Dreamy Thinking on Free Trade

Ian Fletcher
Globalization and, more specifically, free trade have a remarkable capacity for inducing dreamy thinking in American minds.  The “everything will be all right” lullaby arguments called forth by the subject are endless.  These lullabies are not especially hard to construct, as many popular arguments for free trade sound persuasive—until real numbers intrude. 
For example:

“Free trade is good for America because it means a billion Chinese .are now hungry consumers of American products.”

But America is running a huge deficit, not a surplus, with China. ($272 billion in 2010, about 54 percent of our total). China deliberately blocks imports, mainly with non-tariff barriers, in order to decrease consumption, increase savings, and boost investment. (This high investment rate is the main reason its economy is growing so fast.) As a result, even the limited purchasing power China’s mostly poor pop­ulation does have rarely gets spent on American goods. The dream of selling to the Chinese functions primarily as bait to lure in American companies, which are forced by the government to hand over key technological know-how as the price of entry. They then build facilities which they discover they can only pay off by producing for export. The China market remains the mythical wonderland it has been since the 19th-century era of clipper ships and opium wars (when it was hyped as aggressively as today, by the way).

A related myth is this:

“Other nations are rapidly catching up to American wage levels. India, for example, has a middle class of 250 million people.”

But middle class in India means the middle of India’s class system, not ours: a family income about a tenth of what it would take here. India’s per capita income is only about $1,000 a year; an Indian family with $2,500 a year can afford servants. For $5,000 a year, American corporations off-shoring work there can hire fresh computer-science graduates.

This myth is calculated to soothe American anxieties:

“Offshoring is a tiny phenomenon.”

Offshoring, of course, is just trade in services. But it’s just getting started and will be big soon enough, thanks to 15 percent per year compound growth. Alan Blinder, former Vice-Chairman of the Federal Reserve and now an economist at Princeton, has estimated that it will ulti­mately affect up to 40 million American jobs.

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Here is a hopeful dream some people console themselves with:

“Cheap foreign labor is not a threat to American wages because increasing prosperity will drive up wages overseas.”

While this may be true in the long run, at currently observed rates of income growth it will take decades at best. And it may not happen at all, as the past experience of nations like Japan, which rose from poverty to wages similar to the U.S., may not be replicated. Sub-Saharan Africa has a lower per capita income today than 40 years ago and worldwide, the UN reported in 2003 that 54 nations were poorer than they had been in 1990.

This common claim has no real quantitative basis:

“Free trade brings us enormous benefits.”

But one of the dirty little secrets of free trade is that the benefits of expanding it further—as we are constantly told we must do—are actually quite small, even according to the calculations of free traders themselves. (More on this in Chapter Seven.)
This next claim appeals to the American sense of superiority:

“We can sustain our huge trade deficit indefinitely because foreigners .are so eager to invest in our wonderful business climate.”

Unfortunately for this idea, most foreign investment in the U.S. goes for existing assets. For example, of the $260.4 billion invested in 2008, 93 percent went to buying up existing companies. Even worse, much goes into mere government debt—which gets converted, by way of deficit spending, into consumption, not investment. 

Here is a sophisticated-sounding analysis that seems to take the draw-backs of free trade seriously:

“Free trade costs America low-quality jobs but brings high-quality .jobs in their place.”

That would obviously be a kind of free trade we could live with. But the hard data actually show America losing both kinds of jobs. For example, according to the Bureau of Labor Statistics, the U.S. lost over 162,000 engineer and architect jobs between 2000 and 2009.

This myth is particularly slippery:

“Savings to consumers from buying cheaper imports outweigh the .wages lost by not producing these goods domestically.”

But there is no data that actually proves this, particularly since the crucial data concerns the long term, which we have not yet had the oppor­tunity to observe. And there is no principle of economics that guarantees that this will be true, even in theory. But we do know that since George W. Bush took office, America has lost nearly five and a half million manufacturing jobs.

Here is a seductive and, frankly, dangerous argument:

“America is still the world’s richest country, and we’re free traders, .so free trade must be right.”

But any case for free trade that turns on the present general prosperity of the United States ignores the fact that short-term prosperity is a lagging indicator of the fundamental soundness of a nation’s economy. Immediate prosperity largely consists in the enjoyment of wealth, like housing stock, produced in years past, so a nation that has been rich for a long time has considerable momentum to ride on. Declining industries may even reap record profits during the years in which they liquidate their competitive positions by outsourcing production, cutting investment, and milking accumulated brand equity. 

Many of the indicators used to show America economically outperforming the rest of the world are questionable, anyway. Our unemployment rate is no longer lower than other major developed nations like Germany, as it long was, and looks even less impressive once prison inmates and other forms of nonemployment are factored in. Our high per capita income is largely a result of Americans working longer hours than in other developed nations and of our having a higher percentage of our population in the workforce. As a result, our output per man-hour is much less impressive, even less so if one assumes that our currency is unsustainably overvalued, as it is. 
The reality?  Free trade is bad for America and we are being misled—often deliberately—by the promoters of the above arguments.  It’s high time we stopped falling for them and returned to America’s original tradition of a tariff-protected economy.
Ian Fletcher is Senior Economist of the Coalition for a Prosperous America, a nationwide grass-roots organization dedicated to fixing America’s trade policies and comprising representatives from business, agriculture, and labor. He was previously Research Fellow at the U.S. Business and Industry Council, a Washington think tank founded in 1933 and before that, an economist in private practice serving mainly hedge funds and private equity firms. Educated at Columbia University and the University of Chicago, he lives in San Francisco. He is the author of Free Trade Doesn’t Work: What Should Replace It and Why.

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