FREE TRADE AND MORAL CAPITALISM. Caux Round Table Statement on Trade Policy p. 7. Trade Concerns from Germany to Japan p. 4. Trade and Populism p.

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1 VOLUME VII, ISSUE IV APRIL 2017 A NEWSLETTER FOR THE CAUX ROUND TABLE NETWORK LOOKING AT BUSINESS ABOVE THE CLUTTER AND CONFETTI FREE TRADE AND MORAL CAPITALISM Trade Concerns from Germany to Japan p. 4 Caux Round Table Statement on Trade Policy p. 7 Adam Smith on Trade p. 11 Trade and Populism p. 9

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3 Pegasus Stephen B. Young 3 Introduction Erik Sande 4 Trade Concerns from Germany to Japan Caux Round Table 7 Caux Round Table Statement on Trade Policy Professor Robert T. Kudrle 9 Populism and Trade Stephen B. Young 15 Adam Smith on Trade Ralph Hinton 18 The 100% American Erik Sande 19 Outro: The Canary in the Coal Mine

4 INTRODUCTION The need to once again raise the standard of free trade as necessary for a moral capitalism has taken me by surprise. But with the rise of nativism and populism as a response to a decade of disappointment in globalization for middle and lower classes in OECD countries, such as the U.S. and U.K., governments are putting protectionism on the table of interstate relations. As noted in press excerpts below, protectionist demands are being negotiated. At a macro level of human nature, I suppose this assertion of protectionism simply responds to innate fears of others and resulting demands for protective autonomy. But the power of such autonomy to give protection is illusory. The individual alone is always more vulnerable than when in community. The American philosopher William James reminded us that The community stagnates without the impulse of the individual. The impulse dies away without the sympathy of the community. Nowhere is this more true than in economics. No one can produce what he or she needs to live. Not even our most ancient ancestors. Building and tending fires to cook food the better to absorb protein was a joint effort. Hunting was more successful when done in groups. Defense of huts and sleeping quarters was more successful if coordinated among many. Trade and exchange give rise to specialization and division of labor and those, in turn, give rise to the wealth of nations, argued Smith. In 1986, the Caux Round Table (CRT) came together for the first time to discuss issues of free trade. The first ethical principle advanced by its founders was that moral responsibility called for advancing welfare through trade. Later, in 2000, the CRT issued a statement on free trade. That statement is included in this issue of Pegasus. Also included is an article from University of Minnesota Professor Robert Kudrle on the current state of Populism and Trade. Finally, we bring to you as a reminder to our political leaders around the world the classic argument of Adam Smith for free trade and against mercantilism. His observations and conclusions have stood the tests of 200 years of world economic history and the growth of capitalism. Why should we therefore forget them in our time? Stephen B. Young Global Executive Director Caux Round Table Adam Smith put this reciprocal dependency at the heart of his understanding of the genius of capitalism as a system for human flourishing: we need the baker and the butcher for our bread and meat and they need us for their money. We are always better off in trade than in making things for ourselves. 3

5 Trade concerns from Germany to Japan A summary of recent trade-related articles and topics Erik Sande On March 31, 2017, the Wall Street Journal (WSJ) published an article entitled, Germany Hits Back at U.S. Proposals of Anti-Dumping Tariffs on Steel Imports. Germany s Foreign Minister, Sigmar Gabriel has raised issue with the use of Anti-dumping duties against German steel companies. Per the WSJ: According to the WSJ article, The Department of Commerce said Thursday that certain steel producers in Europe and Asia were dumping imports of carbon and alloy steel plate in the U.S. and proposed duties ranging from 3.62% to %. However, this is just one instance of trouble brewing in the previously smoothly running engine of our globalized economy. The U.S. government is apparently prepared to provide American companies with unfair competitive advantages against European and other companies, even if this is contrary to international trade law, Sigmar Gabriel said in a statement. This came after a wide-ranging anti-dumping tariff action by the U.S. Department of Commerce against steelmakers in Germany, Austria, Belgium, France, Italy, Japan, Korea, and Taiwan. This is only one example of the fear felt by many, including Germany and other EU members that America First agenda being pursued by President Donald Trump could boost U.S. protectionism and trigger a trade war President Trump has espoused rhetoric that emphasize[s] U.S. sovereignty over its trade policy and complained about international trade and multilateral institutions. This sentiment distrust of the economic system and concern for one s own country s economic needs has been echoed in many nations around the world. German Foreign Minister Sigmar Gabriel Source: Wall street Journal, European Pressphoto Agency The article goes on to note that, [AG der Dillinger Huttenwerke spokeswoman Ute Engel] said the U.S. market played a limited role in Dillinger s portfolio. The duties are nevertheless painful, she said, because such protectionist measures affecting many countries will re-route more steel products into the EU, where the market is already struggling with excess capacity. 4

