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Economy

Free but Fair Trade – Is it Possible?

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Free but fair trade is an expression which we often hear today from President Trump; just as we hear that millionaires and billionaires must pay their fair share from Senator Sanders. When asked what percentage is fair; since these millionaire and billionaires are in the highest tax bracket and pay the most in taxes, we never seem to get an answer. All we hear is from the progressive left that they have too much and need to pay more.

Similarly, the expression free but fair trade sounds great, but the meaning of “fair” is utterly void of any substantive meaning. The idea of a 25% tariff may be fair, but it is by no means free. So the question is, how can we obtain free but fair trade?

The Reality

Before we can answer this question, we must first examine the deficiencies in our current trade policies. The first thing we must realize is that we do not currently have free trade. Think about it like this. If we did have free trade why would we need complex trade agreements? The fact is we have thousands of tariffs in the United States. Just like every other country, we seek to protect some industries over others.

Some are for supposed national security reasons, and others are simply to protect an industry in a member of Congress’ district.

The second and most significant reason we do not have free trade is that true free trade is optimal but not politically expedient. For instance, let us use China and the United States as examples and let us say we currently do not trade with each other.

Establishing trade with one another is beneficial for both countries regardless of tariffs. Since trade never existed, an unfavorable trade agreement is preferable over no trade at all. Reasons being both countries will benefit from trade. Industries may open, and some may close, but there will be a net positive for both countries. It is a mutually beneficial arrangement.

Now instead of unfavorable trade agreements, what if we had free trade. All products coming from China into the United States and vice versa are tax-free. In this situation, you will see the greatest mutually benefit as both countries will have positive net growth. If this situation exists for years, you will see a fluid economy as some industries will be created, grow, decline, or shut down.

The problem that arises is not the creating and growth of some industries but the decline or elimination portion.

If a software engineering firm which sells most of its software to China opens up in a congressional district, you will be sure to see that member of Congress at the ribbon cutting ceremony will a plethora of other politicians stating their policies fostered the creating of this software engineering firm.

On the other hand, you won’t see these same politicians at the factory down the street which is packing up and moving to China. The same policies that opened up the software engineering firm eliminated your manufacturing job. What is an elected official to do?

What they will try and do is give tax incentives and add tariffs to prevent the closure. If they succeed, they will once again take credit; even though the biggest net benefit to the economy as a whole is to allow the factory to shut down, though it isn’t politically expedient.

Back in China, they will also try and protect their software engineering firms by adding tariffs and regulations on the US-based company. The result of all this will be less than optimal, but a long-term net benefit is not politically expedient. So protectionism will inevitably begin.

Possible Solution?

Therefore, how do we create complete free and fair trade? The honest answer is you can’t; as we have demonstrated allowing complete laissez-faire trade policy will never occur because it isn’t politically expedient. Some may be for good reasons and some for bad reasons.

To achieve the most optimal outcome would be to eliminate tariffs. But how do you do that without cheating and allowing politically expedient policies?

Maybe this example trade policy below might help in this endeavor.

All products, goods, materials, and services, entering the United States and its territories shall be free of tariffs. Any fees, including but not limited to docking, storage, and inspection imposed at points of entry shall be uniform at each location regardless of country of origin. Likewise, all products, goods, materials, and services produced in the United States and its territories shall be free of tariffs. Any country that imposes a tax on any of said products shall immediately, have the highest equivalent tax impose on all their goods and services at the same rate plus 10%; until eliminated.

Likewise, any fees should not favor any other country over the United States and its territories. Fees must be uniform or to the benefit of the United States. If fees are to the disadvantage of the United States, those same rates shall be immediately imposed on said country plus 10% until eliminated.

How it works

I postulate this trade policy would allow greater free trade then we have ever seen.

For instance, if China has a combined 20% tariff on mid-sized trucks and 25% on sedans, then since 25% is the highest tax imposed on US products then 100% of all items coming into the United States from China will have a tariff of 27.5% immediately imposed on it. This scheme would also apply to any value added tax or border adjustment tax which would disadvantage the United States over other foreign or domestic products. Therefore, I believe the consequence would be so devastating to China they wouldn’t dare put a tax on American products, and likewise, the United States would not want to engage in a trade war just to protect one industry or factory.

Let us say that we just succeeded in creating Free Trade the vague notion of Fair Trade can never be quantified or defined.

For instance, if China is subsidizing its steel industry and shipping Chinese steel into the United States cheaper than the free market can produce it, is that still Fair Trade?

