Americans Sour on Trade

Last Wednesday I did a post on currency and finished the posting with a comment that history teaches us some lessons about trade wars...they usually lead to fighting wars.

Today the very top headline in the Wall Street Journal is this;

Americans Sour on Trade
Majority Say Free-Trade Pacts Have Hurt U.S.; Wedge Issue in Some Races

The American public, already skeptical of free trade, is becoming increasingly hostile to it.

Across the country, politicians are responding accordingly, and that is clouding prospects for congressional approval of pending free-trade pacts with South Korea and Colombia. It is also prompting concern among U.S. businesses reliant on the rest of the world for growth.

While the rhetoric may be heated by approaching congressional elections, the sentiment isn't likely to disappear after November. "We are entering a very dangerous period in which we could actually slip backwards and see the undoing of some of the progress that has been made in recent decades toward a more open world economy," said William Galston, a former adviser to President Bill Clinton now at the liberal-leaning Brookings Institution think tank in Washington.

See it here; http://online.wsj.com/article/SB10001424052748703466104575529753735783116.html?mod=googlenews_wsj

Some will say, "So Dennis, I don't get it. What the heck does this have to do with anything?"

Here is a VERY simple explanation; Let's say you have a business making cabinets for homes. You have been in business for 25 years and along the way added 4 employees to help create your pre-made cabinets that you sell to Menards and Home Depot for them to sell to homeowners. For the first 20 years of business your business model provided a very nice middle income wage for you and your workers.

Now about 5 years ago Menards started buying similar cabinets from China...made by a company paying it's Chinese workers $1 per hour and giving them no Social Security, no unemployment benefits, no health insurance...nothing except that $1 per hour.

You go to Menards and aske them how you can earn their business back and they tell you that in order for that to happen, you would have to cut the price on your cabinets by 50%. You realize that without the Menards contract you are going to have to fire 3 of your employees AND take a sizable pay cut for yourself. So you lower your price and then go to your employees and lower their wages...telling them that they can either work for 25% pay cut or you will have to let them go. With no jobs out there...they have no choice. You also give yourself a 25% pay cut to keep things going.

Now this year, Menards calls you back in and says you have to cut your prices by 25% more because the Chinese supplier has lowered their prices. By now you have taken out a small business loan, a home equity loan and maxed out your credit cards during the lean times of the past 4 years....hoping in the back of your mind that your situation would turn around. But now you realize you are out of business. You lay off your employees and soon the credit card companies and your mortgage company start calling with a harassing tone to their calls. Your life as you new it is now over....AND YOU ARE BITTER MAD!!

Of course the cheaper cabinets felt really good to those of us who were out buying cabinets at Menards. In the short term, we don't really care WHY the cabinets are cheaper today than they were 5 years ago...we are just happy they are cheaper because that leaves more money for us to spend on the bathroom.

WE DON'T REALIZE THAT WE ARE ALL SLOWLY CUTTING OUR OWN THROATS BY MAKING THE AMERICAN LIFESTYLE UNSUSTAINABLE!

We simply can't afford to have a healthy middle class in this country when the Chinese, the South Koreans, the Vietnamese, etc... are happy to show up at work every day for far less than we can afford to work for.

So we complain to our congressman and senators...and they start to look into the Chinese business model. They also start to look at the Chinese currency and how China may be fictitiously keeping the value low...so Menards see their cabinets as even cheaper.

The Senators complain to China...then they threaten...then a trade war can ensue....then a fighting war can ensue. We seem to simply keep repeating the same patterns.

Then see this sentence from the above article;

"China is cheating," she said in an interview. "We need to send a message that they need to play by the rules."

If you say China is cheating...then essentially you are calling them cheaters. Can you see how this is all unraveling...since we owe the "cheaters" $ 1 trillion dollars...and we desperately need them to extend that loan into the unforeseeable future?

What kind of "message" do you send them as you balance on a tightrope that is already sagging and swaying?