Free Trade Doesn't Work Read online

  Formal mathematical modeling of the economy, where these distortions reside, should be viewed as a tool, not as identical with economics as such, an error common in the profession since WWII.38 Sometimes modeling can be very revealing, but sometimes it conceals realities that are hard to wrap math around.39 Sometimes, it can even destroy knowledge, when it prevents important facts from being recognized simply because they are hard to mathematize. Some of the most insightful recent work in economics—by thinkers like 2009 Nobelist Oliver Williamson, Harvard Business School’s Michael Porter, Tokyo-based financial journalist Eamonn Fingleton, and Norwegian economist Erik Reinert—barely uses it.40 The economic technocrats of Beijing, Tokyo, and Seoul, who have produced amazing economic achievements in recent decades, have shown almost no interest in it at all, beyond basic statistics.41

  VALUE JUDGEMENTS VS. ECONOMICS

  Economics has some problems understanding the effects of free trade simply because it is a social science and therefore value-free. Many people are surprised to learn this, but there is actually nothing in economics that holds that prosperity is better than poverty, any more than neuroanatomy holds that pleasure is better than pain.42 And yet economics uses terms, such as “efficient,” which certainly sound like value judgments. So when economists say that free trade is efficient, this actually has a narrowly technical meaning, with limited connection to national economic well-being as most people would understand it.

  Conversely, economics also has its true believers, for whom the infallibility of free markets, of which free trade is a part, is a “beautiful idea,” a secular religion like Marxism once was. The libertarian Cato Institute in Washington is their Vatican and the old Ayn Rand cult of “objectivism” their fundamentalist sect. But these people are trying to pass off political ideology as if it were economics. It is simply not the same thing.

  A discipline dealing in observable facts, like economics, is not an appropriate object of faith, which rightly pertains to religious subjects and other nonempirical matters. If economic facts are observable, then observation should determine what we think about them. Nobody should have “faith” in free markets (or their opposites); they should have evidence (either way) or not hold an opinion. The Cold War gave Americans a terrible habit of turning economics into a quasi-theological clash of absolute values.

  ECONOMICS TAKES DECADES TO GET THINGS RIGHT

  Economists have been criticizing free trade on and off since it was first advocated near the dawn of modern capitalism 400 years ago.43 However, the current wave of academic critique is relatively young. New trade theory, the blandly named but pathbreaking critique that is the academic foundation of Part III of this book, emerged in the late 1970s. But it only achieved its breakthrough synthesis in 2000, with Ralph Gomory and William Baumol’s brilliant little book Global Trade and Conflicting National Interests (whose ideas we will explore in Chapter 10). Because it takes time to gather data and think through objections, decades may pass before a new insight becomes the general consensus of the discipline. So it may still be a while before the economics profession as a whole digests these innovations and changes its mind about free trade.

  Right now, the (slowly crumbling) consensus in economics mainly derives from work that reached acceptance in the 1980s. This was the heyday of free-market economists, Milton Friedman and others, who did brilliant work debunking the liberal Keynesian consensus under which they grew up. That consensus, which was gospel from the 1940s to the 1960s, broke down under the stagflation of the 1970s and was a product of the Great Depression. It had itself overturned an even older consensus derived from the laissez faire gold-standard world of the late nineteenth century. In the 1960s, when the political consensus was Keynesian, the profession was Keynesian. In the 1980s, when free markets resurged in political popularity under Reagan and Thatcher, economics was in eager support with so-called “efficient markets” theory. Neither of these ideas, in its orthodox form, is taken seriously by many economists today.44 This suggests that economists are suspiciously reliable sock puppets of the political status quo, and that their reasoning is not as different from the thinking of ordinary concerned citizens as their intimidating academic facade might suggest.

  A NONIDEOLOGICAL ECONOMIC NATIONALISM

  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.

  But this is an atti­tude of little practical use to a nation in serious economic trouble. As economist Herman Daly of the University of Maryland, best known for his work on ecological economics, puts it, “Free trade makes it very hard to deal with these root causes at a national level, which is the only level at which effective social controls over the economy exist.”45 Because we have a national government, because Americans care about what happens to their economy, and because it is the national debate on the question that will bring changes (or fail to), our trade problems will be fixed in Washington or not at all.

