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Introduction to International Political Economy: The Wakefield Seminars (Class Two)

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By Greg Rushford

May 22, 2020

NOTE TO READERS: This text is the second of three lectures I presented via Zoom to students at the Wakefield Country Day School in Huntly, VA, earlier in May. For the first lecture, click here, or return to the main page and click on the link. I will post the third lecture in a couple of days.

Welcome to the second of three classes on what international-trade economists call Political Economy. This is the same basic presentation that I’ve made over the years in college economics classrooms. But if it sounds rather daunting to present college-level material to high school students, it shouldn’t be.

As you would know from last week’s class, the fundamental concepts are not difficult. Anyone can get this, simply by understanding a few simple economic definitions, and by looking around at what’s in their daily lives. 

For sure, looking around us here in Rappahannock County, Virginia, doesn’t immediately suggest that global trade flows touch our lives at all. We are in the boonies, tucked away in the foothills of the Blue Ridge Mountains — only 70 miles west of downtown Washington, D.C., but in the middle of nowhere.  

Rappahannock County is about the same size as Singapore, but instead of nearly six million people, there are only about 7,300 of us. Why, we don’t even have one stop light on our quiet country roads! 

But look more closely — look to the Virginia Inland Port, about twenty minutes to our north, just outside the little town of Front Royal. You’d be surprised at the amount of international cargo that goes through Customs at this inland port. The Front Royal port handles twice the cargo traffic as do the major U.S. southern seaports of Miami and Jacksonville, combined.

Many of the goods come into Front Royal’s customs zone from nearby Dulles International Airport, an hour’s drive from the East, on Interstate Highway I-66.

The imports also come into Front Royal — by rail and interstate highways — from the international terminals at Norfolk, VA, the big U.S. deep-water seaport some 220 miles to our southeast. And then they are sent on to other major cities whose economies also depend upon international trade: Atlanta to the south, Chicago to the west, and so on. And of course, the same international products are here in Rappahannock County. 

My wife and I often look around our American-made home and marvel at how the international marketplace is at our front door. Literally. That door comes from mahogany that was harvested in Honduras and finished in Costa Rica. Our cherry-wood floors come from Brazil. We’ve got lights made in China. A granite kitchen countertop from India. Some fixtures in our bathrooms come from Italy — and much more. 

So, if trade is obviously so important to our lives, why do many Americans believe it is “unfair?”

The heart of the matter begins to be seen in just two economic definitions that are in Economics 101 college textbooks. The first is Price Discrimination. Second: International Price Discrimination. The terms are presented in a rather dry fashion. But they aren’t dry to those who understand the politics that fuel the antagonisms toward trade.

Price Discrimination involves products that are sold at lower prices in some markets than others. Widgets might be sold at cheaper prices in, say, South Dakota than in Manhattan, based on calculations that New Yorkers might pay more. 

Or they even might be sold below their costs of production. You’ve perhaps noticed so-called “loss leaders” in your supermarkets: items priced so cheaply that they entice shoppers into the stores. This is often called cutthroat pricing. Economists tend to praise such ruthless pricing wars, as they encourage healthy competition. 

Only if Price Discrimination becomes predatory, in the legal antitrust sense of the term, do economists frown. Predation happens when, say, a large corporation with deep financial reserves deliberately prices products so low as to drive the little guys out of business. Then the big guys are left with so-called “market power,” or monopoly power — so they can raise prices on helpless consumers who don’t have a choice. The antitrust laws are meant to police such uncompetitive economic behavior. 

An automobile could be made in Detroit, and then sold more cheaply to Americans who live in Alabama, for example. But what if the Canadians make automobiles, and export them to Americans at prices that are lower than in Canada? Now we’re talking about International Price Discrimination.

International Price Discrimination is the same as domestic Price Discrimination. Except here, the goods cross international borders and are considered as having been “dumped,” and politically “unfair.”

Such “unfairly dumped” goods can be taxed, with high tariffs. Here in the United States, this happens a lot. Domestic concerns that can’t match the prices of their foreign competitors find themselves good lawyers. Those lawyers then file “anti-dumping” lawsuits with the U.S. government, which investigates and decides whether to tax the “unfair” imports with tariffs. 

 (Those “anti-dumping” cases are considered by the U.S. Commerce Department and the International Trade Commission, each of which has bureaucracies to consider various aspects of anti-dumping complaints by looking at the costs of production.)

