Free Trade Doesn't Work Read online

  Will it do so one day? Even this is unlikely. Even where famously dematerializing and globalizing assets like fiber optic telecom lines are added—assets that supposedly make physical location irrelevant—they are still largely being added where existing agglomerations of capital are. For example, although fiber optic backbones have gone into places like Bangalore, India, which were not global economic centers a generation ago, big increments of capacity have also gone into places like Manhattan, Tokyo, Silicon Valley, and Hong Kong, which were already important.59 As a result, existing geographic agglomerations of capital are largely self-reinforcing and here to stay, even if new ones come into being in unexpected places. And these agglomerations have national shape because of past history; legacy effects can be extremely durable.60 Previous technological revolutions, such as the worldwide spread of railroads, were at least as big as current innovations like the Internet, and they didn’t abol­ish the nation-state.

  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.

  There is no getting around politics. Politics is still mostly practiced at the national level, and practiced with sovereignty only at that level. And the reality for almost all people and corporations is that national policies still matter. It matters whether one has good physical infrastructure and basic security. It matters whether one must constantly pay bribes to get things done. It matters whether one gets cut out of the best opportunities in favor of political cronies. It matters whether the local education system produces quality employees. It matters whether one has a sound currency to work with. It matters whether the local population reveres things like science, efficiency, and entrepreneurship. And it matters whether the politicians in charge of all these things are wise enough to keep them that way, and whether the voters (if the country is a democracy) are wise enough to elect the right politicians.

  Globalization doesn’t make all these things less important—let alone “irrelevant.” They are arguably even more important in a more globalized world because the rewards for getting them right (and the punishments for getting them wrong) are larger. Without globalization, mediocre industries can just sputter along for decades. But with globalization, these industries can get wiped out. But they can also conquer the world if they’re not mediocre. So national policies are arguably more important than ever.

  There is an important related factor: as 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.61

  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.62 According to one study, multinational companies “typically have about two-thirds of their assets in their home region/country, and sell about the same proportion in their home region/country.”63 Another meticulous 2008 study bluntly concluded that:

  Globalization as popularly understood does not exist. For example, there is no evidence that U.S. firms operate globally. Instead, they both produce and sell on a home region basis, as do MNEs [multi-national enterprises] from Europe and Asia.64

  So whatever else multinational corporations may be guilty of, vanishing into denationalized thin air isn’t it.

  Economic nationalism is usually held up by free traders as a dumb and reactionary force. Sometimes, of course, it is. Boneheaded economic nationalism belongs in the junkyard of history with the other ideologies rusting there. Nothing in this book is intended to defend it. But economic nationalism can also be a smart, technocratic, forward-looking force—indeed one of the key things that makes economic globalization work—when implemented correctly. Nations with weak or fragmented national cohesion, such as Nigeria, Afghanistan, or Iraq, haven’t exactly seized the opportunities of the global economy lately. Neither, in the U.S., have we.

  THE MYTH OF THE BORDERLESS ECONOMY

  The cliché that we live in a borderless global economy does not survive serious examination.

  Because the U.S. is roughly 25 percent of the world economy, a truly borderless world would imply that imports and exports would each make up 75 percent of our economy, since our purchase and sale transactions would be distributed around the world.65 This would entail a total trade level (imports plus exports) of 150 percent of GDP. Instead, our total trade level is 29 percent: imports are 17 percent and exports 12 percent.66 So our economy is nowhere near borderless. And as our trade is almost certainly destined to be balanced by import contraction, rather than an export boom, in the next few years, our trade level is almost certainly poised to go down, not up.

  A truly unified world economy would also mean that rates of interest and profit would have to be equal everywhere (or the differences would be arbitraged away by the financial markets). But this is nowhere near being the case. Even between adjacent and similar nations like the U.S. and Canada, national borders still count: Canadian economist John McCallum has documented that trade between Canadian provinces is on average 20 times as large as the corresponding trade between Canadian provinces and American states.67 It has been estimated that the average cost of international trade (ignoring tariffs) is the equivalent of a 170 percent tariff, of which 55 percent is local distribution costs and 74 percent is international trade costs.68 Much of international trade is interregional anyway, not global, being centered on European, North American, and East Asian blocs; this is true for just under 50 percent of both agriculture and manufactured goods.69

  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 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. Free trade’s widespread global unpopularity combines with the perception that America is behind it to antagonize peoples and governments around the world as often as it rallies them to our side. Occasionally, free trade may bribe foreign governments to cooperate with the United States, but it also enriches nations, like Saudi Arabia and Venezuela, whose elites are knee-deep in funding terrorism and other international mischief. Hard-coding free trade as a legal obligation, as the WTO does, frustrates our ability to use trade concessions as leverage to win foreign cooperation against our enemies.74

  Ironically, the Central Intelligence Agency seems to grasp many of these problems better than the supposedly economics-oriented agencies of the U.S. government. In its Global Trends 2015 report, the agency warns that:

  The process of globalization...will be rocky, marked by chronic financial volatility and a widening economic divide...Regions, countries, and groups feeling left behind will face deepening economic stagnation, political instability, and cultural alienation. They will foster political, ethnic, ideological, and religious extremism, along with the violence that often accompanies it...Within countries, the gap in the standard of living also will increase….Increased trade links and the integration of global financial markets will quickly transmit turmoil in one economy regionally and internationally.75

