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SCI LIBRARY

Pollard's Brilliant Free Trade Speech!

Harry Pollard



[Part 1 of 2 / 1992]


RICE COOKIES


The Gulf war isn't the only case of the United States demonstrating the awesome strength that belongs to a modern superpower. We flexed our muscles and stopped our citizens from eating Italian pasta. This aroused the European Common Market which promptly heightened its image by preventing its citizens from eating Californian fruit and nuts.

Meantime, Jamaica sold us the 970 galions of icecream a year it is allowed to sell us, while Mexico sold our women the alLowable 35,292 bras.

This is your government at work and this is the trade war. We pay grown men and women large amounts to wage it against ourselves. If it seems funny I fear we must respond with hollow laughter.

In the whole of Indo-China, we have one friend. Not VietNam, nor Laos, nor Cambodia. Of course it is Thailand, whose major crop is rice and whose principal customer is the US. To ensure the rice growers of California would use all their heavily subsidized water and live well at the expense of the American consumer, we stopped the Thais from earning a living by closing our market.

On what grounds? -- Our Commerce Department, after exhaustive study, found that the Thai government price support system gave the Thai farmer a subsidy of 0.004%; the cooperative assistance program provided a subsidy of 0.009%; a mortgage program was equivalent to a 0.02%; discounts to the millers provided a 0.01% subsidy, and on and on and on. Your taxes are not wasted, this is important work.

All in all, the Thais were subsidizing their rice farmers about $100 a year. And while this potty analysis was going on, we were giving our own rice growers about $200,000 a year to keep the wolf from the door. Not, that they needed help. Even before the gold was poured into their bank accounts, the average full-time grower was a millionaire.

And next time you hear of the vicious refusal of the Japanese to import American rice, remember that in 1986, for example, the U.S. government spent close to $1 billion to flood world markets with American rice. This depressed world prices by half and probably bankrupted the Thai farmers whose rice scared us so much.

If you were Japanese, would you allow your basic food to be in the hands of these maniac Americans?

Anyway, now you see why we need to give subsidized water to the Californian rice growers who are growing rice in our deserts.

THE SITUATION


I should mention that most of the figures I use are from information provided by the Commerce Department and the Federal Trade and International Trade Commissions.

First thing is to place international trade in perspective. About the same number of American workers face direct import competition as produce for export. So, every job ‘saved' by tariffs, quotas, or other political intervention places another job in jeopardy.

And these ‘jobs in jeopardy' represent efficient companies. When a competitive business is trashed to keep an inefficient operation alive, economic vitality is lost. An economy cannot provide a good standard of living when political policy deliberately reduces the general productivity of its workers. We are the largest exporter in the world. In the last half of the 1980's we doubled our trade. As Peter Drucker said, for this to happen to a little country wouldn't attract attention, but when this ‘doubling' happens to the foremost trading country in the world, this is astounding.

The problems we confront are not economic, but political. There are two directions for economic policy. We can choose the market, or we can choose privilege. ‘Privilege' is a technical term used by Georgists to mean ‘private law' (privi - lege). Privilege is legislation that benefits one person at the expense of another. Protection, without exception, is privilege.

PHONE BUSINESS


This is the way it works. When Motorola wanted its cellular phones in Japan, it put all its money, effort, and industrial knowhow behind the project. It contacted Washington and gave $100,000 to Republican candidates.

Carla Hills was President Bush's trade top gun. She handled the attack. The media bulged with stories about the Japanese refusal to allow our telecommunications products to be imported. For ‘telecommunications products' read Motorola cellular phones.

The plot thickens. Japan routinely alters its cellular phone frequencies for the American market. Motorola insisted Japan should install the Motorola frequency in the Tokyo corridor -- the most important cellular market. This is like Ford insisting that, for the convenience of Ford, we buy 3 wheel cars.

Carla proceeded to use Super 301 to threaten a 100% tariff on a list of Japanese products ranging from burglar alarms to sunscreen. This would mean that American burglars wouldn't feel threatened by the police, but they would be at risk from skin cancer.