Domestic advocates of the anti-dumping laws frame their arguments using antitrust-like language of predatory pricing. Politicians often misleadingly call International Price Discrimination “Illegal Dumping.” It’s in fact not illegal — or unfair — to price, say, automobiles or bicycles, you-name it, at lower prices in some countries than the home market. The item to which International Price Discrimination is applied, again, is just subject to being taxed. The rationale is more political than economic. And over the years, the cries of “unfair trade” have landed at the heart of the debate over whether international trade is a good thing, or not. 

Here’s how this works. 

I first began to understand the emotional world of anti-dumping litigation almost exactly thirty-six years ago to this week, around Mother’s Day, 1984. American flower growers were upset that Colombia was exporting roses to U.S. markets at low prices. Prices that rose growers in, say, Michigan, couldn’t match. That was unfair, the American rose lobby complained.

So the U.S. rose growers hired lawyers to petition the federal government to put high tariffs on the import competition from Colombia. 

Tariffs, of course, are taxes imposed on American businesses that import foreign products. American consumers who buy the foreign goods are taxed again when importers pass along their extra costs in the form of higher prices. The American rose growers hoped that higher tariffs on Colombian roses would allow them to keep prices high. 

I took the roses story to the CBS Evening News in May of 1984: The Rose you Buy for Mother’s Day is Part of an International Trade War. That was when I realized that economics could be easily explained to normal Americans who have never heard of price discrimination. 

The economic principle in the Colombian flowers “dumping” case was what the famous economic theorist David Ricardo — you’ll hear his name in your first college economics course — called comparative advantage. Rough translation: Countries export products that they are better at making than their trading partners. They import products that others make better. 

This isn’t rocket science. In the roses case, the Colombians’ comparative advantage was — sunshine. Simply tropical sunshine that nourished rose beds, for free. By contrast, rose growers in places like Michigan had to pay the high costs of electricity necessary to heat greenhouses in cold weather. The American rose growers thought that was unfair. They thought that the rest of us should pay far higher prices to keep them in business. 

The American petitioners lost the rose-dumping case in 1984. It’s easy to argue that that was a sensible economic outcome; just go into your local grocery store and see those wonderful flowers from Central America, offered at affordable prices. And trade is a two-way street: Colombian buy American machinery,  cereals, various electrical and electronic goods, and more. 

Fast forward from the 1980s, and today there are hundreds of such “dumping” cases in which globally uncompetitive American industries have successfully sought high tariffs on too many products to mention here.

Many of these mini-trade wars have involved various types of steel: pipes, tubes, wire, hot-rolled steel, cold-rolled steel, and so on. There have been anti-dumping fights over bicycles, pencils, nails, bedroom furniture, candles, softwood lumber, manhole movers — and even something called extruded rubber thread, which is the rubber-like stuff that puts the snap in your underwear. 

Seafood products including crawfish, catfish, salmon, and shrimp have their own anti-dumping politics.

American catfish farmers from states such as Mississippi and Arkansas were upset that they couldn’t compete with catfish from Vietnam — so upset that they persuaded the U.S. Congress to make it illegal to call catfish from Vietnam, “catfish.” When you go into the seafood section of your supermarket, check out “swai,” or “basa,” or “tra” — ways to say “catfish” in Vietnamese. 

The idea was to make the affordable Southeast Asian catfish look perhaps too scary to eat. That didn’t work, as “Basa” sounded, well, exotic and interesting, to American consumers. 

Then the word was spread that foreign catfish is unhealthy. When nobody got sick, the American catfish lobby’s lawyers persuaded the U.S. government to hit the tasty foreign fish with anti-dumping tariffs. While the Vietnamese exports to America then slowed for awhile, the Chinese saw an opening and started to sell us their catfish. Economists call that: trade diversion. Erect high tariff walls on imports from one country, and exporters in other countries will take the advantage. 

Or take shrimp. Americans catch wild shrimp off coastlines that stretch down the Atlantic Ocean from the Carolinas to Florida, and then onto Louisiana and Texas along the Gulf of Mexico. Problem is, they can’t harvest enough shrimp even to supply one national U.S. grocery chain such as Costco. There isn’t enough American wild-caught shrimp to supply Red Lobster restaurants nationwide, or any other nationwide restaurant chain.

It takes foreign shrimp, mostly of it grown on farms in twenty-some countries around the world, to supply the shrimp you buy in your grocery stores. When I was young, living in a small city in Illinois, I didn’t get fresh shrimp until our family took a vacation to Florida when I was about eight. Now, thanks to international freight services, fish dealers all across the United States sell fresh imported seafood from everywhere to Americans, every day. 

That’s what trade does when free markets work properly. It creates winners. 

But that’s only one side of this story.

International trade also creates losers. 

