Why is it that a small country like Singapore, which is not much more than a city-state, outperforms the American economy in terms of GDP per capita? In other words – why is Singapore so rich?
To answer this question, let’s consider two very important points.
The first is location. Singapore is located in the middle of Southeast Asia, perfectly positioned as a trade port and hub in the center of the major trade routes connecting India, Thailand, Vietnam, China, South Korea, Japan and Indonesia. Therefore, could the reason for Singapore’s economic boom be just a lucky coincidence of location? To answer this question, let’s take a look across the Pacific. Hawaii is located directly between two economic super powers: the United States and China.
Instead of growing, the GDP per capita in Hawaii has been recently stagnating. A state that was once among the leaders in GDP per capita is now below average as a result of a decade-plus slump in growth. If location was the primary factor driving Singapore’s growth, Hawaii’s similar geographic position should have lead it to experience a similar boom over this time period.
Source: Fred. Economic Data, St. Louis Fed
Maybe a second point, economic freedom, will provide a better explanation for Singapore’s prosperity and Hawaii’s stagnation. The Heritage Foundation measures economic freedom by aggregate score across four main categories:
- Rule of Law (property rights, government integrity, judicial effectiveness)
- 2. Government Size (government spending, tax burden, fiscal health)
- 3. Regulatory Efficiency (business freedom, labor freedom, monetary freedom)
- 4. Open Markets (trade freedom, investment freedom, financial freedom)
Source: Economic Freedom Index
Here Singapore dominates, placing second in the rankings, while the US has been losing ground since 2009 and is currently ranked seventeenth. The main difference between Singapore and the United States – and Hawaii in particular – lies in two categories: tax burdens and trade freedom.
How is it possible that the ”Land of the Free” has such limited freedom in trade?
Back in 1920, roughly 70 percent of all merchant ships worldwide were made in the United States. However, post-war innovations sparked global growth in the shipbuilding industry: other nations could now compete with the American industry for the first time. At the same time, WWI demonstrated the importance of naval independence to trade, ironically creating the demand for protectionist policy in the United States. As a result, the Jones Act was introduced in 1920 to protect the local ship-building industry and to secure trade power in times of war. The Jones Act sought to protect ~90% of the American harbors from foreign traders. It states that all ships that carry out trade between American harbors have to be made in the United States, sail under the United States flag, and have at least a 75% American crew on board. Only certain harbors allow foreign ships to bring their cargo, such as Los Angeles.
These days, the United States trade fleet does not account for even one percent of the world’s trade-shipping fleet, and every cargo container delivered from South East Asia must first go to L.A. so goods can then be transported by an American ship to Hawaii. This policy causes significant harm to Hawaii’s economy: shipping costs for every container are raised by a multiple of 5 due to the Jones Act’s archaic protectionism.
In times of war,nations generally tries to limit each other’s supply of goods with an embargo or blockade. For example, during the civil war the Union States blockaded the ports of the Confederate States, and during the Cold War the US enforced an embargo against Cuba.The United States is basically doing the same thing now with Hawaii, Alaska and Puerto Rico, even in peace time, by enforcing the Jones Act.
The exception from enforcement of this rule is hurricanes. If a hurricane hits the United States and does devastating damage the President can allow a specific window of time where all ships from all countries can bring supplies to the parts of the US where it is needed.
This means that free trade is allowed in the event of a natural disaster, but not in normal circumstances. Why?
The main argument, as it is for all protectionist ideas, is to secure jobs in the US shipping industry. The reasoning is that if the United States no longer protects US jobs, they will be lost. This may or may not be true, but there is no assurance that all the jobs will be kept if the United States frees up the trade restrictions. However, a shipping fleet that once dominated the world now makes up only 0.71% of the world feet in 2015. It has already lost most of those jobs and still, the US economy is doing very well. Also, as Schumpeter explains, during the process of creative destruction; some jobs are lost but new opportunities will emerge. Imagine the potential for growth if Hawaii were allowed to let foreign ships in their harbor. A quick search on google maps comparing the L.A. trade harbor with the harbor on Hawaii shows how much unused potential is wasted. Many unseen business opportunities, which we can’t imagine now, will create more prosperous economic conditions for both Hawaii and other states affected by the Jones Act. Shenzhen, for example, opened its harbors to foreign ships and businesses and abolished most trade restrictions and is now one of the fastest growing cities in China.
The second argument for protectionism, needing to secure the supply and trade in wartime, does not hold true in this case. The United States is undoubtedly the strongest Naval power on the sea: it has the most powerful aircraft carriers, the largest fleet, and is also allied with nearly all big trade nations except for China. Also, if the United States fears losing independence in trade, why does this not apply to cargo planes? Nearly all cargo airplanes are built outside of the United States and are not required to operate with an American crew -why is there no protectionism there?
President Trump ought to free up restrictions in Hawaii to let it grow and thrive. Let it become the next Singapore and enrich all Americans by increasing their purchasing power. Minimize the costs by abolishing protections which are just harmful to trade. Free trade always benefits both sides.