The World's Free Trade Policies — Effects on the World's Economy
Last month’s column closed with the statement, “The eventual effects of the United States support of the world’s free trade policies has had more effect on the present and future of the World’s economy than any other single factor.
Let me explain by going back to some basic economics. A free economy divides the interests of its participants into Capital and Labor. With the advent of free trade, Capital was able to pursue its interest in profit-seeking into the Global economy. Labor, on the other hand, is still restricted to the domestic economy in which it finds itself and can only command the benefits of that domestic economy.
The domestic markets of China and India have produced abundant cheap labor. When Free Trade made this cheap labor available to Western Capital, full advantage was taken of the increased profit opportunities by the Capital side of Western economies. This turn of events was, of course, no advantage to the labor side of these economies. In fact, it was a disadvantage to Western Labor by taking jobs away and reducing the bargaining power of Western Labor.
Let me give you an example of how this profit opportunity worked. I served on the Board of a company that sold a product here in the United States for $125. It had been buying this product from a United States manufacturer for $65. The company decided to have the product manufactured in China. The Chinese made product, made to the same specifications and delivered to San Francisco, cost the company only $14.
The company’s gross profit on this product went from $60 per unit to $111 per unit. There was no effect on the Selling Costs or the General and Administrative Costs and the extra $51 per unit went straight to Net Profit.
Multiply this one case by thousands and thousands of products and you can see why profits of companies doing business with China and India increased so dramatically.
These dramatic profits have created the surplus of cash that we have seen in the World’s economies. It is the need to invest this abundance of cash in equally profitable investments that has led to the devaluation of Risk and the consequent overvaluation of Assets that has caused the crisis in our Credit Markets.
NEXT MONTH I WILL DISCUSS WHERE THIS CREDIT CRISIS MAY TAKE US.