The Dangers of International Free Trade Agreements

Conservatives and libertarians are renowned for desiring the greatest possible autonomy with respect to the free market. This phenomena, in fact, aided in igniting “the shot heard ‘round the world” April 19, 1775 at Lexington and Concord. History teaches high school students the economic principle behind the French term laissez-faire, or “to let be”. Free market economics were born from centuries of intercolonial trade within the British Empire and others known as mercantilism. Tariffs were placed on commodities in transit from markets outside these colonial domains as a protectionist approach to preserve imperial interests with little outside interference. And whether there was mercantilism or laissez-faire polity involving international trade, one thing remains certain: there never has been a nation to subsist with a purely isolationist foreign policy. Global interactions preclude such a possibility. A Trans-Pacific free trade pact would flood the market with far more than merely unregulated immigration and undercutting the American people’s capacity to compete for jobs. It stands to lead to a Pangaea effect for supranational socialism through statism and its ugly red-headed stepsister, corporatism. It will lead to an unprecedented dystopia born of globalization through the imposition of an inevitable single currency.

Most scholars attribute the laissez-faire concept to Adam Smith’s “invisible hand”. Legend has it in 1681, a conference between French foreign minister Jean Baptiste Colbert and a cartel of domestic businessmen led by M. Le Gendre convened on how better to expand French maritime and intercontinental trade. Upon the pro-mercantilist Colbert inquiring what the French government could provide to better grow trade and expand commerce, Le Gendre’s reply was simply “Laissez nous faire, or literally “let us be”. No doubt then Le Gendre referred to taxation and tariffs on imported goods.

The legend was revisited in a 1751 issue Journal Oeconomique by pro-free trade minister René de Voyer, Marquis d’Argenson in what is recognized as the first known instance of the term and its concept in print. The Marquis d’Argenson had himself employed it in during a diary rant recorded in 1736.

Laissez faire, telle devrait être la devise de toute puissance publique, depuis que le monde est civilisé … Détestable principe que celui de ne vouloir grandir que par l’abaissement de nos voisins! Il n’y a que la méchanceté et la malignité du coeur de satisfaites dans ce principe, et l’intérêt y est opposé. Laissez faire, morbleu! Laissez faire!![1]

(Trans: “Let it be, that should be the motto of all public powers, since the world was civilized … That we cannot grow except by lowering our neighbors is a detestable notion! Only malice and malignity of heart is satisfied with such a principle and our (national) interest is opposed to it. Let it be, for heaven’s sake! Let it be!)

The actual term laissez-term, however, was popularized for all time by the philosophe Vincent de Gornay during the 1750s in applying it in François Quesnay’s papers regarding China. The term which Quesnay coined is a direct transliteration of the Cantonese term “wu wei” ( 無為) and “mo wei”.

Unlike communism, the crux of the Age of Enlightenment’s intellectual expansion into the field of economics is attributed to Adam Smith’s reference to natural law known as “the invisible hand”. But like his two contemporary economic theorists Thomas Malthus and David Ricardo, Smith never actually used laissez-faire in his work. He however applied the “invisible hand” nomenclature in his treatise The Theory of Moral Sentiments in 1759 laying the philosophical groundwork on the state of nature in the human application of ethics, methodology and psychology for future pieces as The Wealth of Nations (1776).

Smith’s position on this fundamental economic principle relies on four postulates leading to truths with respect to human nature and its conduct towards their fellow man.

1. The individual is the basic unit in society.

2. The individual has a natural right to freedom.

3. The physical order of nature is a harmonious and self-regulating system.

4. Corporations are creatures of the State and therefore must be watched closely by the citizenry due to their propensity to disrupt the Smithian spontaneous order.

In reading Smith, one can trace the employment of unchecked corporate expansion as tools of the state, inevitably leading to socialism under Marx’s conditions for industrialized nations falling prey to disenchanted, alienated proletarians. The policy of busting monopolies under President Theodore Roosevelt ended the alarming rise in corporate monopolies which not only usurped the individual imperative, but the power of the federal government. Through government prior to Teddy Roosevelt, the rights of the individual were quashed, their voices silenced through massive accumulations of wealth while working conditions and poverty grew more pervasive through factory slums and ghettos. While Marxism called for the abolition of all self-sufficiency in favor of a central authority serving as the dictatorship of the proletariat, corporatism followed the Fabian Society model of gradual usurpations of individual liberty by bribing the state through social Darwinist evolutionary principles, often in bankrolling many of its initiatives. Through corporate welfare from taxpayer money or Marxism, only a few winners will emerge. The status quo will always lose. Free speech and constitutional liberty will inevitably die upon the rise of militant trade and labor unions intermarrying with the others, manifesting global, supranational socialism through a central regulatory body such as the United Nations (U.N.).

