Free Trade Doesn’t Work: What Should Replace It and Why by Ian Fletcher

Here are some highlights from this 2011 book:

* Foreign governments treat trade as war and use every trick in the book—legal and illegal under international agreements—to grab their industries a competitive advantage. And even when they don’t cheat, they are often more skilled in cultivating their industries than we are. Toyota, despite its troubles, somehow didn’t go bankrupt when GM did.

* Furthermore, vested interests are not infinitely powerful. They have to persuade the rest of the country, especially Congress, to go along with the policies they want. Despite political corruption, all the money in the world couldn’t bribe Congress to pass a law requiring people to roller-skate to work; legislation always requires some non-laughable justification. Therefore, lobbying successfully for free trade requires credible economic ideas that support it.

* Japan clearly did not become the second-richest nation in the world practicing free trade. China is conceded from one end of the political spectrum to the other to thumb its nose at free trade, but it is booming.
Even Europe seems to handle these matters better than we do: Germanic and Scandinavian Europe (Germany, Switzerland, Austria, Holland, Belgium, Luxembourg, Denmark, Sweden, Norway, and Finland) usually run healthy surpluses, and the Eurozone as a whole has had its trade within pocket change of balance since the euro was created in 1999.20 Thirteen European countries now pay their factory workers better than we do,21 and Germany (not China!) was the world’s largest exporter as late as 2008.22 Do all these countries know something we don’t?

* Economist Paul Craig Roberts, an Assistant Treasury Secretary under Reagan and today one of the most distinguished critics of free trade, reports seeing, when he was a fellow at the Center for Strategic and International Studies in Washington, memos analyzing what grants that think tank could obtain from the administration of George Bush, Sr. in exchange for firing him.24 (He had displeased the administration by criticizing its economic policies.) Bush’s science advisor, Alan Bromley, was forbidden to talk to the media for six months in 1991 after he told The Wall Street Journal that America needed an industrial policy.25 In 2003, the Defense Department temporarily shut down its own Advisory Group on Electron Devices after this group released a report detailing the destruction of U.S. innovation capabilities in electronics by imports.26 And Bruce Bartlett, one of the early figures of Reagan’s supply side economics, was fired by the conservative National Center for Policy Analysis in 2005 for denouncing George Bush, Jr. as a conservative “impostor,” later publishing a book by that title.27 Who pays the piper will certainly try to call the tune, no government likes to hear bad news, and shooting the messenger remains one of the favored ways of making bad news go away.

* When one scratches the editorial-page surface of economics and comes face to face with its intellectual core, one finds a mass of equations. This gives it the appearance of hard fact. How could anything so mathematical be a matter of opinion? (It also looks distinctly like something which people who don’t understand it should keep their mouths shut about.) But in fact, sophisticated math is actually overrated as an economic tool, as hinted by the fact that hedge funds employing it fared no better than others in the financial meltdown of 2008.

The overreliance of contemporary economics upon sophisticated mathematics creates a number of problems.34 The fundamental one is that because it is easier to mathematize some ideas than others, some ideas appear truer than they really are. But the presumption physics enjoys, that mathematically “elegant” theories are more likely to be true, simply doesn’t hold in economics, however much many economists may want it to.35 The aggressive use of simplifying assumptions can deliver elegant math on demand, but only at the price of misrepresenting reality.

* Some economists give unhelpful answers about free trade simply because they don’t think the national economic interest matters. Technically, they are of course correct that choosing America as the entity whose economic well-being one cares about is arbitrary, from the point of view of pure economics. There is nothing in economic science that privileges whatever nation lies between the 49th parallel and the Rio Grande.

* Contrary to myth, modern history has simply not been a one-way escalator to ever increasing global economic interconnectedness. Instead, this interconnectedness has ebbed and flowed upon larger political currents. It was pushed up by colonialism, but pushed down when former colonies, like the U.S. and India, adopted protectionist policies of their own after independence. It was pushed down by fascism on the right and socialism on the left. But it was pushed up by the Cold War. Prior to the 1970s, the peak of world trade as a percentage of world economic output was in 1914—a peak to which it did not return for two generations.52

* prosperous.53
Modern technology does not mandate free trade either. While technology indeed favors the expansion of trade, by reducing shipping and transaction costs, it does not mandate that this trade be free, rather than subject to tariffs. Indeed, if technology erodes natural trade barriers like distance, and trade barriers are sometimes beneficial (as we will shall see), then modern technology can, paradoxically, increase the justification for tariffs.
All inevitability arguments are moral evasions, anyhow, because offloading responsibility to the free market ignores the fact that we choose whether, and how much, to regulate markets. This is probably what the great protectionist President Teddy Roosevelt was driving at when he wrote that “pernicious indulgence in the doctrine of free trade seems inevitably to produce fatty degeneration of the moral fiber.”54
THE NATION-STATE IS NOT IRRELEVANT