6 This will be interesting to monitor moving forward as it is the first anti-dumping procedure in the steel sector under the new Trump administration. Furthermore, what starts as a trade dispute focused on steel might not always stay in that same sector. That is similar to a case with U.S., Canada, and milk production. According to a Reuters story of April 18, Trump vows to back U.S. dairy farmers in Canada trade spat, Canada s dairy sector is protected by high tariffs on imported products and controls on domestic production. These pricing policies have led to numerous complaints in the past from other dairy-producing countries. Per Reuters: Canada s dairy farmers agreed last year to sell milk ingredients used for cheese-making to Canadian processors, which include Saputo Inc and Parmalat Canada Inc at prices competitive with international rates. The pricing agreement was a response to growing U.S. exports of milk proteins that were not subject to Canada s high tariffs. Commerce Department imposed preliminary duties averaging 20% on imports of Canadian softwood lumber, used to build houses. A rise in this type of brinksmanship and protectionism will, ultimately, be bad for the global economy as a whole. Again, from the Economist: Canada is vulnerable. The United States and Canada traded $635bn-worth of goods and services last year. Three-quarters of Canada s goods exports went to the United States. Its access to the American market helped attract C$37bn ($27bn) of net foreign investment in The reconstruction of trade barriers would put all that in jeopardy. The Canadian dollar weakened after Mr Trump fired off his salvoes. Stephen Poloz, the governor of the central bank, told a committee of the Canadian Senate in April that American protectionism is the biggest threat to the economy. While the U.S., and other countries, complain about Canadian dairy policies, Canada (and others) complain about the subsidized market America has created for cotton seed, corn, and sugar. Contrary to the glut of milk in the global market, Japan has recently faced a severe shortage of potatoes. According to the Wall Street Journal, Japan s Potato Panic, Japan has very strict regulations essentially non-tariff barriers to trade for the importation of fresh potatoes. Japan needs fresh potatoes not the dehydrated or frozen potatoes that currently make up the bulk of imports to make a snack favorite; potato chips. Per the Journal: Japan banned the import of American fresh potatoes in 1950, ostensibly because of concerns about the potato wart bacteria and the cyst nematode. That was part of a wave of protectionism based on spurious claims. Tokyo justified keeping out U.S. beef because Japanese intestines were supposedly unable to digest it. Source: The Economist Canadian authorities have maintained that the U.S. farmers problems are due to overproduction, not the Canadian tariff system that is at fault. Either way, the United States has moved to other sectors. As reported in the Economist: Alongside dairy farmers, [President Trump] put loggers and energy producers on his Canadian enemies list and launched an investigation of imported steel, of which Canada is the biggest single supplier. On April 24th, the United States The current drought of potatoes due to a bad local harvest is causing potato chip makers to close production, leading to a run on potato chip stocks in stores. One way to eliminate this local production concern is to diversify inputs via trade policies and agreements. The Trans-Pacific Partnership (TPP) would have contain[ed] a mechanism to resolve phytosanitary issues i.e. unjustified import restrictions based on disease. Potato Grower magazine estimated TPP would allow U.S. exports to grow to $50 million annually within five years. This is perhaps the clearest example of the (sometimes) double-edged sword of trade while domestic producers of goods and services are perhaps spared competition with Japanese (and other Trans-Pacific) suppliers, other produc- 5

7 ers lose out to lucrative markets. As the Journal concludes, Japanese snackers could soon be munching on wasabi-flavored chips made with Australian-grown potatoes. A wide selection of Japanes potato chips Source: Tomohiro Ohsumi/Bloomberg In our integrated global trade system, disputes such as these should be taken to the WTO for deliberation and a ruling. However, as Jaime Castaneda, senior vice president for the U.S. Dairy Export Council explained, A WTO complaint would be a last resort because it would take five or six years to come to any resolution. With the world being as flat as it is now and with populist concerns in almost every nation this type of multi-sector retaliation will no doubt be on the rise. 6

8 Caux Round Table Statement on Trade Policy (Adopted by the Caux Round Table Global Governing Board February 2000) Introduction The Caux Round Table (CRT), a network of senior business leaders from both industrialized and developing nations, believes that business must take a leadership role in developing a more fair, free, and transparent society, leading to greater world prosperity and sustainability of resources. The CRT seeks to motivate and mobilize business leaders to be a force for positive change. To this end, in 1994 the CRT published its Principles for Business. Principle 5 called for support of multilateral trade. Aware of deep concern over the impact of world trade as expressed in protests against the World Trade Organization in Seattle at the end of 1999, the CRT decided in February 2000 to re-affirm its conviction that free, multilateral trade over time helps to empower people throughout the world and improve the lives of the poor everywhere. The opinion of the CRT is contained in the following position paper. Free trade in goods and services worldwide is seen as an ultimate foal for business relationships between all nations, based on the concept of fair dealing. Free trade is acknowledged as an essential requirement in wealth generation and is a fundamental element in achieving vigorous national and international economies, and in creating employment. To establish the basis of fairness, international trade requires to be undertaken within a framework of rules which will have to be negotiated and renegotiated from time to time as political, social, and economic conditions develop. These rules should aim to eliminate competitive distortions and embrace ethical practice in the general conditions applying to all players while leaving incentive to achieve competitive advantage through individual business endeavors. It is believed fundamentally that free trade should be sought progressively within an international framework of such rules, with the opportunity for concurrent development of regional agreements. These would address the need to develop positively more localized trade where disparate conditions may otherwise be obstacles provided multilateral development is not impeded. For instance, NAFTA provides a basis for freer trade between the USA, Canada, and Mexico, despite substantial differences in underlying economic factors and, similarly, regional agreements between countries in the Pacific area or between the European Union and Easy European countries are seen as necessary developments, provided these are not inconsistent with the underlying development of an international, multi-lateral basis for freer trade. Failure to achieve this, it is believed, will encourage a reaction towards bi-lateral and localized trade agreements with the establishment of protectionist trade blocs. Historically, it was seen that the development of protectionism proved to be a source of economic decline, unemployment and international conflict. A critical milestone has been the establishment of the World Trade Organization. Every possible action should be take to strengthen it and to avoid bilateral disputes. 7

9 It is vital to establish this as a viable and credible institution through which to effect the development of future trade policy with a multilateral international framework. In particular the WTO is equipped with a strengthened disputes settlement procedure which would be used where bilateral resolution of differences is no possible or poses dangers either to the relations between the parties involved or to maintaining the multilateral outcome. Further pursuit of freer international trade must take account of emerging issues of growing importance. These include environmental, labor, social, investments and competition issues, as well as ethical business practices. Clarifying the linkages between trade and these issues to ensure that they are realistically and effectively addressed without becoming a means of disguised protectionism is of utmost importance. In some countries, corruption and lack of transparency inhibit the trust and confidence on which trade and investment depend. At the same time, developed nations should eliminate many subsidies and trade barriers which unfairly discriminate against less developed countries seeking, if necessary, other transitional means fro supporting producers. More active involvement in these issues by business leaders and entrepreneurs is encouraged. A strong correlation is seen between the development of trade and wealth on an international basis and the required generation of new sources of employment in all countries of the world. In pursuing these goals, the different needs in industrial and less industrial nations will have to be recognized and, at times, provided for transitionally without creating barriers against progress in the underlying direction of free world trade. 8

