“Free Trade” – a Fraudulent Name for Trade Bills U.S. Government Wants to Pass

by Victor Sperandeo with the Curmudgeon

Disclaimer: As usual, all opinions expressed herein are those of Victor Sperandeo.

Introduction:

Trade agreements, like NAFTA ("The North American Free Trade Agreement" - passed in 1994) and the new TPP ("Trans Pacific Partnership" – pending approval) are not really about “Free Trade.” For example, "Trade" is only discussed in 20% of the TPP. A more accurate name for these agreements might be "The Corporate Windfall Profits- Workers Sucker Deception Bill.”

The distortion in names for these trade agreements, as Confucius (551-479 BC) counseled, is to mislead the public. “The beginning of wisdom is to call things by their proper name," Confucius wrote in his famous work: The Rectification of Names. It's a doctrine of feudal Confucian designations and relationships, behaving accordingly to ensure social harmony. Without such accordance "society would essentially crumble and undertakings would not be completed."

That's exactly what is occurring today... "society is crumbling" as NAMES (of trade agreements) are changed to mislead and deceive the public. The GOP establishment has become a pawn of Corporate America. "The U.S. Chamber of Commerce" has effectively been replaced by political campaign contributions to promote “free trade," which later becomes a huge disadvantage for the American worker.

GOP Establishment's Push for “Free Trade:”

The 2016 election has been a grand propaganda scheme for indirectly trying to get "the people" to believe that the GOP establishment candidates are for "Free Trade." Donald Trump, the GOP front runner, is called a "protectionist" and that is painted as "bad for America." Why? Because Trump wants to stop the loss of job and wage declines in the U.S., which has occurred since 1994 when NAFTA was passed by Congress and went into effect.

Meanwhile, the Conservative establishment cheerleaders, [e.g. WSJ op-eds ("Five Big Myths About Trade" by Alan Blinder-4/22/16) and National Review ("The Truth About Trade" Scott Lincicome-4/11/16)], are selling this “Free Trade” snake oil elixir to cure whatever ails the U.S. worker.

A History Lesson on U.S. Minimum Wages:

[Note that “trade” is used broadly here to include government laws like setting a minimum wage, because it impacts competitive nation's labor costs. Currency manipulation (e.g. China and Japan) effects the price of imported goods, but that's beyond the scope of this article.]

When Adam Smith wrote “The Wealth of Nations” in 1776 (one of the greatest books ever written) the world had no minimum wage laws, no regulations, and was on a gold standard. David Ricardo developed the principle of "Comparative Advantage" in 1817. Those were great ideas to promote the uplifting of society and people worldwide.

All this began to change the positive effects of free trade when New Zealand created the first minimum wage law in 1894. The U.S., under FDR, enacted a minimum wage starting in October 1938 at 25 cents an hour.

California (CA) just enacted a $15 an hour minimum wage, to be implemented over several years to 2022. That will result in a compounded increase in minimum labor costs of 5.06% per year over 83 years. Note that's much higher than the current inflation rate.

→Raising the CA minimum wage labor rate to $15 per hour will cause dramatic changes in economic planning by employers, who are required to pay the bills and cover their costs, even if prices can't be increased.

Realities of Foreign Trade & Treaties:

Foreign trade is critically impacted by the huge differentials in labor costs between countries. For many years, U.S. consumers have been buying goods and garments of all kinds that are made in China, Vietnam, Pakistan, Bangladesh, and other developing nations with much lower labor costs than in the U.S. or Europe.

Other factors effecting foreign trade include: the amount of liberty of a nation's citizens, corporate tax rates, laws and regulations, environmental rules, (paper) currency devaluations, currency changes, and manipulations.

According to the U.S. Constitution, trade agreements are referred to as “treaties," which must be approved by a 2/3rd's vote of the Senate to become law.

Curmudgeon Notes on the TPP:

1. Trade agreements like the TPP attempt to bypass that Constitutional requirement. Congress gave President Obama fast-track authority on June 24^th for the TPP. Fast-track, or trade promotion authority, will allow the U.S. President to send trade deals to Congress for up-or-down votes. The Senate will not be able to filibuster them, and lawmakers will not have the power to amend them.