“The invisible hand” theory has tremendous virtues. Applied too literally however and the rise of an unintended consequence lead to malevolent forces stripping what liberties still permissible to the individual remains. For example, Reuters columnist David Jay Johnston reported July 16, 2012 the IRS and Federal Reserve undervalued the Flow of Funds from non-financial U.S. corporations in liquid assets that May. The striking figure was by how much.

The Fed’s latest Flow of Funds report showed that U.S. nonfinancial companies held $1.7 trillion in liquid assets at the end of March. But newly released IRS figures show that in 2009 these companies held $4.8 trillion in liquid assets, which equals $5.1 trillion in today’s dollars, triple the Fed figure.

U.S. non-financialaAssets per the IRS (Reuters)

U.S. non-financial assets per the IRS (Reuters)

The Fed receives its data from the IRS, which only measures the flow of funds domestically. And this is where free trade agreements fall on deaf ears for both statists and advocates of this unintrusive nature of economic trends and growth transnationally. Again Johnston reports staggering figures which understate why not just the North American Free Trade Agreement (NAFTA) has been an abject failure, but the European Union. The E.U. is on the brink of total collapse due to free trade and unregulated immigration, the welfare state becoming overtaxed both in resources, housing benefits for migrant workers residing in other nations, the public’s dwindling incomes in the dying eurozone and finally, the evolution of Euroskepticism to the majority of the British people’s demand to exit the federal body on the continent.

First, Congress lets overseas profits accumulate untaxed, so long as offshore subsidiaries own the cash. Second, companies have a hard time putting cash to work because fewer jobs and lower wages mean less demand for products and services. Third, a thick pile of cash gives risk-averse CEOs a nice cushion if the economy worsens.

Given the enduring hard times, you might think that corporations have used up their cash since 2009. But real pretax corporate profits have soared, from less than $1.5 trillion in 2009 to $1.9 trillion in 2010 and almost $2 trillion in 2011, data from the federal Bureau of Economic Analysis shows.

That is nearly $1 trillion of increased profits over two years, while actual taxes paid rose less than a tenth as much, BEA reports show. Dividends, wages and capital expenditures all grew less than profits, while undistributed profits rose. The result: more cash.

Bigger profits are good news, but it would have been better news had those increased profits been put to work, not laid off in accounts paying modest interest. Hoarding corporate cash in bank accounts, Treasuries and tax-exempt bonds poses a serious threat to the economy, as Congress recognized when it enacted the corporate income tax in 1909.

Taxation is in itself, state-sanctioned theft. Tax exemptions and bailouts granted following the global financial market crash of 2008 led to an equally-insidious ploy by corporate moguls to engage in business mergers and acquisitions, or globalization. Relaxing taxation levels while employing the Teddy Roosevelt strategy of trust busting (which Ronald Reagan also applied such as in his administration’s break-up of the AT&T monopoly leading to the telecommunications and tech booms through the Internet during the 1990’s) maintains American jobs at home while simultaneously granting greater access to entrepreneurship for prospective small business owners, discouraging corporate and capital flight to nations with cheaper labor in contrast to the disastrous Clinton-era NAFTA folly.

Socialism either nationalized or under the control of corporate monopolies discourages thrift and instead, profits off the woes of their citizens and employees. To place this further in perspective, consider the following too.

The 2009 cash reported to the IRS equaled America’s entire economic output that year from New Year’s Day through May Day.

This cash pool came to $16,700 for every man, woman and child in the United States, a 53 percent real increase from 2004, my calculations from IRS data show.

Looked at yet another way, these companies had 11.3 percent of their assets in cash, or enough to pay their 2009 corporate income tax bills, which amounted to $148 billion, more than 34 times over.

