Free Trade

The vitriol of the 2016 U.S. presidential election has once again brought Free Trade to the forefront of public discourse. And being one who has been on the front lines of the issue for three decades, I have some personal experience with the topic.

Having earned a degree in economics, I am naturally inclined to support the theoretical concept of Free Trade. The keyword is theoretical, however. In reality, the benefits of Free Trade are only realized if there is a level playing field between the two trading partners.

Which is precisely why, in practice, Free Trade is a myth. Setting aside the cost and availability of labor and natural resources, which are the foundation of the theoretical benefit of Free Trade, each country has vastly different approaches to protection of the environment, the protection of workers, taxation of both the individual and his or her employer, and other forms of direct and indirect regulation. And each of these factors can and does have a material impact on the tilt of the pitch, as it were.

And then, of course, there is currency. The exchange rate between two currencies is probably the most important factor in determining whether the basis for Free Trade truly exists. And the reality is that while most ‘free market’ nations will argue that they make no attempt to manage their currency, the reality is that any county, including the U.S., that has a central bank, regulates its currency. Perhaps not intentionally so, but it is the de facto result, not the intent, that ultimately matters when it comes to matters of trade. And it would be implausible, at best, to argue that central bank policy does not impact international exchange rates.

Perhaps the biggest flaw in the practice of Free Trade, however, is what might be referred to as the indirect benefit of being an American company. Not unlike the rationale for taxing an American individual’s world wide income on the basis that the benefit of government expenditure flows to the citizenship, not the residency, that I wrote about a couple of posts ago, American companies enjoy distinct benefits of simply being American.

The simple fact is that no American company could move jobs abroad without the benefit of American technology, American technical skills, and American management know-how. And how were those skills and knowledge acquired? Through the American education system, of course, which is funded by all Americans, including those whose jobs are lost as a result of its effectiveness.

All of that aside, however, Free Trade agreements are not the reason that so many Americans are so apparently angry at being locked out of the American Dream. That distinction goes to a common law doctrine few Americans have even heard of – the Doctrine of Employment at Will. It is not a written law, but a doctrine followed by the courts that allows both employees and employers, with certain exceptions, to terminate the employer-employee relationship at any time.

The court’s decision in Payne v. Western Atlantic RR, decided in 1884, is often cited as the initial precedent for Employment at Will. Over the years, the courts have narrowed the scope of the Doctrine for both common law and statutory reasons. You can’t terminate employees in violation of public policy, for example. And you can’t terminate employees on a discriminatory basis, creating the concept commonly known as protected classes (e.g. gender, ethnicity, age, etc.).

On the surface, the Doctrine may seem a victory for employees. Without it there would be the potential for the equivalent of indentured servitude, limiting the potential for workers to work wherever they please.

In reality, however, it gives near-unlimited flexibility to employers to terminate whomever it pleases. And move the job elsewhere, for example, or eliminate individuals the management of a company wants to get rid of. (Employers don’t make decisions, after all; people do.) The exceptions are relatively easy to get around. Want to get rid of some employees in a protected class? Just get rid of some that are not protected at the same time and you can argue, typically successfully, that there was no discrimination involved.

The real flaw in the Doctrine of Employment at Will, however, is that it is enforced by common law. It is enforced, in other words, by the courts. And the courts, by definition, advocate for no one. Their only purpose is to administer the law.

Without an advocate, workers are at a distinct disadvantage. If a worker wants to challenge his or her dismissal, he or she will have to spend his or her own resources to hire an attorney to do so. The employer, on the other hand, can use the company’s assets to fight the challenge. And it takes time, a lot of it, typically, at a time when the terminated employee really needs to be devoting fulltime to finding a new source of income.

In the end, the employer is in the driver’s seat. Few cases of wrongful discharge are ever effective or worthwhile for the terminated employee. Unlike Europe, therefore, where the cost to close a factory is so prohibitive as to make it impractical in most cases, American employers can usually decide to move production to a foreign country without giving the cost of terminating all of the employees any material consideration.

But this is a blog about China.

There are two fundamental differences between China and the U.S. in this regard. The first is that China has much more regulatory protection for the employee in place. (The fact that these regulations are not always enforced is another issue and that is changing rapidly.) Employers cannot terminate an employee without showing very good cause, such as stealing. Even performance is realistically accepted to be in the eye of the beholder and employers are required to provide additional training and the consideration of other jobs more suited to the employee’s talent before it can make the case for non-performance. (And that case cannot be just the opinion of the supervisor.)

Perhaps most importantly, employees have an advocate in China, in the form of the Labor Bureau. If an employee feels mis-treated he or she can go to the Labor Bureau, at no cost, and file a complaint. The Labor Bureau will investigate the case and has the authority to adjudicate the case as it sees fit.

To those who would argue that this tilts the field to the other extreme – in favor of the employee – I would argue that there are very practical reasons why that doesn’t happen. The Labor Bureau, unlike the U.S. court system, doesn’t exist in a vacuum. It is part of a government eco-system that is collectively measured on many fronts, including the economic prosperity of the area it overseas. No Labor Bureau wants to unfairly drive otherwise worthy employers out of business and cause the area to lose both the employment and the tax revenue.

As with most things in life, there are pro’s and con’s to both approaches. When a country can’t field a single presidential candidate with a favorable likability rating among the electorate, however, common sense would argue that something isn’t working.

We need employers. And they need to be competitive to survive. Like everything in life, however, there has to be a sense of balance. With the rich getting richer, and the mobs taking to the streets, it’s hard to argue that we have reached that harmonious state, as they might say in China. Something has to change.

Simply eliminating Free Trade, however, isn’t the answer. We must take a more holistic approach to the problem and understand cause as well as effect.

You may contact the author at: understandingchina@yahoo.com