10 Populism and Trade Professor Robert T. Kudrle Populism and support for free trade seldom coexist. Despite survey evidence from Pew showing majority support for freer trade in the U.S., populist forces ascendant in both political parties those celebrating common sense over expertise blame trade and bad trade deals for the stagnant incomes of much of the U.S. population. reinforced by powerful business lobbying transformed a controversial idea, the value of open trade, into orthodoxy. That orthodoxy was largely embraced in all developed countries, and they prospered. A story well-known to economists captures the difficulty of the open trade case in political discussion. Nobel- prize winning economist Paul Samuelson, perhaps the most important figure in the mathematical formalization of economics, was once challenged by the famous mathematician Stanislaw Ulam to name a single social scientific proposition that is both true and non-trivial. Samuelson could not think of anything on the spot, but he later realized that the correct response was David Ricardo s doctrine of comparative advantage in international trade developed in the early 19 th century. It implied that two countries can both gain from trade regardless of their relative living standards. Samuelson wrote: That it is logically true need not be argued before a mathematician; that it is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them. Populists typically see open trade as an elite conspiracy, and there is much truth to that. In the first decades after World War II, freer trade gained widespread elite support. Some combination of experience with the disastrous Smoot-Hawley tariff of 1931, the drive for non-communist bonding in the cold war, and an increasing number of congressional staffers with some introductory economics more often than not from Samuelson s textbook all of it Willis C. Hawley (left) and Reed Smoot in April 1929, shortly before the Smoot-Hawley Tariff Act passed the House of Representatives. But a lot has happened since. In particular, the speed and magnitude of China s rise forced a rethinking of economic adjustment costs. Recent research reveals that in many commuting areas displaced local labor was not reabsorbed into the rest of the local economy. Instead, unemployment and reduced spending from the devastation of industries competing with Chinese imports caused a long term drop in the income of entire commuting regions. The rise of China was one-off, and industries such as clothing and furniture are not going to return to the U.S. But such vivid evidence certainly supports a trade skeptic who asks: what should I believe, your theory or my own eyes? In fact, of the 5.6 million manufacturing jobs lost between 2000 and 2010, only 13 percent was due to trade rather than technological change or shifts in taste (and U.S. manufacturing output 9

11 grew substantially). Nevertheless, when trade is a central cause of pain in some places, it is easy to blame trade excessively elsewhere. That is just what many politicians have done recently, and a substantial part of the public believes them. The abandonment of the Trans-Pacific Partnership was both an economic and a broader foreign policy mistake. A solid front in the Pacific would have set trading relations on a liberal path by either isolating China or obliging it to embrace greater transparency and less state interference. But that is not to be, and it is very doubtful that the bilateralism promised by the Trump administration will prove an effective substitute. The elite conspiracy that dominated both major U.S. political parties is under siege. Increased openness and the greater general prosperity that it brings has at least temporarily stalled. Who will lead the U.S. back to genuinely progressive trade policies? Source: Thomson Reuters Robert T. Kudrle is the Orville and Jane Freeman Chair in International Trade and Investment Policy at the Humphrey School of Public Affairs. Kudrle is also an adjunct faculty member with the University of Minnesota Law School. He studies industrial organization, public policy toward business, and international economic policy. Much of his recent research has examined economic relations among industrial countries. He has served as a consultant and expert withness for the Antitrust Division of the U.S. Department of Justice and as a consultant to the Internal Revenue Service, Canadian Department of Consumer and Corporate Affaits, U.N. Center on Transnational Corporations, Overseas, Private Investment Corporation, Agency for International Development, and Urban Institute. 10

12 Adam Smith on Trade Stephen B. Young Sketch of Adam Smith Source: Wikimedia Book IV - Of Systems of Political Economy Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects; first, to provide a plentiful revenue or subsistence for the people, or, more properly, to enable them to provide such a revenue or subsistence for themselves; and, secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign. Chapter I - Of the Principle of the Mercantile System That wealth consists in money, or in gold and silver, is a popular notion which naturally arises from the double function of money, as the instrument of commerce, and as the measure of value. In consequence of its being the instrument of commerce, when we have money we can more readily obtain whatever else we have occasion for, than by means of any other commodity. The great affair, we always find, is to get money. To grow rich is to get money; and wealth and money, in short, are, in common language, considered as in every respect synonymous. A rich country, in the same manner as a rich man, is supposed to be a country abounding in money; and to heap up gold and silver in any country is supposed to be the readiest way to enrich it. Mr Locke remarks a distinction between money and other moveable goods. All other moveable goods, he says, are of so consumable a nature, that the wealth which consists in them cannot be much depended on; and a nation which abounds in them one year may, without any exportation, but merely by their own waste and extravagance, be in great want of them the next. Money, on the contrary, is a steady friend, which, though it may travel about from hand to hand, yet if it can be kept from going out of the country, is not very liable to be wasted and consumed. Gold and silver, therefore, are, according to him, the most solid and substantial part of the moveable wealth of a nation; and to multiply those metals ought, he thinks, upon that account, to be the great object of its political economy. In consequence of those popular notions, all the different nations of Europe have studied, though to little purpose, every possible means of accumulating gold and silver in their respective countries. Spain and Portugal, the proprietors of the principal mines which supply Europe with those metals, have either prohibited their exportation under the severest penalties, or subjected it to a considerable duty. The inland or home trade, the most important of all, the trade in which an equal capital affords the greatest revenue, and creates the greatest employment to the people of the country, was considered as subsidiary only to foreign trade. It neither brought money into the country, it was said, nor 11

