By
Loyd E. Eskildson "Pragmatist" (Phoenix, AZ.)
This review is from: Free Trade Doesn't Work: What Should Replace it and Why (Paperback)
“Ian Fletcher, economist, is an Adjunct Fellow at the San Francisco office of U.S. Business and Industry Council, with a specialty in protectionism and industrial policy. Fletcher believes that America's financial mess and our festering trade crisis were both caused by bad policies that mainstream economists told us were OK. His writing is data driven, uses common sense, is interesting, and eschews arcane mathematics. The 'bad news' is that overcoming free trade will be an uphill fight - 97% of economists support it.
Iif only 'free trade' doctrine was the provenance of university mathematics departments, it wouldn't last five minutes. Elementary math is enough to discredit the underlying thinking. Unfortunately, in the past two decades the U.S. has accumulated a $6 trillion trade deficit following its prescriptives. University of Maryland economist Peter Morici estimates the U.S. economy is about 12% lower than it would be absent these trade deficits.
Fletcher contends that many free trade supporters are simply Ayn Rand cultists (eg. Alan Greenspan) or libertarian ideologues (eg. Milton Friedman - anti Social Security, Medicare, postal service, public education, welfare) passing those views off as economics. Fletcher's "Free Trade Doesn't Work" reports that the logic supporting comparative advantage/free trade makes ten erroneous assumptions, invalidating its conclusions. My slightly modified version:
1)Immobile Capital: David Ricardo, originator of the theory of comparative advantage that underlies free trade, wrote that free trade would be limited because investors would not want to entrust their capital with a strange government and new laws. Thus, it would remain 'in-country.' Probably true in 1817 when Ricardo wrote this. No longer - U.S. entities have invested about $3.2 trillion in China alone, and added another $340 billion in 2009.
2)No Externalities (effects not reflected in prices): China is well-known for its serious air and water pollution problems, some of which cross international borders.
Another externality problem is that funding trade deficits via asset sales and foreign debt, as well as turning over the sourcing and/or manufacturing of key products (eg. generators) cedes control to other nations. (Remember the Arab Oil Embargo?) Adam Smith, another respected free trade proponent, specifically cautioned against this problem.
3)Mobile Labor: Ricardo and his acolytes assume displaced labor can easily move between industries. Unfortunately, I have frequently met people who lost jobs in industry A, then trained for industry B - only to see that industry then decimated by offshoring as well, then ending up in low-paying service jobs. Some free trade defenders claim that offshored jobs must be weighed against the number of Americans working for foreign-owned companies. Fletcher retorts that this logic is invalid because few of these jobs are NEW, that they are primarily existing jobs at existing enterprises. As for 'winning' U.S. industries hiring more people - Fletcher contends that they're winning because they have high productivity, and thus aren't likely to hire more workers. Finally, U.S. workers whose homes are 'underwater' are in poor financial ability to move - a 'short' sale creates substantial tax liabilities and wrecks credit; abandonment isn't any better.
Other free trade defenders assert that our low unemployment rate (until now) vindicates free trade. Not so, says Fletcher. Displaced workers eventually find something to do - usually in low-value-added, low-wage areas (security guards, construction, waitressing, retail) not subject to international competition, though often under wage-pressure from illegals. Finance, education and health care have been other major growth areas - the first creating considerable destructive impact, and the latter two representing mostly waste because they are grossly overstaffed compared with other nations. Fletcher adds that the U.S. economy has ceased generating net new jobs in internationally-traded sectors. All our job growth is now in non-tradable sectors.
4)Currency Manipulation Doesn't Occur: Try selling that idea to Secretary Geithner and the G-20.
5)Savings From Off-Shoring Outweigh Losses From Lost Jobs: Fletcher says we actually have no data on this.
6)Free Trade Frees Up Resources to Do Something Better: Supposedly high-technology would benefit from resources released from sending manufacturing overseas. However, we already have a trade deficit in high technology manufactured products, and China will soon have more biotechnology research equipment in a single building than the entire U.S. More specifics: In 1989 only 30% of Chinese imports competed with high-wage industries in the U.S.; in 1999 that rose to 50%. First Solar is the only U.S. company among the world's top ten solar panel producers, and most of its production is in Asia. U.S. printed circuit-board production has fallen to 8% of the world total, down from 26% in 2000; similarly, only 7% of new semiconductor fab plants are now in the U.S. (up to $10 billion each). G.E. is the only U.S. firm among the top ten in wind-energy (18.6% market share). In 2008, no cell phones were produced in the U.S. Our machine-tool industry market share has fallen from 28% in 1998 to 5% in 2008. As for the future, Georgia Tech's 2008 triennial "High Tech Indicators" study that takes into account human skills, national policies, number of scientists involved, high-tech export success, etc. placed China ahead of the U.S.; off-shoring also weakens research at our universities, and strengthens Asia's.
Our service sector trade surplus is much smaller than the manufacturing deficit, and likely will soon also become a deficit, per former Federal Reserve Vice-Governor Alan Blinder. As many as 30-40 million jobs are vulnerable. India is probably the biggest threat here, and high-paying jobs in IT, legal, accounting and finance, medical, engineering, and R&D will be among those at risk.
