Tuesday, June 14, 2016

The Importance of Open Trade vs Protectionism

Free trade agreements seem to create a natural fear that jobs will move overseas and people will suffer the consequences of lost jobs and income. It is not as though some of these ideas have merit but what we find over time is that protectionist policies do have an impact on long-term growth putting people at much greater risk.

Consider the two main approaches. We can protect our industries, raise tariffs, and make it difficult for companies to invest in the U.S. What we will find is there will be a short-term positive effect of secure wages and better profit margins. However, in the long run we will continue to lose our global competitiveness and eventually experience economic collapse.

Countries that have tried this approach require companies to hire a certain amount of workers which raises costs and they protect their companies from foreign competition. Its really great! Eventually, the U.S. capacity gets more out of line with foreign competition and can't maintain its competitiveness. Expenses will rise and revenues will decline.

Few companies will want to invest in a country with lots of rules and regulations. They will option to invest in emerging markets like India or Eastern Europe where regulations is easier to handle. We will continue to lose our global competitiveness in a way that is non reversible leading quickly to the 2nd, 3rd or 4th spot in the global economy.

Protectionism only works in the short run on specific industries that need a little time to adapt and develop to be competitive. In the long-run they will stop adapting and rely on government protection to maintain their profits until they collapse. A much better approach is to embrace the global market and to rethink our policies.

We need to make our people and cities more competitive with increased innovation, reduced costs, and greater investment opportunities. This can only happen if we make cities hubs of economic activity where data infrastructure is improve, quality of living is enhanced, policies are open to development, tax rates are low, environments are enhanced, global investments are encouraged, and innovation is worshiped.

Free trade is beneficial when the environment is conducive to capitalizing on new opportunities. In the long run, we will have to accept that we are losing our competitiveness because our basic platform needs work. Opening our trade means doing so in a way that improves opportunities for investment and development within the U.S. Having a focal point on the older platforms in cities is a social and economic method of transformation.

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