Incidentally, Japan wasn't the only target. Carla snarled at India and Brazil at the same time. Brazil was ordered to buy more of our goods, or else! Let me point out that Brazil was selling her goods to us to get dollars to meet the interest payments she owed us. If she bought our goods, she would have no money to pay the mortgage. A scenario we'll meet again and again is the unconcealed ignorance displayed by the clowns who claim to be our leaders. They think in linear fashion, completely unaware of consequences that ripple through the economy.

Well, instead of telling Carla to ‘Get Lost!', Japan caved in, gave Motorola its special frequency, and the company sold its American cellular phones. Well, not exactly. The phones Motorola sold to Japan were actually made in Malaysia.

THE CONTESTANTS


In trade, as you might imagine, we have the edge in some areas of production and they have the edge in others. Their advantage rests in things like footwear; apparel and textiles; some electronic goods; basic iron and steel; and motor vehicles. We beat the pants off them in agriculture, chemicals, office and computing machines, and engines. We're not far behind in electrical machinery, plastics and legal drugs. We also sell services. We sell our brains.

In the 20 years up to 1980 our exports of services increased from about $350 million in 1958 to $26 billion. It is still rising. It seems we choose to earn our wages, not at the coal-face, but in air-conditioned offices. One of the Bells recently installed a telephone system -- for the whole of New Zealand. General Electric shows us a commercial, with subtitles. We need the subtities, because the commercial is seen on Tokyo television, where GE recently installed a power system they say is the largest export order they have ever had. I don't know what hardware power was involved, but I know the Japanese bought American brain-power.

SMOKESTACK SCAREMONGERS


Now, we are told that providing services is a pretty bad thing. We are likely to lose interest in our basic industries. These are the dirty, often dangerous, jobs. Our ‘smokestack industries' are declining we are told which spells doom for the U.S.

I've noticed that most of the people who deplore our loss of smokestacks haven't got their hands dirty in years -- except in a figurative sense. They may have dabbled in some dirt to get pocket money during college, but to go everyday, every week, all year, to a place where molten steel can burn you, or jagged metal can cut you, or the roof can collapse and bury you in coal dust, is not what they want to get used to. They feel others should do it. It's good for the country.

They aren't keen for their own kids to take honest work at the bottom of the pitshaft. They send them to college, there to learn how to wear a white coat in the laboratory, or a pressed suit in the executive suite. Honest toil at the coal-face is something other patriotic kids should do.

The farmers of free trade England, in all weathers worked long underpaid hours to produce half the food the English ate. The other half was produced in one square mile called the City of London by well-dressed and well-paid businessmen working from 9 to 3. You can judge which is better. I've already made up my mind.

Incidentally our proportion of industrial workers, about 25%, hasn't changed much in the last 30, or 40 years. About 40% of their production exported and their business depends on imports, for most of our imports supply our factories and not directly the retail market. Raise the price of imports and you'll make it harder for industrial workers to make a living.

JAPANESE COMPUTER DOMINANCE


But back to brains. We are in the business of brains.

Chips & Technologies is one of our major chip manufacturers, except they don't actually make any. They conceive the chips, they plan the chips, they design the chips. Then, they send them to Taiwan, or somewhere (it doesn't matter) to be made. They even send people to train and oversee production. In due course they get the chips back. Now, where is the profit in these chips? Not in the semi-skilled workers of the production line, but in the work done by Chips & Tech in the U.S.

We sell our brains.

About 95% of all the software in the world is American.

Between 80-90% of the computer operating systems in the world are American. Bill Gates didn't become a multibillionaire just selling to us.

To use this software, you need the right hardware. Some 80-90% of the CPU's in the world are American. These are the processing units in every computer that make it go. Intel has such a lock on CPUs that other American companies are desperately seeking alternatives to the Intel monopoly.

All those Japanese computers that are taking over the world have little Intels in them. Or, little Motorolas. And also Bill Gates little MSDOS's to run them.

JAPANESE COMPUTER INDUSTRY


The monolithic Japanese computer industry, which scares the wits out of dangerous people like Gephard is 40% American -- and climbing.