13 carried any out of it. The country, therefore, could never become either richer or poorer by means of it, except so far as its prosperity or decay might indirectly influence the state of foreign trade. A country that has no mines of its own, must undoubtedly draw its gold and silver from foreign countries, in the same manner as one that has no vineyards of its own must draw its wines. It does not seem necessary, however, that the attention of government should be more turned towards the one than towards the other object. A country that has wherewithal to buy wine, will always get the wine which it has occasion for; and a country that has wherewithal to buy gold and silver, will never be in want of those metals. They are to be bought for a certain price, like all other commodities; and as they are the price of all other commodities, so all other commodities are the price of those metals. We trust, with perfect security, that the freedom of trade, without any attention of government, will always supply us with the wine which we have occasion for; and we may trust, with equal security, that it will always supply us with all the gold and silver which we can afford to purchase or to employ, either in circulating our commodities or in other uses. with those who have neither wherewithal to buy it, nor credit to borrow it. Those who have either, will seldom be in want either of the money, or of the wine which they have occasion for. This complaint, however, of the scarcity of money, is not always confined to improvident spendthrifts. It is sometimes general through a whole mercantile town and the country in its neighbourhood. Over-trading is the common cause of it. Sober men, whose projects have been disproportioned to their capitals, are as likely to have neither wherewithal to buy money, nor credit to borrow it, as prodigals, whose expense has been disproportioned to their revenue. Before their projects can be brought to bear, their stock is gone, and their credit with it. They run about everywhere to borrow money, and everybody tells them that they have none to lend. The quantity of every commodity which human industry can either purchase or produce, naturally regulates itself in every country according to the effectual demand, or according to the demand of those who are willing to pay the whole rent, labour, and profits, which must be paid in order to prepare and bring it to market. But no commodities regulate themselves more easily or more exactly, according to this effectual demand, than gold and silver; because, on account of the small bulk and great value of those metals, no commodities can be more easily transported from one place to another; from the places where they are cheap, to those where they are dear; from the places where they exceed, to those where they fall short of this effectual demand. If there were in England, for example, an effectual demand for an additional quantity of gold, a packet-boat could bring from Lisbon, or from wherever else it was to be had, fifty tons of gold, which could be coined into more than five millions of guineas. But if there were an effectual demand for grain to the same value, to import it would require, at five guineas a-ton, a million of tons of shipping, or a thousand ships of a thousand tons each. The navy of England would not be sufficient. When the quantity of gold and silver imported into any country exceeds the effectual demand, no vigilance of government can prevent their exportation. All the sanguinary laws of Spain and Portugal are not able to keep their gold and silver at home. No complaint, however, is more common than that of a scarcity of money. Money, like wine, must always be scarce A tulip, known as the Viceroy (viseroij), displayed in the 1637 Dutch catalog Verzameling van een Meenigte Tulipaanen. Its bulb cost between 3,000 and 4,200 guilders (florins) depending on size (aase). A skilled craftsworker at the time earned about 300 guilders a year. Source: Wikimedia Even such general complaints of the scarcity of money do not always prove that the usual number of gold and silver pieces are not circulating in the country, but that many people want those pieces who have nothing to give for them. When the profits of trade happen to be greater than ordinary, over-trading becomes a general error, both among great and small dealers. They do not always send more money abroad than usual, but they buy upon credit, both at home and 12

14 abroad, an unusual quantity of goods, which they send to some distant market, in hopes that the returns will come in before the demand for payment. The demand comes before the returns, and they have nothing at hand with which they can either purchase money or give solid security for borrowing. It is not any scarcity of gold and silver, but the difficulty which such people find in borrowing, and which their creditor find in getting payment, that occasions the general complaint of the scarcity of money. The importation of gold and silver is not the principal, much less the sole benefit, which a nation derives from its foreign trade. Between whatever places foreign trade is carried on, they all of them derive two distinct benefits from it. It carries out that surplus part of the produce of their land and labour for which there is no demand among them, and brings back in return for it something else for which there is a demand. It gives a value to their superfluities, by exchanging them for something else, which may satisfy a part of their wants and increase their enjoyments. By means of it, the narrowness of the home market does not hinder the division of labour in any particular branch of art or manufacture from being carried to the highest perfection. By opening a more extensive market for whatever part of the produce of their labour may exceed the home consumption, it encourages them to improve its productive power, and to augment its annual produce to the utmost, and thereby to increase the real revenue and wealth of the society. It would be too ridiculous to go about seriously to prove, that wealth does not consist in money, or in gold and silver; but in what money purchases, and is valuable only for purchasing. Money, no doubt, makes always a part of the national capital; but it has already been shown that it generally makes but a small part, and always the most unprofitable part of it. The Octavius was a British merchant vessel that was trading with China in the late 1700 s 13 These great and important services foreign trade is continually occupied in performing to all the different countries between which it is carried on. They all derive great benefit from it, though that in which the merchant resides generally derives the greatest, as he is generally more employed in supplying the wants, and carrying out the superfluities of his own, than of any other particular country. It is not by the importation of gold and silver that the discovery of America has enriched Europe. By the abundance of the American mines, those metals have become cheaper. A service of plate can now be purchased for about a third part of the corn, or a third part of the labour, which it would have cost in the fifteenth century. With the same annual expense of labour and commodities, Europe can annually purchase about three times the quantity of plate which it could have purchased at that time. But when a commodity comes to be sold for a third part of what bad been its usual price, not only those who purchased it before can purchase three times their former quantity, but it is brought down to the level of a much greater number of purchasers, perhaps to more than ten, perhaps to more than twenty times the former number. So that there may be in Europe at present, not only more than three times, but more than twenty or thirty times the quantity of plate which would have been in it, even in its present state of improvement, had the discovery of the American mines never been made. So far Europe has, no doubt, gained a real conveniency, though surely a very trifling one. The cheapness of gold and silver renders those metals rather less fit for the purposes of money than they were before. In order to make the same purchases, we must load ourselves with a greater quantity of them, and carry about a shilling in our pocket, where a groat would have done before. It is difficult to say which is most trifling, this inconveniency, or the opposite conveniency. Neither the one nor the other could have made any very essential change in the state of Europe. The discovery of America, however, certainly made a most essential one. By opening a new and inexhaustible market to all the commodities of Europe, it gave occasion to new divisions of labour