Never forget this. We’re talking about people with real lives here. People who lose their jobs through no fault of their own, but because they had worked in industries that no longer could compete globally.

We could talk all day. Tell a steelworker in Ohio or Pennsylvania whose mill is shut down to praise economic efficiency and just move on with his life. Tell those steelworkers whose factories move to Mexico to appreciate the economic efficiencies. 

Tell women who have worked for generations in textile mills in the Carolinas that they should go to community college or enter various training programs where they would learn to do something else. Tell catfish farmers in the Mississippi Delta that they should realize that their competitors in the Mekong Delta in Southeast Asia can offer the same fish to Americans, at lower prices. You won’t get far. Change may be necessary, but it’s often wrenching. 

The losses from global competition can shake entire communities. I’ve been in declining steel towns in Pennsylvania and West Virginia to see Stand up for Steel rallies. Angry people came for miles around: the unemployed workers, their families, high-school bands, mayors, and even preachers who railed against foreign steel. 

(But then again, even that story wasn’t so simple. One CEO of the local steel mill in Wheeling, West Virginia, stirred the crowd by shouting that the foreigners could take their steel and “shove it where the sun don’t shine.” But when I later went to his office, it turned out the same CEO had also been busy doing profitable business with his Korean steel-making partner. In political economy, where people fight over money and jobs, things are often not quite what they appear.)

We are talking about a political-economic problem that nobody has ever been able to answer satisfactorily. The Luddites in the 19th century tried to prevent new machinery being brought into their mills that would throw some workers out in the streets. The blacksmiths were trapped when automobiles began to replace horses. Whenever there is rapid progress in technology and science that demands change, the lives of decent people will be upended. Not everyone will be able to cope, without help. 

Next week in Class Three, we’ll talk about how these fights over money and jobs are handled in the World Trade Organization, the international institution based in Geneva, Switzerland. The WTO presides over the rules of international trade. This institution’s smooth functioning is absolutely crucial to the health of the global economy. And it is currently in danger, thanks to parochial politics in key WTO member countries. 

So bring your thinking caps next week, as there are big issues here. They will be with you for the rest of your lives. Hopefully these classes that introduce International Political Economy will help you think them through yourselves.

Introduction to International Political Economy: the Wakefield Seminars (Class One)

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by Greg Rushford

May 20, 2020

Note to readers: The following is the first of three Zoom presentations, lightly edited and amplified, that I delivered this month to high school students at the Wakefield Country Day School in Huntly, VA. Huntly is tucked away in the scenic foothills of the Blue Ridge Mountains in Rappahannock County, Virginia, 70 miles west of Washington, D.C. Its population is 7,300 persons. 

The setting would seem to be as removed from global trade and its controversies as it gets. But the three Zoom sessions explained how the world — especially the GATT/World Trade Organization, which is presently under the most severe political attacks from various world capitals in seven decades — is tightly woven into the daily lives even in remote corners of America. 

In these three classes I tried to share some of the most valuable basic lessons that I’ve learned over the past half century — which go far beyond the pre-university level. I encourage readers to share them with friends and relatives who wonder what the fuss is all about, and why they should be greatly concerned where the controversies are headed.

(I also encourage American readers to bring these materials to the attention of their local Members of Congress. Both Republicans and Democrats in the U.S. House and Senate are currently standing by in a sort of passive ignorance while some of the world’s most valuable international institutions are being deliberately weakened. And a few me-first CEOs who are afraid to stick their political necks out might also benefit from seeing how easy it is to explain the benefits– and importance– of trade.) 

The first session was held on May 5:

Good morning. The inspiration for today’s class, the first of three, was a question on many American minds in these days of the coronavirus pandemic: Should we manufacture medicines right here in the USA, both to protect American jobs and ensure that we are not dependent upon the goodwill, or perhaps not, of foreigners to protect our public health? 

I’m not going to answer that, really. But by the time we finish the third class, I hope that each of you will be better equipped to think through such questions independently. I’m going to offer you a framework for analytic thinking aimed at giving you the “ammunition” you need to understand the reasoning behind such questions. And I’ll point you to some links and sources aimed at provoking further research and independent thinking— certain that your teachers here at Wakefield have already said over-and-over again is the point of any true education.

We’ll be talking about perhaps a new concept: Political Economy. That’s a term familiar to every economics professor you will have in college. 

Today, let’s concentrate on the economics part, focusing on some simple-but-very-important examples of how the international economy functions. 

International trade is in all of your daily lives. The clothes you wear. Your iPhones. Your schools. Your laptops. The cars you drive. The homes you live in. What you eat. And certainly the world is in your medicine cabinets. 