Such protections of the individual imperative from corporate mergers into large monopolistic conglomerates can be attributed to actions taken against the “robber barons” of the late 19th/early 20th Century (Rockefeller, Carnegie, Morgan, Vanderbilt) controlling the Federal Government, or in the case of J.P. Morgan, financing it. Below are reasons why this has grown problematic.

For workers, idle cash means idle hands and minds. With one in five Americans unemployed or underemployed, and real median wages in 2010 back down to the level of 1999, this is no time for capital to go on an extended holiday.

For taxpayers, untaxed profits subtly reduce corporate tax burdens and increase the tax burden on individuals. Because taxes owed on offshore profits are not adjusted for inflation, they depreciate at the rate of inflation. That means a double whammy for taxpayers as government pays interest on money it borrows while its accounts receivable from multinational corporations lose value.

Since the income tax system began, Congress has authorized a tax on excessive accumulated earnings to limit damage to the Treasury — and the economy — when companies hold far more cash than their operations require. Without the accumulated earnings tax, corporations can become bloated tax shelters instead of engines of growth.

A business holding more cash than its operations reasonably require can be hit with a 15 percent levy under Section 531 of the Internal Revenue Code, on top of the 35 percent corporate income tax. The Tax Court even devised a mechanical test in 1965 for how much is too much.

While the IRS historically only levied taxes on privately-owned firms and corporate public trade businesses with few stockholders, this strategy was emphatically reinforced with Ronald Reagan’s signing Section 532 © of the Internal Revenue Code that empowered the terms of Section 531 for all firms, with a few exceptions of untaxed offshore profits. Much of these issues were mitigated greatly by the Reagan-era hard antitrust policies. Unfortunately the latter trend in its symbiosis has not continued and led to Reagan’s signed bill granting work visas in exchange for foreigners paying taxes for income earned domestically into the hell good intentions go to die. The idea was articulated by Reagan in a 1980 GOP primary debate.

“Rather than… talking about putting up a fence, why don’t we… make it possible for them to come here legally with a work permit? Then, while their working and earning here, they pay taxes here, and when they want to go back, they can go back.”

The cash hoarding exemptions continue to grow worse, never more so than under Barack Obama, who has presided over an economy where Wall Street serves as his casino economics policy. As greater, more deregulated exemptions lead to repurchasing stock options such as with the Alibaba Trojan horse from China, purely domestic firms are discriminated against and during times of economic distress, jobs lost.

Johnston made an excellent observation. Multinational corporations pledge to return to America what it robbed. They pledge to return some $1 trillion should Congress provide them an 85 percent tax discount. Yet all it yields are more casino economic policies, most especially under liberal policies as these corporate raiders are overwhelmingly supportive of Democrats — after all, none other than George Soros crashed the Bank of England September 16, 1992 (“Black Wednesday”). Unless an aggressive antitrust policy is strategically in place, too much of a good thing is really not a good thing at all.

That said, buyer beware. Do not sign dotted lines of documents not yet presented. Between militant labor unions and tax exemptions on multinational corporations, a small collection will win while the 99 percent always lose. President Reagan’s position on immigration was well-intentioned and in principle, wonderful. Unfortunately in quoting perhaps the most famous song regarding the progression of society by Bob Dylan, “the times, they are a changin’” — and it is no longer a matter of merely keeping tabs on undocumented aliens entering to work for peanuts and still earn more through public welfare, but of national security. And once a nation signs into a free trade pact and engages in draconian protectionist policies with respect to outside governments, the options are limited until future expansions lead to a geopolitical Pangaea by way of a single currency and common market — neo-mercantilism.


Just ask the ghost of Margaret Thatcher. The Lady not only was not for turning, she refused to sell Britain’s soul to Brussels. It cost her the role as Prime Minister.







[1] as quoted in J.M. Keynes, 1926, “The End of Laissez Faire”. Argenson’s Mémoirs were published only in 1858, ed. Jannet, Tome V, p.362. See A. Oncken (Die Maxime Laissez faire et laissez passer, ihr Ursprung, ihr Werden, 1866)

[2] Gaspard, Toufick. A Political Economy of Lebanon 1948–2002: The Limits of Laissez-faire. Boston: Brill, 2004. Print



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