15 of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society. and improvements of art, which in the narrow circle of the ancient commerce could never have taken place, for want of a market to take off the greater part of their produce. The productive powers of labour were improved, and its produce increased in all the different countries of Europe, and together with it the real revenue and wealth of the inhabitants. The commodities of Europe were almost all new to America, and many of those of America were new to Europe. A new set of exchanges, therefore, began to take place, which had never been thought of before, and which should naturally have proved as advantageous to the new, as it certainly did to the old continent. Chapter II - Of Restraints upon Importation from Foreign Countries of such Goods as can be Produced at Home By restraining, either by high duties, or by absolute prohibitions, the importation of such goods from foreign countries as can be produced at home, the monopoly of the home market is more or less secured to the domestic industry employed in producing them. The modern Merchant ship Source: Flickr The general industry of the society can never exceed what the capital of the society can employ. As the number of workmen that can be kept in employment by any particular person must bear a certain proportion to his capital, so the number of those that can be continually employed by all the members of a great society must bear a certain proportion to the whole capital of the society, and never can exceed that proportion. No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it into a direction into which it might not otherwise have gone; and it is by no means certain that this artificial direction is likely to be more advantageous to the society, than that into which it would have gone of its own accord. Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can, both to employ his capital in the support of domestic industry, and so to direct that industry that its produce maybe of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. What is the species of domestic industry which his capital can employ, and of which produce is likely to be of the greatest value, every individual, it is evident, can in his local situation judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in what manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it. To give the monopoly of the home market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must in almost all cases be either a useless or a hurtful regulation. If the produce of domestic can be brought there as cheap as that of foreign industry, the regulation is evidently useless. If it cannot, it must generally be hurtful. It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make 14

16 The natural advantages which one country has over another, in producing particular commodities, are sometimes so great, that it is acknowledged by all the world to be in vain to struggle with them. By means of glasses, hotbeds, and hot-walls, very good grapes can be raised in Scotland, and very good wine, too, can be made of them, at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and Burgundy in Scotland? neither the one nor the other, but employs those different artificers. All of them find it for their interest to employ their whole industry in a way in which they have some advantage over their neighbours, and to purchase with a part of its produce, or, what is the same thing, with the price of a part of it, whatever else they have occasion for. What is prudence in the conduct of every private family, can scarce be folly In that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. The general industry of the country being always in proportion to the capital which employs it, will not thereby be diminished, no more than that of the abovementioned artificers; but only left to find out the way in which it can be employed with the greatest advantage. It is certainly not employed to the greatest advantage, when it is thus directed towards an object which it can buy cheaper than it can make. The value of its annual produce is certainly more or less diminished, when it is thus turned away from producing commodities evidently of more value than the commodity which it is directed to produce. According to the supposition, that commodity could be purchased from foreign countries cheaper than it can be made at home; it could therefore have been purchased with a part only of the commodities, or, what is the same thing, with a part only of the price of the commodities, which the industry employed by an equal capital would have produced at home, had it been left to follow its natural course. The industry of the country, therefore, is thus turned away from a more to a less advantageous employment; and the exchangeable value of its annual produce, instead of being increased, according to the intention of the lawgiver, must necessarily be diminished by every such regulation. Merchants and manufacturers are the people who derive the greatest advantage from this monopoly of the home market. The prohibition of the importation of foreign cattle and of salt provisions, together with the high duties upon foreign corn, which in times of moderate plenty amount to a prohibition, are not near so advantageous to the graziers and farmers of Great Britain, as other regulations of the same kind are to its merchants and manufacturers. Manufacturers, those of the finer kind especially, are more easily transported from one country to another than corn or cattle. It is in the fetching and carrying manufactures, accordingly, that foreign trade is chiefly employed. In manufactures, a very small advantage will enable foreigners to undersell our own workmen, even in the home market. It will require a very great one to enable them to do so in the rude produce of the soil. If the free importation of foreign manufactures were permitted, several of the home manufactures would probably suffer, and some of them perhaps go to ruin altogether, and a considerable part of the stock and industry at present employed in them, would be forced to find out some other employment. But the freest importation of the rude produce of the soil could have no such effect upon the agriculture of the country. The case in which it may sometimes be a matter of deliberation how far it is proper to continue the free importation of certain foreign goods, is when some foreign nation restrains, by high duties or prohibitions, the importation of some of our manufactures into their country. Revenge, in this case, naturally dictates retaliation, and that we should impose the like duties and prohibitions upon the importation of some or all of their manufactures into ours. Nations, accordingly, seldom fail to retaliate in this manner. To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but, what is much more unconquerable, the private interests of many individ- 15