2. Alex Newman highlighted Obama's deception in an article in The New American:

To build support for congressional approval, Obama falsely claimed that the TPP was a “new” type of trade agreement that “puts American workers first.” Yet the United States economy is at the very bottom of the list, with the World Bank forecasting TPP related GDP growth at a fraction of 1%!

3. For more details on the true nature of the TPP, please refer to previous Curmudgeon blog post expose's: Trans Pacific Partnership: A Deal Made in Secret by the Devil? and Analysis of Secret Trade “Partnerships” (Pseudo Treaties) Which Bypass the Constitution.

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Labor Cost Comparison: U.S. vs Mexico Auto Manufacturing:

Tesla Motors builds electric cars in California where it has relatively high manufacturing costs. Tesla had a little over $4 billion in revenue in 2015, with 13,100 workers. Average pay per worker is $91,000 per year plus employee benefits and stock options. For this comparison of U.S. vs Mexico car manufacturing labor costs, that number is way too high. It's provided only for illustrative purposes.

Instead, let's examine the manufacturing costs of a fictitious U.S. auto maker “XYZ Motors,” which has significantly lower costs than Tesla and no employee benefits or stock options for its workers. For XYZ Motors, let's assume:

1. The average hourly wage is $30 per hour without benefits and without stock options. We'll use that number for comparison purposes, even though the U.S. auto production worker is far more expensive at about $79 per hour. Thank the UAW for that!

2. Employee expenses for “XYZ Motors” are estimated at 30% of revenue (the range is usually from 30% to 40% of revenue for most U.S. manufacturing companies).

Let's now derive the cost of an average auto worker in Mexico. The minimum wage in Mexico is $4.30 per day (=54 cents per hour for an 8-hour day; less if 12-hour day). The average manufacturing wage in Mexico is $2.10 per hour. For 8 hours of work per day, that's $16.80 a day in 2015. Let's use that number as the daily wage of an auto worker for “Mexico Motors.”

A rough (back of the envelope) calculation of the annual labor costs and the associated wage cost differentials between the two fictitious auto companies:

“XYZ Motors” labor costs: $30 x's 8 hours x's 365 days =$ 87,600 per worker. Multiply that by 13,100 (workers)= $1,147,560,000. Note that this total doesn't include employee benefits or stock options, which many U.S. workers receive.
“Mexico Motors” labor costs: $2.10 x's 8 x's 365 x's 13,100= $80,329,200.

→Extra profits for the “Mexico Motors” are slightly over $1 billion, due to the reduction in total employee labor costs!

Ah, but Mexico's labor cost advantage gets much better! If you make weekly payments in pesos on wages and considering the U.S. dollar has appreciated 27% versus the peso in last year, the labor cost savings (=extra profit for the company) is far greater.

Also, the income tax rate in Mexico is 30% versus the average U.S. federal, state, and local tax combined rate of 39% (the highest in the world except for Chad and the UAE). Therefore, the company manufacturing cars in Mexico will save another 23% on Mexico's lower tax rate. Also, health Care in Mexico is based on a "free market system." An additional minor cost is added by driving the autos via truck from Mexico to the U.S. a little further from the U.S. No wonder that Ford is building cars in Mexico!

→This is not meant to be an exact full cost benefit analysis, but a guide as to why "free trade" is causing the steep decline (or crash) of the typical U.S. worker.

Observations & Opinions:

Every manufacturing company, more or less, achieves the same proportional increase in profits (via reduction in labor costs) as the auto example shown above. As a result, I'm surprised there are any manufacturers left in the U.S. at all?
Mexico's main exports are goods like automobiles, electronics, televisions, computers, mobile phones, LCD displays, oil and oil products, silver, fruits, vegetables, coffee, cotton, etc.
Take away the NAFTA "Free Trade" agreement and what would be left for Mexico to export? Only oil and oil products, silver, fruits, vegetables, coffee, cotton with perhaps a few other manufactured goods.
In reality, have you ever heard of an auto company called Mexico Motors? Or Jalapeno Computer? or Hot Tamale Robotics? Not likely, because those products and others are manufactured in Mexico by foreign companies.