  Globally, for good or ill, the nation-state is still where the buck of political legitimacy stops. (Higher and lower political entities, from Kansas to the United Nations, enjoy legitimacy only because nation-states have given it to them.) So even if other instruments for controlling the world economy can be developed over time, the nation-state will be the bottleneck for developing them. A blanket rejection of even the mildest economic nationalism—an attitude common at both extremes of the political spectrum—simply hands a blank check to multinational corporations, foreign powers, and distorted market forces to do as they please.

  At an absolute minimum, economics should not be abused to “prove” the inappropriateness of caring about national economic well-being—something it does not do. From the point of view of pure economics, internationalist assumptions are as arbitrary as nationalist ones. People who reject the national economic interest should do so openly, not hide behind theoretical constructs that do this on the sly.

  The ultimate value of nationalism vs. internationalism is a value judgment beyond the scope of this book. A nonpartisan “soft economic nationalism” is postulated herein simply to make the critique tractable, as the problems with free trade become clearest when one asks how a given nation may be helped or harmed by it. The only thing this kind of nationalism insists upon is that a nation’s economy should basically be run for the benefit of its people.46 It has no ideological commitments with regard to other usages of the term “nationalism,” and leaves open to partisan debate the best way to realize its objectives. As we shall see, the trade solutions America needs could be implemented by either party and painted in a wide variety of ideological colors.

  Some of the analysis in this book is more relevant to other nations than to the U.S., simply because it applies to economic circumstances that obtain there more than here. We will, for example, take a long hard look at why free trade is bad for developing countries. Whether the policy implications of these analyses are also good for America depends on the analysis in question. This is not a univocally America First book, simply because not every valid critique of free trade implies policies that would be in America’s interests. Other nations have the right to play the game for their own benefit and seek the well-being of their own people, too. Free trade is so problematic that easily half the world has something to gain by ending it. There is no point foreclosing the scope of our analysis just to avoid discovering holes in free trade that will help Costa Rica more than ourselves. But don’t worry: America is going to get plenty out of ending free trade.

  PART I

  THE PROBLEM

  Chapter 1

  The Bad Arguments for Free Trade

  Before we delve into the defective economics of free trade, we must clear away a c
onsiderable mass of accumulated intellectual debris. The issue is bound up in the public mind with a lot of extraneous questions, so we must disentangle it from these if we are ever to think straight about it.

  For a start, we are not debating whether cosmopolitanism is a good thing. In many ways it is, but it is a cultural question with little to do with the actual hard economics of international trade. Neither are we debating the choice between, in the words of New York Times columnist Thomas Friedman, “the Lexus and the olive tree,”47 that is between the efficient but soulless rationalism of the global marketplace and the rooted particularism of nations and communities. The economics itself of free trade is legitimately controversial, so there is no justification for bracketing it as a settled question and turning to imponderables like the relative value of prosperity vs. heritage.

  We are also not debating globalization as such (an historical process) or globalism (the ideology that favors globalization).48 Though it has ramifications that affect almost everything, free trade is, strictly speaking, a purely economic question, and globalization involves a lot more than economics. It includes cultural exchanges, population movements, global governance, the global environment, and many other things. So one can certainly oppose free trade and support globalization with respect to its noneconomic aspects (or vice-versa, for that matter).

  Even a certain amount of economic globalization is perfectly compatible with ending free trade. If every nation on earth imposed a 10 percent tariff, this would end free trade by definition, but the world would still be globalizing economically—albeit in a slower and more controlled fashion than today. It has been estimated that the spread of air freight had the same effect as a tariff cut from 32 to 9 percent in the U.S. from 1950 to 1998.49 But no ideological energy is expended on the problem of air freight pricing.