17 uals, irresistibly oppose it. Were the officers of the army to oppose, with the same zeal and unanimity, any reduction in the number of forces, with which master manufacturers set themselves against every law that is likely to increase the number of their rivals in the home market; were the former to animate their soldiers. In the same manner as the latter inflame their workmen, to attack with violence and outrage the proposers of any such regulation; to attempt to reduce the army would be as dangerous as it has now become to attempt to diminish, in any respect, the monopoly which our manufacturers have obtained against us. This monopoly has so much increased the number of some particular tribes of them, that, like an overgrown standing army, they have become formidable to the government, and, upon many occasions, intimidate the legislature. The member of parliament who supports every proposal for strengthening this monopoly, is sure to acquire not only the reputation of understanding trade, but great popularity and influence with an order of men whose numbers and wealth render them of great importance. If he opposes them, on the contrary, and still more, if he has authority enough to be able to thwart them, neither the most acknowledged probity, nor the highest rank, nor the greatest public services, can protect him from the most infamous abuse and detraction, from personal insults, nor sometimes from real danger, arising from the insolent outrage of furious and disappointed monopolists. Udo Keppler s vision of Standard Oil as monopoly Source: the Atlantic How far it may be proper to impose taxes upon the importation of foreign goods, in order not to prevent their importation, but to raise a revenue for government, I shall consider hereafter when I come to treat of taxes. Taxes imposed with a view to prevent, or even to diminish importation, are evidently as destructive of the revenue of the customs as of the freedom of trade. Part II - Of the Unreasonableness of those extraordinary Restraints, upon other Principles In the foregoing part of this chapter, I have endeavoured to show, even upon the principles of the commercial system, how unnecessary it is to lay extraordinary restraints upon the importation of goods from those countries with which the balance of trade is supposed to be disadvantageous. Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce, are founded. When two places trade with one another, this doctrine supposes that, if the balance be even, neither of them either loses or gains; but if it leans in any degree to one side, that one of them loses, and the other gains, in proportion to its declension from the exact equilibrium. Both suppositions are false. A trade, which is forced by means of bounties and monopolies, may be, and commonly is, disadvantageous to the country in whose favour it is meant to be established, as I shall endeavour to show hereafter. But that trade which, without force or constraint, is naturally and regularly carried on between any two places, is always advantageous, though not always equally so, to both. By advantage or gain, I understand, not the increase of the quantity of gold and silver, but that of the exchangeable value of the annual produce of the land and labour of the country, or the increase of the annual revenue of its inhabitants. If the balance be even, and if the trade between the two places consist altogether in the exchange of their native commodities, they will, upon most occasions, not only both gain, but they will gain equally, or very nearly equally; each will, in this case, afford a market for a part of the surplus produce of the other; each will replace a capital which had been employed in raising and preparing for the market this part of the surplus produce of the other, and which had been distributed among, and given revenue and maintenance to, a certain number of its inhabitants. Some part of the inhabitants of each, therefore, will directly derive their revenue and maintenance from the other. As the commodities exchanged, too, are supposed to be of equal value, so the two capitals employed in the trade will, upon most occasions, be equal, or very nearly equal; and both being employed in raising the native commodities of the two countries, the revenue and maintenance which their distribution will afford to the inhabitants of each will be equal, or very nearly equal. This revenue and maintenance, thus mutually afforded, will be greater or smaller, in proportion to the extent of their dealings. If these should annually amount to 100,000, for 16

18 example, or to 1,000,000, on each side, each of them will afford an annual revenue, in the one case, of 100,000, and, in the other, of 1,000,000, to the inhabitants of the other. It is a losing trade, it is said, which a workman carries on with the alehouse; and the trade which a manufacturing nation would naturally carry on with a wine country, may be considered as a trade of the same nature. I answer, that the trade with the alehouse is not necessarily a losing trade. In its own nature it is just as advantageous as any other, though, perhaps, somewhat more liable to be abused. The employment of a brewer, and even that of a retailer of fermented liquors, are as necessary divisions of labour as any other. It will generally be more advantageous for a workman to buy of the brewer the quantity he has occasion for, than to brew it himself; and if he is a poor workman, it will generally be more advantageous for him to buy it by little and little of the retailer, than a large quantity of the brewer. He may no doubt buy too much of either, as he may of any other dealers in his neighbourhood; of the butcher, if he is a glutton; or of the draper, if he affects to be a beau among his companions. It is advantageous to the great body of workmen, notwithstanding, that all these trades should be free, though this freedom may be abused in all of them, and is more likely to be so, perhaps, in some than in others. Though individuals, besides, may sometimes ruin their fortunes by an excessive consumption of fermented liquors, there seems to be no risk that a nation should do so. That it was the spirit of monopoly which originally both invented and propagated this doctrine, cannot be doubted and they who first taught it, were by no means such fools as they who believed it. In every country it always is, and must be, the interest of the great body of the people, to buy whatever they want of those who sell it cheapest. 17

19 The 100% American Included below is a meditation that Steve came across many years ago. It reflects on the global nature of our everyday habits and routines and I believe that it speaks directly to the concerns of trade, globalization, and populism addressed in this issue of Pegasus. Our solid American citizen awakens in a bed built on a pattern that originated in the Middle East and modified in Northern Europe before it was transmitted to America. He throws back covers made from cotton, domesticated in India, or linen from the Middle East, or silk, from China. All of these materials have been prepared by spinning or weaving, processes invented in the Middle East. Our citizen slips into his moccasins, first used by the Amerindians of modern New England. He goes to the bathroom, where the fixtures are a mixture of European and American inventions created in the last century. He removes his pajamas, a garment invented in India and washes with soap first used by the ancient Gauls (modern France). He proceeds to shave, a masochistic rite first used in the second millennium BCE in either Egypt or Sumer. Returning to the bedroom, he turns on the radio and listens to some jazz which traces its roots to western Africa rhythms brought to America by slaves. He removes some clothing from a chair of the southern European style and begins to dress. He puts on garments whose form is traced to the Asiatic Steppes (mostly modern Russia), ties his shoes made from skins tanned by a method invented in ancient Egypt and cut to a pattern borrowed from pre-christian civilizations of the Mediterranean, and ties around his neck a strip of bright-colored cloth which survived from the shoulder shawls worn by the 17 th century Croatians (Balkans). Before going out for breakfast, he glances through a window, made of glass invented in Egypt; and if it is raining, he puts on overshoes made of rubber discovered and used by Central American natives long before Columbus arrived. On the way out, he reached for an umbrella, invented in southeastern Asia, and dons a hat made of felt, a material originating in the Asiatic steppes. On his way to breakfast, he stops to buy a paper, paying for it with coins, an ancient Lydia (modern Turkey) innovation. At the restaurant, a whole new series of borrowed items confronts him. His plate is made from porcelain in a form first used in China. His knife is of steel, an alloy first forged in southern India his fork originated in the Middle East and was brought to Europe by the 11 th Century Crusaders. His spoon is a derivative of the Roman original. When our friend has finished eating, he settles back to renew a bad habit, smoking. He lights up a cigarette made of a plant first domesticated by pre-columbian Americans. He reads the news printed in characters perfected by Phoenicians (c.900 B.c.) on paper invented by the Chinese (105 A.D.). At the end of an entire day of using borrowed products, he falls to his knees and thanks a Hebrew deity in an Indo-European language that he is a 100% American. Ralph Hinton, American Mercury, 1937; revised by Mark Welter, Ph.D.,

