Challenging The Conventional Wisdom on Free Trade

Free trade has been the conventional wisdom in the U.S. for so long that many people have forgotten that it is even possible to challenge its fundamental assumptions. It is supposedly a settled truth of economics that free trade is always best and that anyone who questions it is either merely ignorant or the spokesperson of some special interest. Protectionism supposedly belongs to the dark past —despite the fact that we ourselves accuse some of the world’s most successful economies, like China, of practicing it in the 21st century.

But in reality, free trade is not generating rising prosperity, rather a relentless economic headwind which “caps” the incomes of ordinary Americans by competitive pressure from foreign nations, some of which suppress their own wages by undemocratic means. According to the Census Bureau (see page seven of this report, real median family income in 2008, the last year for which complete data are available, was actually slightly lower than in 1999. An entire decade has proved a giant economic bust for the average American, even before the recession.

The hard fact is 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 like waitresses and security guards. We were promised that high tech jobs would be America’s salvation, but this failed, as we have been running a deficit in high technology since 2002. High-tech jobs are not going to save us. Neither, given the rise of offshoring, are service jobs, given that service jobs immune to offshoring (because they must be performed in person) are either too elite to help most people (surgeons) or low-paid (the aforementioned waitresses and security guards).

The supposedly intellectually-impeccable economic economics that vindicates free trade is, as I discuss in my new book Free Trade Doesn’t Work: What Should Replace it and Why, a tangle of weak reasoning, outdated facts, and outright corruption. It ultimately comes down to counting up the (undenied) benefits of free trade, then assuming that these benefits “must” surpass free trade’s costs because of economic logic that is either:

a) Simply assumed, either by sleight-of-hand or on the grounds of laissez faire ideology.

or

b) Based on cartoonish oversimplifications of how real economies work, economic theories that haven’t been updated since Ricardo’s 1817 theory of comparative advantage, and factual premises that are observably not true today.

The great irony is that these problems are no real mystery. The problems with free trade have, in fact, been understood for hundreds of years—indeed since free trade was first advocated at the dawn of modern capitalism 400 years ago. They were certainly understood when America was founded: it is no accident that the U.S. was historically a protectionist economy. This is why the Founding Fathers explicitly granted Congress the power “to regulate commerce with foreign nations” in Article I, Section 8 of the Constitution.

If protectionism is such a terrible and un-American idea, why did the U.S. go from being an agricultural backwater to the world’s industrial superpower under this policy? In our pre-WWII tariff era, we had the world’s highest standard of living despite the fact that imports were well under five percent of GDP. (They are 17 percent today.) The average American was roughly twice as well-off as the average Englishman, despite the fact that Britain in this era had imports roughly three times our scale.

Free traders often defend free trade by reminding us of the benefits of trade. These are real. But trade and free trade are not the same thing. Nobody protectionist in America today is proposing abolishing all trade, but we don’t need a trading system without reasonable limits in order to gain from some foreign goods and foreign competition. We rejected pure laissez faire in our domestic economy a very long time ago, in the Progressive Era around the turn of the 20th century; there’s no good reason to suppose it makes any more sense internationally.

When free traders can’t sell the economics of free trade, they resort to mythology about its supposed political effects. But free trade does not promote democracy, human rights, or peace. Instead, it massively enriches governments like that of China, enabling them to buy the bullets they need to oppress their own peoples and menace their neighbors. And free trade has been the origin of shooting wars for a long time: that’s how Hong Kong became British. Human rights? Under the WTO’s free-trade rules, the sanctions imposed on South Africa in 1986 would now be illegal.

Ian Fletcher is a Research Fellow at the U.S. Business & Industry Council, a Washington-based think tank founded in 1933, and author of the new book Free Trade Doesn’t Work: What Should Replace it and Why. His website for his book is at freetradedoesntwork. He can be contacted at ian.fletcher@usbic.net.