  ECONOMIC GLOBALIZATION IS A CHOICE

  Economic globalization is often debated as something that is either “good” or “bad” and will either “succeed” or “fail.” But framing the alternatives as binary is too crude, and tends to force uncritical approval on both counts. It encourages the assumption that we “must” make economic globalization succeed, and as a unitary package, with no choice about its different aspects possible. The better questions to ask are how far will it go, what shape will it take, and what measures (if any) should we take to influence either?

  If economic globalization is a good thing, then it should be able to survive our getting a choice about how far it is allowed to go. Attempts to foreclose that choice betray a distinct nervousness about what people might choose on the part of those who would foreordain the outcome—usually in favor of a radically laissez faire result. The tragedy of free trade is that it gives up some of the best tools humanity has to shape what kind of economic globalization we get: tariffs and non-tariff trade barriers. There simply are not that many levers over the world economy that are both feasible to pull and have a large impact. If we rule out some of the best, we haven’t got many left.

  The fundamental message of this book is that nations, including the U.S., should seek strategic, not unconditional integration with the rest of the world economy.50 Economic openness, like most things in life, is valuable up to a point—but not beyond it. Fairly open trade, most of the time, is justified. Absolutely free trade, 100 percent of the time, is an extremist position and is not. (The difference between the two is rational protectionism.) Valid economics simply doesn’t support the extravagant notion that, in the words of techno-utopian Wired magazine:

  Open, good. Closed, bad. Tattoo it on your forehead. Apply it to technology standards, to business strategies, to philosophies of life. It’s the winning concept for individuals, for nations, for the global community in the years ahead.51

  Nations need instead a well-chosen balance between openness and closure towards the larger world economy.

  One giveaway sign that laissez faire in foreign trade (what free trade is) is wrong is that laissez faire hasn’t been taken seriously in America’s domestic economy for well over 100 years—since before the era of Teddy Roosevelt’s trustbusters around the turn of the 20th century. Despite perennial posturing to the contrary by free-market ideologues, we have, in fact, found reasonable levels of regulation in most parts of our economy to be best: neither outright state control nor absolute economic freedom. It is no accident that regulating international trade was well within the intention of the Founding Fathers: Article I, Section 8, of the Constitution explicitly authorizes Congress “to regulate commerce with foreign nations.”

  FREE TRADE IS NOT INEVITABLE

  It is often said (or tacitly assumed) that in today’s world, free trade is somehow inevitable. But if so, why do its supporters bother arguing for it so aggressively? The inevitability of free trade certainly does not follow from the apparent inevitability of some form of capitalism, given the long history of protectionist capitalist economies. (The U.S. itself used to be one, as we will see in Chapter Six below.)

  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

  This flux is not an idle curiosity of unrepeatable history: anyone who assumes world trade can only go up in the long run should consider what Peak Oil or tightening environmental constraints may do to transport costs. Neither has increased trade always correlated with increased prosperity and its decline with the reverse: the world economy was actually less globalized in 1960 than in 1910, but more 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.

  In any case, the nation-state is a long way from being economically irrelevant. Most fundamentally, it remains relevant to people because most people still live in the nation where they were born, which means that their economic fortunes depend upon wage and consumption levels within that one society.

  Capital is
a similar story. Even in the early 21st century, it hasn’t been globalized nearly as much as often imagined. And it also cares very much about where it lives, frequently for the same reasons people do. (Few people wish to live or invest in Malawi; many people wish to live and invest in California.) For a start, because 70 percent of America’s capital is human capital,56 a lot of capital behaves exactly as people do, simply because it is people. Another 12 percent is estimated to be social capital, the value of institutions and knowledge not assignable to individuals.57

  So although liquid financial capital can indeed flash around the world in the blink of an electronic eye, this is only a fraction (under 10 percent) of any developed nation’s capital stock. Even most nonhuman capital resides in things like real estate, infrastructure, physical plant, and types of financial capital that don’t flow overseas—or don’t flow very much. (Economists call this “don’t flow very much” phenomenon “home bias,” and it is well documented.)58 As a result, the output produced by all this capital is still largely tied to particular nations. So although, for reasons we will examine in detail later, capital mobility certainly causes big problems of its own, it is nowhere near big enough to literally abolish the nation-state as an economic unit.