20 Outro: The Canary in the Coal Mine But now, we are becoming suspicious of the very things we have long celebrated - free markets, trade, immigration, and technological change. And all this is happening when the tide is going our way. Just as the world is opening up, America is closing down. -- Fareed Zakaria Post American World My first introduction to the concept of Globalization was really the protests of the World Trade Organization s Ministerial Conference in Seattle in As the Atlantic put it, in 2014: The organizers were a hodgepodge of groups unions worried about competition from cheap foreign labor, environmentalists worried about the outsourcing of polluting activities, consumer protection groups worried about unsafe imports, labor rights groups worried about bad working conditions in other countries, and leftists of various stripes simply venting their anger at capitalism. In many people s opinion, these concerns have been borne out. Protests in Seattle, 1999 Source: Wikimedia Commons My first experience truly revisiting trade and globalization outside of a classroom came from Fareed Zakaria. In Fareed Zakaria s Post American World he describes the loss of manufacturing and its impact to the U.S. economy as a whole: Manufacturing has, of course, been leaving the United States, shifting to the developing world and turning America into a service economy. This scares many Americans and Europeans, who wonder what their countries will make if everything is made in China. But Asian manufacturing must be viewed in the context of a global economy in which countries like China have become an important part of the supply chain but still just a part. The Atlantic Monthly writer James Fallows spent a year in China watching that manufacturing juggernaut up close, and he provides a persuasive explanation one well understood by Chinese businessmen of how outsourcing has strengthened American competitiveness. Most Americans, even management experts, have not heard of the smiley curve. Bur Chinese manufacturers know it well. Named for the U-shaped smile on the simple 1970s cartoon of a happy face, the curve illustrates the development of a product, from conception to sale. At the top left of the curve one starts with the idea and high-level industrial design how the product will look and work. Lower down on the curve comes the detailed engineering plan. At the bottom of the 19

21 U is the actual manufacturing, assembly, and shipping. Then rising up on the right of the curve are distribution, marketing, retail sales, service contracts, and sales of parts and accessories. Fallows observes that, in almost all manufacturing, China takes care of the bottom of the curve and America the top the two ends of the U which is where the money is. The simple way to put this that the real money is in the brand name, plus retail may sound obvious, he writes, but its implications are illuminating. However, to again quote Noah Smith in the Atlantic in 2014: Chinese imports have lowered prices for consumers and raised the income of capital owners, but those benefits are either spread very thinly over a large number of people, or concentrated among the rich. The American workers who have been hurt by globalization have been hurt very badly, and America has no system in place to compensate them for that loss. China s accession to the WTO in 2000, following the 1999 meeting, accelerated its rise as an export powerhouse. As Smith concludes: Smile Curve Source: Wikipedia China is choking under hellish smog, but it has also managed to pull literally hundreds of millions of people out of abject poverty. U.S. inequality is up since Seattle, but global inequality has declined. The industrialization of China and (to a lesser degree) India has been the biggest and most effective anti-poverty program the world has ever seen. Capitalism has its flaws, but it works. The fact that globalized Capitalism can work and, indeed has worked to lift people out of poverty cannot be disputed. But along with a rise in globalization there has recently been a rise in populism and a backlash against trade. This backlash is because the benefits of trade, promised by monied elites and multi-national corporations, did not materialize the way it was supposed to for everyone. Benefits of trade for the populus of Populism are cheaper wares and services. Unfortunately, as evidenced by the hollowing out of the middle class, once those American Dream-sized wages left middle America it became increasingly difficult to purchase said wares. Indeed, one of the primary drawbacks of our globalized world include the fact that capital is mobile while labor is not. If a furniture manufacturer moves its production facility from North Carolina, here in the U.S., to a location that has cheaper labor costs, the factory workers cannot move to Vietnam/Thailand/Mauritius, etc., to continue their employment. Then that worker is, frequently, unable to find employment at the same level of pay that they were used to. To some people, globalization has been a mechanism for globalizing labor costs, causing a race to the bottom for millions of wages. However, a move towards protectionism as espoused by Trump and other populists, faux and otherwise would be a horrible misstep. As with many things, the nuances of trade and globalizations can easily get lost in 140-characters and/or the 24-hr news cycle. The benefits of trade and globalization to everyone s economies outweigh the perceived damages. Indeed, as Douglas Irwin recently wrote in Foreign Affairs: An America first trade policy would do nothing to create new manufacturing jobs or narrow the trade deficit, the gap between imports and exports. Instead, it risks triggering a global trade war that would prove damaging to all countries. A slide toward protectionism would also undermine the institutions that the United States has long worked to support, such as the World Trade Organization (WTO), which have made meaningful contributions to global peace and prosperity. As Professors Kudrle pointed out, and Irwin also notes, there are many factors that have led to the U.S. s current economic woes. The key takeaway is that even if only 13% of the 5.6 million manufacturing jobs lost that Professor Kudrle discussed were lost due to globalization, there s a 20

