Congress Doesn't Understand Trade, Business

Bottom headline of the day. Dog bites man.

CongressNow reports on a hearing before the House Ways and Means Trade Subcommittee, regarding the US-Korea Free Trade Agreement:

Sherman also directed his attention to Bhatia, asking whether there were any studies that showed the U.S.-Korea deal would reduce the trade deficit between the two countries.

When Bhatia said that it was impossible to assess the impact before a trade agreement goes into effect, Sherman responded, "I can't imagine coming into a business boardroom and saying, 'This is the deal. We don't know whether it's going to cost us money or make us money, but sign on the dotted line because it's a good process.'"

Congressman Sherman doesn't seem understand either trade or business, apparently. When a business signs a deal to exchange goods and services -- the appropriate parallel here -- the goal is to make sure that the terms are right, and that they fit into the firm's overall strategy for earning money.

To draw an analogy, when Avis purchases a fleet of cars, they want to make sure they're not paying more than they need to. When Sony supplies CDs to Target, they want to make sure that the markup is not so high that it reduces overall sales. That's how they determine if it's a good deal. Avis does not ask 'how much are we selling to Chrysler?' before making a deal. Target doesn't hold up a deal because Sony is getting its paper products at WalMart.

Companies don't consider the balance of trade when they sign deals. They decide whether the deal gives them the best prices on what they need to buy, and the best chance to earn profit on what they sell. That's the test for agreements such as the US-Korea deal.