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FREE TRADE: AT WHAT COST?

I recently penned a piece, Texas Hold 'Em or Know When to Fold Them?, where the concept of free trade was briefly mentioned. Feeling that was not the appropriate forum to have a more lengthy discussion on this topic, I decided to devote an article exclusively to this important – often emotional and thought provoking topic.

Who hasn’t heard of the term ‘free trade agreement’? Perhaps you are more familiar with the term as it is referenced through one of its popular acronyms like NAFTA, CAFTA or the Euro Zone? If you are familiar with the concept, you are likely either pro or anti free trade. My question to you, dear reader, is have you ever stopped and asked yourself why you are predisposed to be the latter or the former?

In my experience, most anti free trade sentiment is based on either nationalist sentiments or fears of foreign [typically cheaper] competition. The pro free traders usually put forward the thesis that ‘everyone benefits’ from free trade and besides, the world is increasingly becoming one global market place, and not embracing free trade endangers those nations that balk to being ‘left behind.’

How Everyone Is Supposed To Benefit

The claim at the heart of pro free traders arguments is that everyone benefits. The reasoning for this is articulated masterfully by John Williams in his interview with Jim Puplava on The Financial Sense Newshour July 23^rd, 2005 – 2^nd hour. Anyone with an opinion on this subject owes it to themselves to listen to this candid and informative interview. Williams points out that the premise which most people understand, that makes free trade a win – win situation, rests in each party to the agreement specializing at what they do best. As such, if my specialty is making buggy whips and I make them cheapest, it is advantageous for me to ‘trade’ with someone whose specialty is making buggies cheapest – that way, both parties subject to the ‘free trade’ of buggies and whips benefit from the specialization of doing what they do best.

In a universe where there is one buyer and one seller, like the example outlined above, it should be clear to anyone that both parties benefit from trade in this case. In the real world, however, where the universe is compiled of many buyers and many sellers of a host of different goods and products, another important consideration comes into play. Like Williams, I would contend that this very important consideration is either assumed or overlooked by proponents of free trade. The assumed consideration is that both [or all] parties to a free trade agreement are at or near full employment. Without this condition being met, the manufacture of goods and outsourcing of associated jobs will necessarily flow toward the lower or lowest cost regime.

This brings me back to a discussion which was to the subject of the Puplava / Williams interview, namely, can we really trust the data being supplied to us by officialdom? If Williams’ assertion that the true unemployment rate is more along the lines of 12% instead of the ‘misreported and official’ 5% - officials entering into free trade agreements with low cost/wage countries are knowingly and deliberately penning trade deals that clearly do not benefit middle class Americans or North Americans for that matter.

What I find bothersome is that much of these negotiations tend to be conducted behind closed doors and lack, for want of a better word, transparency.

I also find it troublesome that officialdom tends to shroud the free trade debate in an ideological debate pitting freedom and choice against backward thinking isolationism. After paying a visit to a web site that has dedicated much space to this debate, Global Issues.Org, I must admit I was not shocked to find,

“The mainstream media has been flooded by free trade proponents and heavily backed by those that will profit from it the most. This makes public debate more difficult.”

So, for the record, I would like to state here and now that I am pro freedom, pro middle class, heck - I consider myself to be pro upper and lower class too. As to whether or not I’m currently pro free trade – that’s a whole different ball of wax because I really don’t think I’m getting straight enough goods to make an informed decision – and that scares me more than anything.

Today’s Market

Overseas equity markets began the week on a positive note with Japan’s Nikkei Index closing up 47 at 11,947. Meanwhile, North American markets ended the day mixed with the DOW down 17.76 to 10,623, the NASDAQ up 10.55 to 2,195 and the S & P up 1.13 at 1,235. NYMEX crude oil futures closed up 1.00 at 61.57 per barrel.

In the interest rate complex rates backed up today in the wake of a strong ISM Index [Institute for Supply Management] report which came in at 56.6 vs. an anticipated 53 - 54. Ten-year bonds closed at 4.32%, up about 4 basis points while the 5-year bond closed the day at 4.15%.

In foreign exchange markets, the U.S. dollar index closed .53 lower at 88.70 with the YEN at 112.26, the EURO .8205, the GBP .5655, the CAD 1.2109, the YUAN 8.1096 and the RUBLE at 28.57.

Precious metals also ended the day modestly better with COMEX gold futures closing at 431.90 – up 1.90 per ounce while silver futures ended the day up .04 at 7.28 per ounce in N.Y. trade. Meanwhile, the XAU gold index tacked on .22 to close at 90.98 while the HUI index closed up .17 at 196.94.

On tap for tomorrow, we should expect to see July auto and truck sales reported around the noon hour. Autos are expected to be reported at a 5.7M rate vs. a prior 5.1M. Trucks are expected at 8.7M vs. a prior 8.9M. At 8:30 a.m. the Bureau of Economic Analysis [BEA] is scheduled to release June’s Personal Income and Personal Spending data. Income is expected up .4% vs. a prior up .2% while spending is expected up .9% vs. a prior reading of 0%. At 10:00 a.m. the Census Bureau is due to release June Factory Orders – expected up 1.1% vs. a prior up 2.9%.

Wishing everyone a pleasant evening and a wonderful and prosperous tomorrow!

Rob Kirby

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