7)GDP is a Good Overall Measure of the Economy: Unfortunately, it ignores growing income inequality and stagnating/declining middle-class incomes and benefits, and the numbers are artificially boosted by unsustainable borrowing, asset sales, and illegal immigration. (In the short run, both trade-deficit and trade-surplus nations benefit from trade between themselves - however, eventually debt in the trade-deficit nation accumulates to a level where it cannot borrow any more because the lost jobs have created declining median incomes and asset values.) GDP simply asks the wrong question "What's good for the economy?" rather than "What's good for America?"
8)Trade Deficits Don't Matter: V.P. Cheney is famous for stating that "Reagan proved (budget) deficits didn't matter." Similarly, others assert that America has survived years of record trade deficits, so trade deficits don't matter either. Fletcher compares that to saying that a patient with a strong constitution that survives cancer 'proves' cancer doesn't matter either. Denying that our trade deficit is a sign of trouble on the grounds that it "reflects inflows of foreign capital" sounds better, but hides the fact that "inflows of foreign capital" means either Americans accumulating debt to foreigners, or existing American assets being sold off to foreigners. Both make us a poorer nation.
9)Free Trade Has Reduced Global Poverty: Claiming free trade has reduced global poverty is bizarre given that, according to the World Bank, the entire net reduction in global poverty since 1981 has been in protectionist China; elsewhere it has increased.
10)Smoot-Hawley Tariffs Caused/Worsened the Great Depression: Fletcher points out that foreign trade was at such a low level at that time that it couldn't possibly have mattered; in addition, most of the tariffs were merely returns to prior levels.
Nobel-winning Milton Friedman took the position, per Fletcher, that it doesn't matter if economic theories make unrealistic assumptions, as long as they make the right predictions. Free traders' predictions of substantial overall benefits have not proven out in the U.S.
Author Fletcher contends that Asian nations take advantage of our blind spots on this topic with tariffs, and limitations on internal buying; China's forced technology transfer and thefts also reduces the rewards for American firms to develop new technologies. Free trade policy in the U.S. is sustained not because of its logical rigor, but to support strong political (bribing nations not to go Communist, or to help fight terrorism) and 'beggar-thy-neighbor' economic interests (eg. the 91% non-manufacturing workers, vs. the remaining 9% that are). Unfortunately, capital is disproportionately powerful (political donations) in America's political system, largely isolating free trade from political support for the economic interests of ordinary Americans.
Improving education is often touted as 'the solution' - not likely, however, when competitors' college graduates are also paid far less than comparable Americans. Fletcher predicts that eventually a crisis (eg. the U.S. going back into recession because of the collapse of the dollar) will allow Obama or his replacement to maneuver out of support for free trade. Surveys already indicate that voters' primary concern is about jobs, but they haven't yet connected the dots leading to free trade as the source of the problem. The Founding Fathers understood the value of protectionism, says Fletcher, so they explicitly granted Congress the power "to regulate commerce with foreign nations" in Article I, Section 8 of the Constitution. ('Free trade' implies no regulation.)
Fletcher would like to see free trade replaced with across-the-board 30% tariffs for all goods and services. He sees this as working selectively to help retain 'infant industries' employing considerable capital and likely to benefit from considerable scale economies, but not enough to bring back the apparel industry (large labor component) or mature industries (much more limited, if any, remaining scale economies). This approach would avoid politically tricky decision-making on which industries to favor.
Summarizing, "Free trade is bleeding America's economy to death." We've lost millions of high-paying jobs in both the old and new economy, the skills and tax revenues (estimated to exceed $1 trillion/year) associated with those jobs, and the American Dream's promise of prosperity and success for those millions directly and indirectly affected. Despite the fact that no country has achieved strong growth under free trade policies, we continue - iust bailed-out G.M. and Chrysler are now building new factories in Mexico, and the White House is pushing for expanded trade with South Korea. The 'good news' is that Fletcher believes the coalition behind free trade will eventually collapse, we will trade less, and do better.
Bottom Line: "Free Trade Doesn't Work" is excellent reading. In addition, Fletcher, though in the minority, is in good company. The late Paul Samuelson, Nobel-winner, author of America's most popular economics textbooks, and the undisputed past leader of the profession, expressed strong doubts about our free trade policies in 2004. Ralph Gomory (researcher, mathematician, IBM V.P.) and William Baumol (named one of the world's most influential economists) have concluded that taxes that penalize offshoring are required to control destructive free trade. Author William Greider says we are at an epic turning point, besieged by trade deficits, with a hard journey ahead. He suggests using Article 12 of the WTO that allows countries with persistent, unsustainable trade deficits to use emergency tariffs. Greider also points out Germany's labor laws require significant worker representation on corporate boards, bringing a broader perspective to offshoring decisions. Finally, Warren Buffett has proposed giving exporters certificates that importers would then have to buy, thereby eliminating the trade deficit. Following Fletcher and others, citizens can reclaim their power, revise economic thinking, and revive the American Dream.”