This fact is undeniably true. Still, many so-called “normal people” — friends and neighbors who are not economists or political analysts, who are happy to live their lives outside of the political pressure cooker called Washington, D.C., aren’t necessarily aware of how much international trade is in their lives. Many believe what they are told by certain political leaders who know how to punch so-called “hot buttons:” that global trade is “unfair.” 

We’ll get into that next week, when we look at the political part of “political economy.” Not parochial partisan politics. Not Republicans vs. Democrats. Not “liberal” or “conservative.” Not Trump vs. Obama, although if the subject is Political Economy, such names sometimes have to come up to illustrate this-and-that.

Polls consistently show that perhaps two-thirds of Americans, year-in, year-out, instinctively believe that trade is a good thing. But the remaining third tend to fear it. 

To prepare for next week’s class, you might want to glance at two fundamental definitions that are in Economics 101 textbooks. Unless one knows better, they seem rather innocuous, boring even. But those two definitions define a subject matter that will be with you for the rest of your lives. 

The first concept is called price discrimination. The second: international price discrimination. Just take a few minutes to google them — and next week I’ll explain why those two terms are not only not boring, but absolutely essential if one wishes to understand the difficult politics of international trade. 

The first thing to understand is that anyone can grasp the fundamentals of political economy. This might be university-level principles, but they are not really difficult to grasp. If I can get it, anyone can.

That’s because my qualifications to try to explain such things are actually slim to nil. My career goes back more than a half century, to the late 1960s. 

In the beginning, I ran traditional national security investigations as a congressional aide — working for both Republican and Democratic senators and congressmen on oversight issues ranging from the security of nuclear weapons to secret intelligence operations and analyses at the Central Intelligence Agency. 

Economics was not then in the picture. After I left Capitol Hill in the1970s, I’d been to the Pentagon, State Department, and the CIA a gazillion times. But had never given the Office of the U.S. Trade Representative a thought. Nor the Departments of Commerce and Treasury, each of which has international trade responsibilities.  

For the last several decades, I’ve been a journalist who has specialized in the politics of international trade. I publish an online journal called the Rushford Report, which you can find at www.rushfordreport.com. 

I have also been an occasional contributor of columns to the Wall Street Journal, and economics magazines such as the Milken Institute Review. That publication is read by many who have doctorates in economics from the Ivy League universities in the East to the University of Chicago and onto the University of California at Berkeley. The trick in reaching even such sophisticated audiences is to grasp the basics, in clear English. 

And it turns out that even journalists like me who have absolutely no economics pretensions can grasp the fundamentals. 

A confession. I never even took economics in college. In fact, I dropped Economics 101 three times. Didn’t understand why the subject was so important. Didn’t quite trust my professors, especially one of whom was a fast-talker who wore colorful bow ties. He wanted me to assume this-or-that, when I wanted to argue why anyone should make such assumptions. When my old professor died a few years ago, the university honored him as one of its greatest teachers, ever. My role was having been his worst student, ever.

A disinterest in economics became something of a dilemma. I was an international studies major, where economics was required. I finally just switched my major to history — that’s how much I hated Econ 101. 

That was really ignorant, of course. But it took years to figure that out, until one day the economic light bulb went off. 

So basically, these three classes explain the kind of stuff that anyone can think through for themselves, if they know where to look. 

It all begins with a decent respect for facts. And some basic facts of economic life lay a solid foundation that illustrates exactly how the economic underpinnings of international trade work in real life. 

First, let’s call it the Nutella Principle, named of course for the delicious chocolate-tasting stuff that so many of us love. 

Roberto Azevedo, the director general of the World Trade Organization (WTO), explained the importance of Nutella very well in a speech a few years ago. (We’ll get to what the World Trade Organization is, and why that crucial international institution is presently under political attack in class three. For now, just trust me: the WTO is very important to your daily lives.) 

Azevedo said: “A jar of Nutella can contain hazelnuts from Turkey, palm oil from Malaysia, cocoa from Nigeria, sugar from Brazil and flavoring from China.” That’s five countries. Which one made the Nutella?

Nutella’s multinational headquarters are in a sixth country, Italy. But the Nutella jar that we Americans are likely to buy comes from one of their factories in Canada. That’s the seventh country. The finished bottle of Nutella comes into the United States labeled Made in Canada.

Next, think about where Master Lock padlocks come from. While Wakefield lockers may not use padlocks, Master Locks are famously in many, many high-school lockers nationwide. Perhaps you remember those Super Bowl commercials, showing locks tough enough to withstand bullets. 