Hewlett-Packard has been there since the 60's. They joined a Japanese computer company to learn the ropes and are still partners, except their share of the firm has gone from 25% to 75%.

Apple was almost unknown in Japan until several years ago, said Scully, former Apple CEO. He didn't say why, but it was probably because their software was written in English which few people could read. Lotus software was in Japanese. For a time they were the #1 software firm in Japan. Apple must have learned. In 4 years their sales increased to $400 million a year.

IBM in Japan recently had had a bad year. Sales down 21% in recession times. This cut their profit to $1.1 billion. This is on sales of less than $11 billion.

They hope things will improve.

Perhaps we should deal with the Japan thing right away.

There are about 1,300 American businesses in Japan. If you added (though why you should want to I can't imagine) the American business done in Japan to our exports to Japan, then compare them to Japanese exports to us, plus Japanese business here -- it would be about equal. If anyone cares.

Actually the only organization that does care is the governent. Numbers like Gross National Product, Consumer Price Index, and Trade Deficits mean nothing to most people, including manufacturers and other businessmen. They are for governments -- and they are mostly wrong.

One other point about how we buy. The Japanese, on a per capita basis, buy more from us than we buy from them. They buy $394 per capita from us, we buy $360 from them.

Japan is one of the largest importers in the world. Next to Canada, they are our best customer. If you listen to the clowns in Washington, you'd believe they only export, never import.

Ho, Ho, Ho, -- THE TRADE DEFICIT


Nevertheless, the biggee in trade statistics is the merchandise trade deficit. Overall, we get more goods from Japan than we send them. Now I happen to think that's good. Politicians don't. What we do is to send them dollars to pay for the extra they send us.

Senator Riegle, I think of Michigan, trumpeted that we've exported hundreds of billions of dollars worth of jobs to Japan. Instead of spending them here where they would create jobs, we sent our dollars and jobs to Japan. I suppose we have to expect this kind of nonsense from people who are doing the job they are paid to do -- by lobbyists, but let's look at those dollars in the hands of the Japanese.

I wonder what they do with them?

Put them under a mattress for a rainy day? Use them for monopoly money? What they do with them is to use them to buy oil from the Arabs. The Arabs use them to buy machinery from Germany, which uses them to buy insurance from Britain, which spends them in the U.S.

We forget that dollars can only be spent here. Sooner, or later, they come back here. This is the only place they can be spent.

Trade statistics are obviously put together by the people who run the House bank. Exports are poorly counted, for who cares, and they are much under-estimated. Imports are carefully counted by the customs guardians at the gates -- all 17,000 of them.

But, there are built-in inaccuracies.

PROTECTION IS EXPENSES


Make no mistake about it. Protection costs us an arm and a leg. But, it does it invisibly by raising prices. Many economists are now suggesting that if we feel that industries must have help, they should not receive it with under the counter tariffs, but with direct subsidies, direct grants of money. At least, these would appear in the accounts and be visible.

Henry George made that suggestion 100 years ago in what is probably the best argument ever written for free trade -- his "Protection or Free Trade". I am not sure he would echo the sentiment today. When he made it, the budget was considerably smaller and a subsidy would loom large in the books. In modern budgets it would disappear among the other billions.

COSTS


The tariff operates invisibly and harmfully to depress the wages of the American worker. A study in 1986 by the Federal Reserve Bank of New York reported that higher prices in protected industries were an effective income tax surcharge ranging from 5% on the wealthy to a whopping 65% on the poor.

Just the protection of textiles lays heavy on the American worker to the extent of some $20 billion each year. That's $80 each for every man, woman, and child in the country. This burden is heavily carried by the poor. Tariffs hit cheaper clothes harder than luxury items -- which often have lower rates. Congressman Tom DeLay estimates that protection cuts the purchasing power of those near, or at, the poverty line by 32%.

BUYING JOBS THE HARD WAY


We should talk about steel. Here's what our free market friend, former President Reagan said:

"In responding to this pressing import problem, we must do all we can to avoid protectionism, to keep our market open to free and fair competition... This administration has repeatedly ... committed itself to resist ... protectionist pressure ... reduce barriers to trade ..."