22 very strong chance that those affected were clustered in communities. A factory town is called a factory town for a reason there s a factory in the town that provides the majority of wealth production and employment. If that factory moves to an overseas location, those newly unemployed people are not going to be all that understanding about the only 13% statistic. Irwin goes on to note that the major problems facing U.S. producers is not trade-related but, rather, cyclical problems involving recession, a stronger dollar, and Big Steel and the Big Three automakers being too slow to adapt to a changing market. While there are tweaks that could (and perhaps should) be made to trade policy, Irwin notes: The problem with wrongly blaming trade for these recent difficulties is that it makes it all too easy to propose protectionism as the quick fix. After all, if imports are seen as the problem, then reducing them by reversing existing trade policies, tearing up NAFTA, or slapping high duties on Chinese goods would seem to be the solution. Yet simply rolling back trade will not repair the damage that has been done. Those who want to curtail trade claim that such actions will revitalize basic manufacturing industries, create new manufacturing jobs, and reduce the trade deficit. In fact, higher trade barriers would fail to achieve any of these objectives. Irwin, referencing the global nature of the modern supply chain, and reflecting some of the nuance typically lost in the trade debate continues: there are far more workers in the downstream industries whose jobs will be jeopardized by trade restrictions than workers in the upstream industries whose jobs might be saved by them. In an effort to help the 147,000 Americans employed in the steel industry, for example, Washington may harm the 6.5 million Americans employed in steel-using industries. Any government efforts should be focused on the workers displaced by technology, product preference, and trade. Finally: Even if trade protection can succeed in helping some domestic producers at the expense of others, it is an illusion to think that it will create many new manufacturing jobs, particularly for low-skilled workers. In the United States, manufacturing has become technologically sophisticated and involves many more engineers and technicians than blue-collar workers on the assembly lines. The clock cannot be turned back. Consider the steel industry: in 1980, it took ten man-hours to produce a ton of steel; today it takes just two. So boosting steel output will not create nearly as many jobs as it would have in the past. A coal miner with his canary. Just as the Caux Round Table (CRT) calls for Moral Capitalism and has established Principles for Business, there need to be an enhanced effort to address globalization s potential shortcomings. Perhaps this is where the role of government should step in to administer more forms of job re-training programs beyond what has been done so far. While Globalization and Trade in general is certainly not the sole (and, indeed, not even the main) cause of the current economic situation, it is perhaps a canary in a coal mine for business and policy leaders. The discussion around trade policy should be recognized as a symptom of some of the deficiencies within the system. Only 13% of manufacturing jobs were lost due to trade but what about the other 87%? Just as the Principles that that the CRT has created over the years have gone to work helping evolve business and government behaviors, perhaps the principles could also help to re-engineer our approaches to unemployment. America needs new mechanisms for dealing with the issues of globalization, outsourcing, automation, changes in taste, etc., and their impact on our communities. Understanding that re-training has been tried before, we need a new approach and new partnerships. Re-training or moving to where the jobs are are certainly answers but there are severe costs involved and who should be responsible for paying those costs? One issue that the newly displaced again, for whatever reason might face is simple informational asymmetry. This could apply to confusion about where the new jobs are, what types of education might be needed, or even where to find that education. In the past when there was an unequal distribution of power in the system employers to employees in this case unions were established. These unions fought for, among other things, workplace safety and higher wages. (Some have argued that the success of the unions on this latter effort is at least partly to blame for their decline in recent years.) Perhaps now as many of America s workers are becoming disenfranchised once again, it is time for the union-ideal to evolve. This new union would not be tied to any type of specific trade but, rather, the idea of workers 21

23 While not a perfect solution it is an attempt at finding one. This large structural issue needs creative approaches. This type of policy could even be embraced by both political sides as it is: a) working to help displaced workers find meaningful employment; b) it is a step above the (recently very popular) idea of a universal basic income; and c) it involves government assistance but in a configuration reminiscent of a public-private structure. The CRT is focused on human fruition through moral capitalism and the issues with trade and the rise of populism are serious concerns. Trade helps build bridges across cultures and borders and can lead to peace and prosperity. It is without a doubt that employment and vocation are keystones to human fulfillment and no matter what the cause, there needs to be something done to address the current economic and political climate where talk of protectionism and populism writ large is so accepted. Lewis Hine, Mechanic at steam pump in electric power house, 1920 Collection of George Eastman House, Rochester in general. Much as when a single worker could be nearly powerless in factories of old, a need arose to band together to gain better representation. That same need has arisen again. Erik Sande Caux Round Table This new type of union could be focused on cutting through the clutter and providing clear and concise information, in a timely fashion, to either at-risk workers or the newly unemployed. The new union could collect nominal dues from employees perhaps even employers on some level and the union could also be funded, in part, through government efforts. This new, national union could then serve to empower workers which have become increasingly less empowered through off-shoring and automation. The union would end up providing two key benefits: assistance to displaced workers and strengthening the sense of national community. A third, tangential benefit would be that empowered workers, better connected to their national community, will be less susceptible to the sways of populist, divisive rhetoric. The type of training could range from new employment opportunities in the employee s local area to advice on how to start a business to even something as big as relocation assistance. Factory worker Getty Images 22

24 Final Thought: Among the Lost and Found Ultimately, everything is lost. Keys. Batteries. Eyeglasses. Socks. Father s liver. Mother s memory. All lost. Even you, yourself, the day you fail to show up for the morning muster. And in the end, endings themselves are lost when there s no one left who knows how the story ends. Slowly, your old vocabulary for complex interactions, the telephone number in your home when you were a little child, all slip away and you are left there, blinking, blank, until a stranger, who might be your best friend for all you know, gently asks, Are you all right? and, with a startled look, you shake your head and answer, What? Oh, yes. I m fine. Thank you. Just feeling a little lost. - Rich Broderick 23

25 Published by the Caux Round Table Editor in Chief Stephen B. Young Editor Erik Sande Assistant Editor Jed Ipsen Design and Layout by Erik Sande

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