Is it Fair?

It’s still Free Trade because no taxes or tariffs are imposed but is it fair?

Some would argue that it is not fair for China to subsidize their steel industry because that puts the US steel industry at a disadvantage. The US could impose a tariff but as stated that would eliminate free trade. The only other option would be for the United States to subsidize the US steel industry or let it possibly collapse. Sidenote, we only receive 2% of our steel from China, and U.S. Steel production makes up 70% of the steel used in the United States.

Some might see this as unfair; others see this as a plus benefit to the United States.

American economist and Nobel Memorial Prize in Economic Sciences recipient Milton Friedman viewed this as reverse foreign aid. If China wants to tax their citizens to provide US citizens and companies with subsidized steel why not let them. In a Milton Friedman perspective, this might seem unfair to Chinese taxpayers and more than fair to US taxpayers.

Some may argue that US steel production is vital to US national security. Having enough steel is crucial to our national security, but that doesn’t mean that we can’t stockpile Chinese steel. Also, it neglects the fact that other countries like South Korea protect their steel industry by subsidizing steel in their country to prevent monopolization by Chinese firms. The US can also buy from South Korea or even Canada.

Countries may also put strict regulations on how steel is produced in their countries as well as impose those rules on foreign producers. These policies may not have a defined numerical value as a tariff but in a sense act as a protectionist trade barrier. Since there is no quantitative value to these types of regulations, having US laws automatically trigger countermeasures would be impossible.

So can we truly have Free but Fair Trade? As we have seen having Free Trade is possible, but Fair Trade is really in the eye of the beholder. Ultimately, the best interest of the United States and its continued success is by having a free trade policy, maybe something like I have spelled out in this article, as well as, limiting regulations and limiting government interference in the economy.

Nothing can be put in place to be completely fair and balanced, but the most reasonable thing to do for the overall benefit of America and Americans is to maximize laissez-faire economic policies void of politically expedient measures.


Konstantinos Roditis is a candidate for California State Controller. You can learn more about his campaign at cacontroller.com, and you can follow him on Twitter & Facebook.

Mr. Roditis a candidate for California State Controller. He is an entrepreneur and owns several companies. He graduated from UCSD with a B.A. in Political Science/International Relations. He's a former City Commissioner with the City of Anaheim, CA. He's a Conservative Constitutional Federalist. Follow him on Twitter @KonRoditis

Democrats

Elizabeth Warren introduces dangerous anti-capitalist bill

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Elizabeth Warren introduces dangerous anti-capitalist bill

Elizabeth Warren made a big announcement this week in introducing her new bill called the “Accountable Capitalism Act.” Her bill aims to “eliminate skewed market objectives” and return America to an era in which “American corporations and American workers did well together.” It’s unclear when the utopia like conditions were according to Warren; however her website lists the 1980’s as the time period in which corporations shifted focus to maximizing shareholder returns. In any business college, it is taught that the job of a CEO is to maximize shareholder wealth. Senator Warren wants to shift this mentality with her new bill. In the statement on her website, she asserts that the “shift” has led to booming profits and less reinvestment into the companies themselves. She claims that wages have not increased despite booming corporate profits. Elizabeth Warren then moves to make the argument that the top 10% owns 84% of American stock and only 50% of households own stock. Thus, she claims, that this reinforces a cycle of the rich getting richer. This is a growing socialist sentiment that poor people, and even middle class, are incapable of affording stock. The main bullet points are outlined below. Read the text of the bill here.

Office of United State Corporations (more government!)

The bill creates a new administration within the Department of Commerce. Corporations earning more than $1 billion in revenue are required to obtain a charter from the federal government, per this new created office. The charter obligates these large corporations to consider the interests of all stakeholders. Failure to obtain this permit to exist results in loss of corporation, which in business terms mean, it would no longer be treated as a separate entity. Therefore there would be no liability protection. The Director of this office would be a Presidential appointee and requires Senate confirmation. The term last four years. Warren seeks to create a new and powerful tentacle of the Federal government.