"However, I have decided to establish a government policy for the steel industry ... which would enable (the steel industry) to return to a level playing field, one in which steel is traded on a basis of market forces ...".

He promptly defined market forces as imports of 18%. The job description for President includes knowing what market forces will allocate.

Government policy for steel pushed up the cost of living to little purpose. We saved the jobs of the steel workers with tariffs and quotas. To save about 21,000 jobs cost us $113,000 per job per year. Trouble was that it also lost 54,000 jobs in other industries, jobs that were lost because steel prices were higher.

When a basic industry suffers a cost increase, everyone else pays -- and often demands protection. Protected steel is expensive, which raises the price of cars and trucks. So, they need protection from imports made with cheaper steel. This raises costs for everyone who uses cars and trucks -- which is everybody. Soon, there are more demands for protection.

Yet, as big steel falters, so does little steel do well. Around the country, 'mini-mills' are proliferating and they offer some interesting comparisons. The average American steelworker produces 350 tons each year. His Japanese counterpart knocks off some 750 tons each 12 months.

The American mini-mill worker churns out more than 1,200 tons per capita. Now the problem is that the workers in the mini-mill are often not unionized and they tend to be enthusiastic. Workers aren't paid the union contract's $22.50 per hour in wages and benefits. They must make do with a measly $17. But the plants are modern, efficient, and have already captured 20% of the market.

They are efficient, so we should support them, right? Well, they are converters and rely on imports of scrap and basic steel, so the protectionists are in full cry for more quotas on imported semi-finished steel and scrap. This led West Coast steelmen to threaten closing, or a move to Canada, if such restrictions are enforced.

Again, the battle is between the efficient and the inefficient, with the political privileges using going to the latter.

SERVICING THE AUTO INDUSTRY


The automobile industry uses a lot of steel. We all know the American love of the automobile. In recent years, however, this affection has turned from the respectable union with a Detroit debutante to a rather more satisfactory relationship with a Japanese geisha.

To battle this problem came voluntary restraints on Japanese imported cars. Just as an unfavorable balance of trade means a favorable balance, and a progressive income tax means that it's regressive, so does a voluntary restraint mean it's involuntary. This is political doublespeak. Watch for it, just as you found it in the other "1984".

Those voluntary restraints hurt us. As the Wall Street Journal put it, buying a car became a "war zone" for buyers and a "gold rush" for the dealers. Yet, what American is not willing to sacrifice for the good of the country?

The car companies were certainly prepared to sacrifice. To show their gratitude, they raised their prices. In September 1984, General Motors quietly raised its prices 2.3%. The idea appealed to them so, four months later, they raised them another 2.3%. Doesn't seem much -- 2.3% -- but each increase was worth about $1 billion more to GM.

Ford might be #2, but it knew a good thing when it saw it. It also annouced a 2.3% increase. All these auto executives must have gone to the same business school. However, Ford had a better idea. It announced a 2.3% increase, then actually raised prices by 5%.

Chrysler, under Iacocca, was of course a class act. So, they announced a 5.7% decrease, then added $402 to the price. Now, that's class!

It turned out well for Ford. I remember the LA Times business news reporting that Ford had $7.1 billion in its hot little hand and was looking for something to buy.

None of the companies were interested in the consumer, only in spending their illgotten gains. The politicians optimistically figured that the car companies would use our money to upgrade their factories. That is, of course, a laugh -- another hollow laugh! GM bought a piece of Japanese Suzuki. Ford built two factories in Europe. Chrysler bought aerospace companies.

But, at least the political dealing saved jobs. The US International Trade Commission figures the quotas saved some 44,000 auto jobs. They also figured the four year cost to American consumers was $15.7 billion which works out at $357,000 a job saved.

Only problem was that higher prices led to lower sales by about a million cars which lost about 50,000 jobs.

THE PROFITS OF PROTECTION


How much more per car did the restraints cost the American buyer? Even the Los Angeles Times did a survey. They asked the dealers. The IMF saw a $1,650 rise in 1984 alone. I prefer more basic figures.