  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

  FLASHY, EMPTY ARGUMENTS

  Some arguments for free trade are sheer intellectual fluff—like the idea we should engage in it because it embodies the spirit of the age, the tide of history, or some other contemporary repackaging of these shopworn ideas.77 Magazines like the libertarian Reason, techno-utopian Wired, and entrepreneurship-oriented Fast Company reveled in such themes all through the dot-com boom years of the late 1990s.78 The hallmark here is loose, breathless prose whose actual analytical content dissolves among vague terms and hyperbolic assertions. (Cf. the quote from Wired magazine in Chapter 1.) The aim, above all, is to make free trade hip: the wave of the future. But free trade’s hard economics is just 19th-century laissez faire, the economics of the iron law of wages.79 Its intellectual kernel is David Ricardo’s 1817 theory of comparative advantage. Its rival, so-called new trade theory, is, by contrast, a genuinely modern—indeed 21st century—school of thought. Free trade is far too old to parade itself as the latest thing.

  Skepticism about free trade is often stigmatized with ad hominem attacks. These mostly come down to variations on the following:

  “Protectionists are dummies, losers, incompetents, hippies, rednecks, dinosaurs, closet socialists, or crypto-fascists.” 80

  Here’s free trader Barack Obama’s version, delivered to an audience of campaign donors in the exclusive Pacific Heights neighborhood of San Francisco while seeking the Democratic nomination in April 2008:

  You go into these small towns in Pennsylvania and, like a lot of small towns in the Midwest, the jobs have been gone now for 25 years and nothing’s replaced them. And it’s not surprising, then, they get bitter, they cling to guns or religion or antipathy to people who aren’t like them or anti-immigrant sentiment or anti-trade sentiment as a way to explain their frustrations.81 (Emphasis added.)

  God forbid the unemployed of an old-line industrial state should think trade has anything to do with their problems!

  But economic logic isn’t even really the issue here, as these arguments are really aimed at people who don’t even try to understand economics, but do care immensely about their social status.82 The media are saturated with this attitude. Thus magazine articles on trade problems focus on the unemployed, implying that only life’s losers oppose free trade (and that their unemployment is probably their own fault, anyway). The careers of people whose jobs are being lost to offshoring? Mere “drudgery.” Their lives are obviously nothing worth worrying about. They’re not like us here in Pacific Heights.

  This is largely just a chic veil thrown over class bias. Despite the doc­u­mented center-left preferences of most journalists on social and cultural issues, on economic issues, including trade, they lean right.83 A late-1990s survey by the watchdog group Fairness and Accuracy in Reporting found, for example, that only on environment-related economic issues were they to the left of the public. But on trade, they were well to the right. For example, 71 percent of editors and reporters supported Fast Track negotiating authority for the North American Free Trade Agreement, while 56 percent of the public opposed it.84 As 95 percent of these editors and reporters had incomes over $50,000, and more than half over $100,000, this comes as no surprise.85

  ARROGANCE AND INCOHERENCE

  The media sometimes tell us that America’s labor force is so much more skilled than other nations that free trade will cause us to cream off the best jobs in the global economy. The next minute, they tell us that our poor math skills and work ethic are the root of our economic problems and that we should only blame ourselves. These obviously can’t both be true.

  Sometimes, we are told to stop being arrogant and face up to the fact that the world isn’t our oyster anymore and that Americans aren’t entitled to be richer than foreigners. Fair enough: we’re not entitled to any particular living standard. But we certainly are entitled to a government that seeks to defend our prosperity, if that’s what we elected it to do.

  Signs that America’s trade policies are dangerously wrong are often reinterpreted as evidence that our economy is so strong that it can survive even these problems. For example, because we have survived a trade deficit which would have produced a currency collapse in any other nation, trade deficits must not matter. But that is like saying that because the strong constitution of a patient has enabled her to survive cancer, cancer isn’t a disease. If free trade is a cancer slowly eating at our economy, we need to know now—especially if it is a problem whose solutions have long lead times.

  Our present complacent attitude is the same one taken by past economic powers, such as the British, Spanish, and Chinese Empires, which postponed economic reform until it was too late. Consider the following piece of triumphalist free-trade rhetoric:

  Our capital far exceeds that which they can command. In ingenuity, in skill, in energy, we are inferior to none. Our national character, the free institutions under which we live, the liberty of thought and action, an unshackled press spreading the knowledge of every discovery and of every advance in science, combine with our natural and physical advantages to place us at the head of those nations which profit by the free interchange of their products. Is this the country to shrink from competition? Is this the country which can only flourish in the sickly atmosphere of prohibition? Is this the country to stand shivering on the brink of exposure to the healthful breezes of competition?86

  These words could have been spoken yesterday by an American politician on either side of the aisle. In fact, they are from a speech by British Prime Minister Sir Robert Peel—in 1846! (His soaring confidence turned out to be misplaced, and Britain’s economic decline began shortly thereafter.)

  America succeeded under free trade (albeit at mounting cost) during the Cold War. But that was a world that was half communist or socialist, and many other nations, as in Latin America, practiced an inward-looking economics that took them out of the game as serious competitors to us. S
o we didn’t have to face true global free trade. Now we do. (Like many ideals, free trade is more attractive when you don’t really have to live by it.)

  NUMBERS THAT DON’T PAN OUT

  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. ($227 billion in 2009, about 61 percent of our total, up from 39 percent the previous year).87 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 then forced by the government to hand over their key technological know-how as the price of entry.88 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.89 For $5,000 a year, American corporations offshoring work there can hire fresh computer-science graduates.90