Curmudgeon Notes on Mexico's Manufacturing Prowess:

1. Many large global companies have chosen to locate significant manufacturing operations in Mexico, particularly along the U.S. Mexican border. That's because of the low cost labor market in Mexico, which enjoys close proximity to the U.S. consumption markets. Many of the raw materials used in Mexican manufacturing facilities are sourced from the U.S.

2. Manufacturing plants have opened in Mexican cities such as Tijuana, Guadalajara and Mexico City, bringing a wave of new jobs to a country still fighting constant drug violence and police corruption.

3. Samsung Electronics México SA de CV is the leading computer maker in Mexico, with a 19% share of retail volume sales in 2015, marginally ahead of Asus México SA de CV. Samsung became the leading company in 2014, and it continued to work hard to position itself strongly through Samsung Galaxy Tab and Note Pro.

4. In addition to autos, motors, robotics and other high technology products, low-end manufacturing of goods like clothing and textiles is continuing to expand in southern Mexico in cities like Campeche and Veracruz. That particular region has benefited from China’s growing labor costs which give Mexico a competitive export advantage, which is also due to NAFTA.

5. Mexico’s manufacturing output is projected to increase between 4 and 4.5% for 2016 accordingly to experts who expect that the manufacturing sector could add between $20 billion and $60 billion to Mexico’s economy in the next three years.

6. Growth in Mexico's manufacturing sector picked up slightly in March to its fastest pace in nearly a year, as a weak peso helped export orders but increased costs, a survey released on April 1^st. Mexico Manufacturing Purchasing Managers' Index rose to 53.2, the highest level since May, 2015.

Impact of U.S. Off Shoring & Outsourcing of Manufacturing (Curmudgeon):

What's the effect of U.S. off shoring and outsourcing manufacturing to Mexico, China, Vietnam, Malaysia, and other developing countries? Answer: Loss of manufacturing jobs and a larger trade deficit, as shown in the two charts below.

Chart courtesy of Trading Economics

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For all of 2015, the U.S. trade deficit increased 4.6% from 2014 as exports fell more than imports. The trade deficit widened to $ 47.06 billion in February of 2016 from an upwardly revised $ 45.88 billion trade gap in the previous month.

Finally, several pundits have attributed the decline of U.S. manufacturing to machines replacing humans, the U.S. becoming more of a service based economy, and currency moves (like a strong US $). While all of those are true, they don't explain the huge amount of U.S. company outsourcing and off-shoring of manufactured products (especially high tech) that's resulted in the loss of so many American jobs.

Victor: The above charts reveal that the decline of U.S. exports started in earnest just after NAFTA's passage in 1994. Is that published in GOP establishment publications that are readily available and transparent to the public? No, it's all hidden!

Transparency & Truth are Missing (Victor):

ACA/Obamacare architect Jonathan Gruber said that "lack of transparency" was a major part of getting Obamacare passed, because “the stupidity of the American voter” would have killed the law if more people knew what was in it. The same lack of transparency is evident in the "secret" TPP agreement, as the Curmudgeon and I have documented in previously referenced TPP blog posts.

Conclusions:

The goal of the political parties is to serve the rich and enslave the poor, i.e. make voters dependent on the government. The more the U.S. off shores and out sources manufacturing overseas and imports goods, the better for the GOP establishment and Progressives to maintain their positions and power.

The result has been increasing "power" for the elite, but not for “we the people.” The Constitution was written for the opposite outcome. Hopefully, “the people” are now getting the picture. Many are joining the Donald Trump bandwagon as a protest against the GOP establishment and Progressives.

Let's end with a famous quote about the concept of the phrase “free trade:”

"You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time." Abraham Lincoln

Good luck and till next time...

The Curmudgeon
ajwdct@sbumail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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