Employee Chosen Board of Director

Employees, not shareholders, will have the ability to choose no less than 40% of a company’s board of director. This bullet point is perhaps the most ridiculous and anti-capitalist. Company boards serve to set goals for the company. The board is usually chosen by investors. In the world of private investment, the board of directors is a bargaining chip for control of the company, as opposed to just percentage of stock. Warren’s bill doesn’t outright say it, but she wants unions to control company boards. Meaning instead of the company’s interest, the board will be powerful weapon of the union. Boards start out as founding members, investors and their appointees, and neutral parties because entrepreneurs and investors craft such interesting deals. Insisting that 40% must be elected by employees renders a board relatively useless for small investment worthy companies or inflates company boards well beyond what they should be for their size (ie small company with GM size board.) This will possibly lead to more empowered officers and weakened boards so that CEOs can perform their fiduciary responsibilities without a labor union threatening their disposal. This could also make companies more risk adverse because undoing mistakes, laying off workers, and other rainy day measures are now more difficult to undo. Ultimately this would empower worse CEOs, ones who aren’t as interested in shareholder wealth. The Securities and Exchange Commission along with the National Labor Relations Board are responsible for enforcing this part of the act, as further indication that this applies to all corporations. Stiff daily fines are to be imposed for failing to comply.

Government control of stock options

Elizabeth Warren claims top executives are compensated mostly with stock options. Her bill restricts these executives ability to sell their shares for five years so that they can focus on long term company success. Basically these executive will be given stock, but will have no real ownership of that stock. This would be the government restricting private property. These types of issues are best left to corporations and shareholders who already impose vesting periods to ensure the same exact goal.

Supermajority for political expenditures (not for unions)

This is a jab at Citizens United because Elizabeth Warren and others are butthurt about the outcome of a critical first amendment case Supreme Court case. It forces company shareholders to vote in order for a corporation to make any political expenditures. It imposes a 75% supermajority threshold. Conspicuously absent from this requirement are labor unions.

Revoking of charter

The corporate charter resembles a “rule of club” for large companies. If they don’t meet the requirements of their charter or have a history of illegal activity, they will have their corporation status removed in time. The question is how political will the enforcement of these charters be? Will there be a separate set of rules for democrats and republicans? If the rest of government is any indication, the answer is clearly foreshadowed.

Closing Thoughts

The socialist movement wants to fundamentally change the purpose of starting a business and running a company. This would most certainly lead to lower caliber CEOs. The bill makes no mention of labor unions yet it’s intentions are clearly to empower them in companies that still allow them and to create politics in organizations that do not. This ideas pressed fourth in this bill are sure to gain traction, just as “Medicare For All” became a socialist rallying point. It brings about questions of how business literate politicians like Senator Warren are? Do they fundamentally misunderstand what a corporation is, or do they not care? The bill aims to reduce a shareholder’s power and return on investment which will only hurt our economic growth. While Elizabeth Warren’s bill isn’t socialist, it is heavily anti-capitalist.

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Economy

Trump expects Harley to lose money on his behalf one way or the other

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Trump expects Harley to lose money on his behalf one way or the other

American motorcycle motorcycle manufacturer Harley Davidson is in a tough spot. Tariffs imposed from Europe against imported motorcycles in response to President Trump’s tariffs on steel and aluminum have forced Harley to consider moving some production to Europe to avoid the tariffs. It’s a fair response, but the President is having none of it.

He has ratcheted up calls to boycott Harley over the potential move.

It’s imperative for President Trump’s reelection that these tariffs work. If they have the expected effect of bringing some jobs back while pushing others away, then they will be painted by the media as a failure. He knows this and therefore must do everything he can to keep jobs in America even if it means painting one of the most beloved American companies as the bad guys.

Trump backs boycott of Harley Davidson in steel tariff dispute

https://www.reuters.com/article/us-harley-davidson-tariffs-trump/trump-backs-boycott-of-harley-davidson-in-steel-tariff-dispute-idUSKBN1KX0J9The Wisconsin-based motorcycle manufacturer announced a plan earlier this year to move production of motorcycles for the European Union from the United States to its overseas facilities to avoid the tariffs imposed by the trading bloc in retaliation for Trump’s duties on steel and aluminum imports.

In response, Trump has criticized Harley Davidson, calling for higher, targeted taxes and threatening to lure foreign producers to the United States to increase competition.

My Take

What does he expect them to do? They will lose tens of millions of dollars if they continue to try to export motorcycles to Europe. They will lose even more if they stop selling motorcycles in Europe. If they try to mitigate the damage by moving some operations to Europe, the President wants them to lose money as a result. This, too, will likely result in cuts to the workforce.

In other words, President Trump will make certain Harley Davidson, an iconic American company, loses money and cuts American jobs no matter which direction they go. If he has an alternative for them that does not hurt Americans, I’m sure they’re all ears.