Asahi, the Japanese newspaper, reported that f.o.b. dockside prices of Japanese autos had increased from $4,300 in 1980 (before the restraints) to $6,800 in 1984. That's $2,500 extra per car. This doesn't mean that the 'average' selling price in the US went up $2,500. What, without doubt, it meant was that the Japanese were sending bigger and more expensive cars within the quota restrictions. So, the price of the Honda Civic went up, say $1,500, but there weren't any to buy. You had to spend a lot more money for an Accord.

Needless to say, Japanese auto manufacturers loved this American nonsense. They made 45% more on a car sold in the U.S. than the fiercely competitive Japanese market. We actually taught the Japanese to screw us! That's an economic term related to protection.

I must warn you we are entering another period of forced voluntary restraints with Japan. I wonder what our money will buy this time for GM, Ford and Chrysler.

MICROFICHE AND CHIPS


But, in one area, there is little disagreement. Everyone knows the Japanese destroyed our computer chip industry by flooding our markets with cheap chips. People who don't even know what a chip is know that. Unfortunately, it's not exactly true, The chips are Drams -- simple little memory chips which fill every computer. Probably, they should all be made in Korea or Taiwan.

Let's go back to 1984. This is a US Semiconductor Industry Association statement about their failure to sell chips in Japan. "In all markets except Japan," it says, "the US semiconductor industry outperforms its Japanese counterparts by a wide margin: In Europe, by nearly five to one; in the US and Canada, by six to one; and in the rest of the world, by three to two in 1984."

Now, this statement from the official body hardly sounds like the croak of a dying industry.

In 1984, PCs were selling like crazy and the D-Ram chip industry was doing so well, investors rushed to board the chip express. Capacity increased by 43% and the industry made $1.3 billion profit. But already the market was being saturated by ever cheaper and better chips. This was a volatile situation.

In 1985, the PC stopped selling, chip demand dropped, and 64k chips dropped from $3.50 to 50 cents as orders dropped by 50%. The chip plants looked out at a declining market. All the plants, for the Japanese found themselves sitting on enough inventory (93 million chips) to supply US industry for 3 months.

Apple alone had bought heavily and was caught with millions of dollars of chips as the bottom dropped out of the market.

Chip producers, such as those old American stalwarts like Fujitsu, Hitachi and Toshiba, suffered horrendous losses. Hitachi, by the way, had aggressively told its salesmen to underbid any opposition quote by 10%. As it courted bankruptcy, no doubt it changed that policy.

As did the top five American firms, who saw their $1.3 billion profit of 1984 drop to a $343 million loss in 1985. Smaller firms suffered too. Advanced Micro Devices not only cut back on hours and wages, it really sacrificed. It cancelled its Christmas party, which in 1984 had cost them about $1 million. They knew how to cut back.

So, we got the Semiconductor Arrangement which was a cartel put together by the U.S. and Japanese governments to fix world prices. This gave American chip makers the opportunity to sell their chips in Japan where 93 million chips were sitting on the shelves.

One month after the 'Arrangement', a deputation of chip users went to Washington to try to reverse the arrangement, but they couldn't get the time of day. The legislators wouldn't budge. They had the courage of their convictions, which nowadays are mostly in minimun security prisons.

Thousands of chip users lost their jobs because of price fixing, which however did creat new jobs. Chip smugglers with suitcases full of chips flew across the world satisfying the market.

It also helped to ruin a large sector of the PC world, already hammered by the '85 recession. I personally, last bought chips for $2.70. I went without when they soared to $12-13. As I recall, this could make 4 megabytes of memory cost close to $2,000. Memory board vendors were selling their boards empty of chips. With them, they wouldn't sell the boards.

Time went by and the Japanese market cried out for U.S. CPUs. A Nippon Electric spokesman pointed out the Pact was worthless as the U.S. could not ven meet current demand. Nevertheless, the clowns were working to extend the Arrangement for 5 more years and were demanding a still larger share of the Japanese market. The Financial Times of London compared the U.S. actions to Mafiosa racketeers.

Part 2