It is sometimes suggested that free trade is a moot question because globalization has made the nation-state irrelevant. As Doug Oliver of the Cessna aircraft company recently said, in response to complaints about his company outsourcing its entry-level Skycatcher plane to a firm that supplies China’s air force:

Nothing is American any more. Nothing is German any more. Nothing is Japanese any more. Harley-Davidson sources parts from all around the world. Let’s face it, we’re in a global economy.55

This is all technically true (with respect to the sourcing of parts at least), but it misses the point. Even if the internationality of modern supply chains means that America’s trade balance adds up at the component, rather than finished product, level, we still run a deficit or a surplus. And even if who builds which finished products isn’t the key to prosperity anymore, who builds which components increasingly is.

* Ironically, the enduring relevance of the national economy is clearest in some of the “poster child” countries of globalization, like Japan, Taiwan, South Korea, Singapore, and Ireland. In each of these nations, economic success was the product of policies enacted by governments that were in some sense nationalist. Japan industrialized after the Meiji Restoration of 1868 to avoid being colonized by some Western power. Taiwan did it out of fear of mainland China. South Korea did it out of fear of North Korea. Ireland did it to escape economic domination by England. In each case, the driving force was not simply desire for profit. This exists in every society (including resource-rich basket cases like Nigeria, where it merely produces gangsterism), but does not reliably crystallize into the policies needed for economic growth. The driving force was national political needs which found a solution in economic development.

* Michael Porter, one of the most distinguished faculty members of Harvard Business School, has observed:

“Competitive advantage is created and sustained through a highly localized process. Differences in national economic structures, values, cultures, institutions, and histories contribute profoundly to competitive success. The role of the home nation seems to be as strong as or stronger than ever. While globalization of competition might appear to make the nation less important, instead it seems to make it more so.”

So what we can call economic national character matters. One sign of this is that even multinational companies are almost always strongly tied to particular nations. Despite the myth of the stateless corporation, only a few dozen firms worldwide maintain over half their production facilities abroad.

* In reality, the world economy remains what it has been for a very long time: a thin crust of genuinely global economy (more visible than its true size due to its concentration in media, finance, technology, and luxury goods) over a network of regionally linked national economies, over vast sectors of every economy that are not internationally traded at all (70 percent of the U.S. economy, for example).70 On present trends, it will remain roughly this way for the rest of our lives.71 The world economy in the early 21st century is not even remotely borderless.

* Free traders since 19th-century classical liberals like the English Richard Cobden and the French Frederic Bastiat have promised that free trade would bring world peace. Even the World Trade Organization (WTO) has been known to make this sunny claim,72 which does not survive historical scrutiny. Britain, the most freely trading major nation of the 19th century, fought more wars than any other power, sometimes openly with the aim of imposing free trade on reluctant nations. (That’s how Hong Kong became British.) Post-WWII Japan has been blatantly protectionist, but has had a more peaceful foreign policy than free-trading America. In reality, free trade sometimes dampens international conflict and sometimes exacerbates it. It enriches belligerent autocrats and helps them dodge democratic reforms. Today, it strengthens the Chinese military by building up China’s econ world economy in the early 21st century is not even remotely borderless.
FREE TRADE AS FOREIGN POLICY

Free traders since 19th-century classical liberals like the English Richard Cobden and the French Frederic Bastiat have promised that free trade would bring world peace. Even the World Trade Organization (WTO) has been known to make this sunny claim,72 which does not survive historical scrutiny. Britain, the most freely trading major nation of the 19th century, fought more wars than any other power, sometimes openly with the aim of imposing free trade on reluctant nations. (That’s how Hong Kong became British.) Post-WWII Japan has been blatantly protectionist, but has had a more peaceful foreign policy than free-trading America. In reality, free trade sometimes dampens international conflict and sometimes exacerbates it. It enriches belligerent autocrats and helps them dodge democratic reforms. Today, it strengthens the Chinese military by building up China’s economy and expanding its access to military technology through both trade and through purchases of American technology companies with the money earned thereby.
Attempts to link free trade to counterterrorism don’t stand up, either.73 The U.S. is the world’s leading free trader, but somehow the world’s biggest terrorist target anyway.

* Neither does free trade promote human rights. If China had to rely upon domestic demand to drive its economy, locking up its population as factory slaves would not be such a viable strategy. The same goes in other nations, and free trade agreements then frustrate attempts to impose sanctions on human rights violators. The sanctions imposed on South Africa in 1986 would be illegal today under WTO rules.76

About Luke Ford

I've written five books (see Amazon.com). My work has been followed by the New York Times, the Los Angeles Times, and 60 Minutes. I teach Alexander Technique in Beverly Hills (Alexander90210.com).
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