Most tariffs are bad in the 21st century. It’s impractical to believe we can maintain our supremacy as the world’s consumer if we continue to slap tariffs on some of our best trading partners. He either lacks the understanding of how this all works or has chosen to ignore the facts for the sake of spinning it for votes when his term concludes.

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Economy

Tariffs on Turkey: Bad for the economy but damaging to a dangerous dictator

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Tariffs on Turkey Bad for the economy but damaging to a dangerous dictator

Say what you will about President Trump’s foreign and economic policies. Whether you support them or not, it’s hard to deny that they’ve made things much more interesting.

The latest move by the President to impose stiff tariffs on Turkish steel and aluminum may seem in line with how he’s been treating the national and world economies recently, but more is at stake with this move than previous ones.

There are two factors at play that make this move different from previous tariffs. First, it is not purely economic but is a response to Turkey continuing to hold pastor Andrew Brunson for allegedly supporting the coup attempt of 2016. Second, the tariffs come at a time when Turkey’s currency, the lira, is in free fall.

It was already starting to show signs of failure when leaders from both countries pushed it even further down. Turkish President Recep Tayyip Erdogan added more challenges for the lira when he asked his people to convert their foreign currency and gold, a sign of trouble that will likely have the opposite effect.

Erdogan calls on Turks to convert hard currency, gold into lira

https://www.reuters.com/article/turkey-economy-currency-erdogan/erdogan-calls-on-turks-to-convert-hard-currency-gold-into-lira-idUSA4N1TM024Turkish President Tayyip Erdogan on Friday called on citizens to convert their hard currency and gold into lira, after the local currency tumbled to a record low this week, reflecting investor concern about a widening diplomatic rift with the United States.

Erdogan, in a speech in Ankara, also said Turkey was diverting to the Chinese market to overcome what he said were “subjective evaluations” from ratings agencies. Erdogan has repeatedly railed against credit raters, saying their downgrades of Turkey’s sovereign debt to “junk” status were politically motivated.

Seizing on the free fall, President Trump made matters worse for for the lira with the sanctions:

Trump authorizes doubling of metals tariffs on Turkey

https://www.cnbc.com/2018/08/10/trump.html“I have just authorized a doubling of Tariffs on Steel and Aluminum with respect to Turkey as their currency, the Turkish Lira, slides rapidly downward against our very strong Dollar! Aluminum will now be 20% and Steel 50%. Our relations with Turkey are not good at this time!” Trump wrote.

Losses in the the Turkish lira deepened on Trump’s tweet, falling as much as 20 percent vs. the U.S. dollar in Friday trading.

Erdogan is now calling this an economic war with the United States and claims he will not back down. Meanwhile, the Euro and other currencies are also feeling the heat:

Euro tumbles as investors fear bank exposures to Turkey

https://www.reuters.com/article/uk-global-forex/euro-whacked-on-turkey-turmoil-as-investors-scramble-for-safety-idUSKBN1KV07M“You’ve had a fairly sharp move lower in the euro and it’s broken through key technical levels as well,” said Richard Franulovich, head of FX strategy at Westpac Banking Corp in New York.

The euro dropped below technical support at $1.15 to $1.1421, down 0.91 percent on the day and the lowest since July 2017. Against the yen, the euro slid 1 percent to 126.79 yen, a two-month low.

Now, the criticism and praise of President Trump’s moves will be debated for days, maybe weeks.

My Take

As I’ve stated on many occasions, I’m not a fan of tariffs. They are misunderstood by most, particularly the President, and no longer yield the results they did in previous centuries. From an economic perspective, I oppose this move.

The bigger picture is how this is being used as a pressure tactic against Turkey. Currently, I like it a lot. That opinion could change based on how things go, but moves like these that apply pressure against a dangerous dictator of the false ally that Turkey has become are welcome. It isn’t just about securing Brunson’s release, though that’s extremely important. Turkey is a rising power on every spectrum that is increasingly turning to Russia and China for help instead of their “friends” in NATO.

The strategic importance of Turkey as a hub that connects Europe, west Asia, and the Middle East cannot be understated. In an ideal situation, Turkey would still be a good ally as they once were. Erdogan has taken advantage of two past U.S. Presidents and seemed poised last year to start taking advantage of President Trump. That doesn’t seem to be happening anymore.

Is this the right way to handle Erdogan? Probably not. Whether it is or not will be revealed in coming weeks. One thing is certain: we’re seeing things being done from the White House that we’ve never seen before and may never see again. It’s troubling, but at least it’s entertaining.

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