trade. Some trade "experts" use data on trade balances, or currency manipulation, or export country tax credits, or whatever. Like (almost) EVERYTHING you read out there on any subject - discussions are incomplete.

There are few people with enough overall knowledge to discuss trade. Trade is like the drug world with no one within an organization knowing the complete picture of how their products move from country A to country B. Usually trade the process is broken into different companies - often with common ownership.

No matter HOW one looks at trade - it is seldom fair.

Some have said the trade of goods with Mexico has been fairly balanced since 2011 with periods where the USA has been running a surplus. But that doesn't agree with the facts [look at green line, right axis].

I believe your neighbor is very important - and Canada and Mexico are very important. It is in the interests of all to trade with our neighbors and try to improve the lives of all involved. That does not say that a trade agreement negotiated 30 years ago is fair to all parties. But your neighbors' economic health is very important as your neighbors need strong economic growth so that the grass is not greener across the borders.

But arguments on free and fair trade miss the technical aspects of trade. No country is trading fairly - even the good 'ole USA. Consider:

Shell games. The objective is for trading companies to show little profit. If one entity is shipping to another entity of common ownership - you make sure profits appear in the country of lowest taxation. I know of no countries which share their export (or import) detailed data with another country so traders can play so the import price declaration does not necessarily match the export price declaration..

Financing. Big ticket items (say airplanes or reactors) are financed. So it is not the sticker price but the financed price. The mission of the USA Exim Bank:

With approximately 85 other export credit agencies around the world trying to win jobs for their own countries, [USA] EXIM Bank helps level the playing field for American businesses. "Made in America" is still the best brand in the world, and EXIM Bank ensures that U.S. companies never lose out on a sale because of attractive financing from foreign governments.

Maybe reading this USA Exim Bank brochure might help you understand how USA Exim goes beyond financing. I have played various countries EXIM banks against each other.

Corporate Income Tax Rates. A lot of discussion revolves around global corporate tax rates. No question that the USA has high rates. From the Tax Foundation:

The competition between countries commands the USA to reduce its corporate tax rate. But there must be many loopholes in tax laws as corporations are avoiding paying taxes and are paying a very low ratio of taxes compared to GDP:

But taxes occur at state and local levels. Do you think that states and local governments are giving tax breaks? Is that fair to not only other states with established industry - but also to free trade of exported items?

Summing It All Up

Trade has always been gamed. All governments are guilty of tipping the scales. I am under no illusion that there is a way to make trade fair. And I do not agree that an overall trade deficit is benign to the employment health of a country.

Trade must be continually monitored and agreements renegotiated as necessary. I would not rule out negotiating with trading companies (instead of countries).

Other Economic News this Week:

The Econintersect Economic Index for April 2017 improvement trend continues although the value remains in the territory of weak growth. The index remains below the median levels seen since the end of the Great Recession. Six-month employment growth forecast indicates modest improvement in the rate of growth.

Bankruptcies this Week from Privately-held Westinghouse Electric Company

Weekly Economic Release Scorecard:

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