Master Lock employs several hundred workers in Milwaukee who make “Made in the USA” padlocks. But there’s more to this, beginning with the company’s operations in places like Mexico, Taiwan, and China. Here’s how it works:

Locks have parts that come from just about anywhere: keys, cylinder assemblies, ball bearings, plated shackle stop pins, anti-saw pins, screws, and so on. One internal Master Lock company memo I found by googling on the Internet listed examples of 20 different products that Master Lock needed to get just from China. 

Another Google search showed how difficult it is to tell where a padlock really comes from. This particular lock had ten different components from various countries. The lock’s basic body was put together by American workers in Milwaukee — working with imports, including a shackle from China.

Those components from around the world were then shipped from Milwaukee to Mexico for final assembly. When the padlock came into the United States, it was labeled by U.S. Customs as a product of Mexico. Millions of normal American high school students would be unaware that their own locker rooms offer a perfect model of how international trade is in their lives.

How about Harley Davidson motorcycles? Those Hogs and Fat Boys, made in Wisconsin and Pennsylvania, are about as American as it gets, right? 

But the American workers who make the bikes couldn’t keep their jobs without access to imported components — transmissions from Japan, wheels from Australia, tires from Spain and Thailand, and so on.

Perhaps about one-third of the value of a Harley motorcycle comes from parts sources outside the United States. Harley buys the best parts it can get, at the best price, wherever they might come from, wherever at home or in the world. The economic forces that drive international trade flows are as simple as that. 

Here’s another real-life illustration of how international trade — imports and exports — works.

Boeing’s 787 Dreamliner has suppliers from everywhere. Former President Barack Obama said the following in 2012 when he visited Boeing’s manufacturing operations in Seattle: “Boeing has suppliers in all 50 states, providing goods and services like the airplane’s ground-breaking carbon fiber composite aircraft structure from Kansas, advanced jet engines from Ohio, wing components from Oklahoma, and revolutionary electrochromic windows from Alabama.” 

Take President Donald Trump’s private Boeing 757 that he used to fly around the country while campaigning for president in 2016 on his America First platform. Both Obama and Trump were cheered by audiences when they said their favorite words were “Made in America.” 

But there’s much more to Buy American politics.

Mr. Trump’s jet couldn’t have flown anywhere without those Rolls Royce 211 engines from Great Britain, for openers. The campaign audiences who cheered the Buy America appeals didn’t notice the famous RR logo on the airplane’s side. Nor did the press corps.

The bottom economic line is clear: Boeing’s airplanes come from — just about everywhere. Here’s how it works:

The Swedish National Board of Trade has published a study showing that some 70 percent of the Dreamliner’s parts come from an atlas’s worth of countries. “The wings are produced in Japan, the engines in the United Kingdom and the United States, the flaps and ailerons in Canada and Australia, the fuselage in Japan, Italy and the United States, the horizontal stabilizers in Italy, the landing gear in France, and the doors in Sweden and France.”

While Boeing makes airplanes in the United States by importing parts from around the world, Boeing also exports its aircraft to customers all over the world — notably including those in countries that supplied components. That’s why, intellectually speaking, one can’t speak of trade only in just terms of imports, or just of exports. We’ll get to the politics of that next week.

For today’s purposes, the focus is on the economics that drive the import side of the equation.

Take careful note of this: “Half of the goods the United States imports are inputs and raw materials that are necessary for U.S. companies to operate their domestic production.” That quote comes from Scott Miller, a former Procter & Gamble executive who is affiliated with an economics research project of the Center for International and Strategic Studies, a prominent Washington, D.C., think tank. 

Miller adds the obvious: such imports are “absolutely essential to the health of American manufacturing.” That means that American workers’ jobs depend upon access to the global economy. 

So, the question is: if imports are so essential to our daily lives, and our domestic manufacturing jobs are dependent upon it, why is international trade so feared and despised by many Americans?

That brings us to next week’s class — the “political” part of political economy, and why trade politics can be so difficult. Besides a few minutes of homework involved with looking up the definitions of Price Discrimination and International Price Discrimination, I’d ask that you visit my www.rushfordreport.com and search for an article from August 15, 2003, that I wrote for the Wall Street Journal: “The Politics of a Dying Industry.” You might also be able to find it via a Google search.

That column helps explain why the lives of decent, hard-working people who were brought up to work in textile mills in the American South were upended as the mills became globally uncompetitive. 

And please check out the website for the World Trade Organization. In class three we’ll talk about what the WTO does — why it is so important, and why it is now being either neglected or deliberately undermined by some key world leaders. This is the big picture. It takes some effort to understand why the WTO is so important. I suggest that anyone would benefit by plunging into the subject.