Free Trade Doesn’t Work

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

I have been a free trade skeptic for a long time now.  I’ve read Chronicles magazine, where Scott Richert and others have long written about manufacturing in Rockford, Illinois, a once-thriving manufacturing city suffering from the “giant sucking sound” of jobs moving out of America.  Richert put a human face on NAFTA and other globalist trade shenanigans;  Ian Fletcher, an economist, gives us the economics.  This is a readable, not-too-technical account of free trade, and there is a lot to say.

Progressivism has long had an internationalist focus, see Woodrow Wilson.  It’s no surprise to find the left doesn’t care about Americans in particular, whether it’s our jobs or our culture, and is fully on board with globalist free trade (see NAFTA, a Bill Clinton project).  You would think the right would fight, but you would be wrong.  Modern American Conservatism was created in the 1950s by William F. Buckley, and was fatally compromised by the influential inclusion of Frank S. Meyer, a formerly-Communist libertarian who cooked up “fusionism”, a synthesis of traditionalism (as represented by Russell Kirk) and libertarianism (as represented by F.A. Hayek).  Over the years the libertarian side won–particularly with the influx of globalist / internationalist neo-Conservatives, disaffected Trotskyist liberals such as Irving Kristol, who burrowed into the right, took it over, and turned it into a globalist force, joining the liberals.  Today one can visit National Review online and see that Free Trade is a Conservative Cargo Cult.  What we now have is a free trade duopoly.

Fletcher starts by describing the problems with free trade.  He elaborates the bad arguments for free trade–and we’ve heard them all, they are accepted wisdom.  The foundation of our Free Trade regime is that the U.S. cannot discriminate in favor of itself.  There is a (false) narrative that Free Trade is inexorable, inevitable, and always good; the interests of the nation-state are obsolete and irrelevant.

The fundamental message of this book is that nations, including the U.S., should see strategic, not unconditional integration with the rest of the world economy.

He quotes Wired magazine as indicative of the simplistic faith in free trade:

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

He says that “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.”  In other words, free trade includes much posturing. Finding out “who benefits?” is illuminating–typically it is the 1%, the Donor Class, those who make their income from returns on capital.

Remember when trade deficits were a big deal?  They weren’t until America embrace Free Trade, and during the 80s they became a big deal (because they had been unusual until then).  The solution was, “get used to it.”  Fletcher spells out the doom of unending trade deficits, which used to worry everyone.  It’s a sell-off of America to foreign interests, due to short time horizons and what he calls a perverse efficiency (immediate profits don’t signify long-term health, a legend that drives the success of the likes of Bain Capital); one day, there will be nothing left to sell off, the well will run dry.

Fletcher lists a number of things that are offered as solutions, and explains why each, in turn, isn’t the prescription.  Productivity growth, compensating the losers (the winners can help soften the blows), education, creativity and freedom, currency revaluation; and post-industrialism comes in for special treatment, and Fletcher lays out the case that having an industrial base is essential to a prosperous, healthy economy.

Fletcher wisely includes a number of critiques of free trade to avoid.

Because free trade has so many flaws in theory and causes so many problems in practice, it’s tempting to throw at it every criticism we can think of.

Fletcher wants the critique of free trade to be about the hard economics, not any number of side issues (he mentions culture as one).  There is no need for villainous drama–such as Big Corporations, or America.  “Fair trade” is a bad argument.  A level playing field is a bad argument.  Labor standards is a bad argument.  He tackles the “race to the bottom” argument.  Free trade doesn’t gut government (sorry libertarians).  It (thankfully) won’t Americanize the world.

Having described the problems with free trade, Fletcher goes into the real economics of trade.  He dedicates a chapter to debunking Ricardo’s theory of comparative advantage, explaining seven dubious assumptions that destroy the theory in practice.  An example is “There are no externalities.”  An externality is something not part of the theory, such as how America has offshored so much production to China, along with the waste and hazards of production (which have costs).  China is paying a steep price environmentally for taking on manufacturing, but this price isn’t being factored in anywhere.  Yet.

At any rate, American business does not believe in or practice comparative advantage, but it is used all the time in politics to lobby for more free trade.  Nevertheless, Fletcher explores ways in which the theory does illuminate things, and ways in which is does work.

Chapter 6 is the most interesting for me, because Fletcher sketches out a history of trade.  He discusses the myth of British free trade, and how in reality British industry went into decline with the adoption of free trade–or possibly, the adoption of free trade is a sign of decline.  If free trade is a sign of decline, it can be no coincidence that America’s full embrasure of free trade, finally adopted in the 60s, is also the time of James Burnham’s Suicide of the West. 

He also describes America as “the sweet land of protectionism.”  It may shock you to learn that

the American Revolution was, in fact, a war over industrial policy in which the commercial elite of the Colonies revolted against being forced into an inferior role in the emerging Atlantic economy.  This is one of the things that gave the American Revolution its exceptionally bourgeois character as revolutions go, with bewigged Founding Fathers rather than the usual unshaven revolutionary mobs.  It is no accident that upon Independence, a tariff was the very second bill signed by President Washington.

Is it any surprise John Hancock was so bold?

He lists out Alexander Hamilton’s economics, a dozen key measures, in his own words, where he emerges as a protectionist extraordinaire.

Southerners should reconcile with tariffs as a good thing.  The Civil War was not about the tariff, but Fletcher explains how slavery and free trade are intimately connected as economic policies:

free trade is, in fact, the ideal policy for a nation which actually wants to be an agricultural slave state.  Because slave states are unsuitable for industrial work, slave states from Rome onward have failed to industrialize.  Because they have no hope of developing comparative advantage in manufacturing, their best move is to optimize the comparative advantage in slave-based agriculture they are stuck with and import everything else.  Classic Ricardian free trade fits this strategy to a ‘t’.

America’s golden industrial age was characterized by tariffs, with Republicans dominant.  The retreat from protectionism was not driven by economics, as though protectionism had been proven bad, but by politics.  It’s a sad tale Fletcher tells how America’s leaders embraced free trade.  The average American wage has stagnated since the early 70s, which coincides with the triumph of free trade.  Fletcher also usefully dismisses the Smoot-Hawley Tariff Act as free-traders’ bogeyman.

Next Fletcher talks about the negligible benefits of free trade.  It does not reduce global poverty, it increases global inequality, and devastates middle-income nations.  NAFTA is a case study for the failure of free trade–for Mexico, not just the USAChina and India are held up a phony successes–their rise preceded their economic liberalizations.

Chapter 8, “The Disingenuous Law and Diplomacy of Free Trade” delves into the World Trade Organization and its nefarious effects in trying to regulate the world into a free trade utopia.  The loss of sovereignty and self-determination of every nation in the WTO is a sordid tale of a globalist power-grab.  And the USA is a victim as well, called by Fletcher  a “Global Sucker”.

Finally Fletcher offers his solutions.  He probes into the question “where does growth really come from?” which is something not well understood; if it were, it would be easy to discard free trade.  Quoting the Economist, a premier outlet of free-trade agitprop,

Economists are interested in growth.  The trouble is that, even by their standards, they have been terribly ignorant about it.  The depth of the ignorance has long been their best-kept secret.

Fletcher notes that

if free-trade economics is bad at explaining growth and knows it, then we really shouldn’t be taking its recommendations on how to get growth so seriously–starting with free trade.

He talks about good industries and bad industries and dead-end economies (say, agriculture).

One telltale sign that a formerly good industry is turning bad is that product innovation exhausts itself and the industry turns to process innovation.  And when a bad industry turns downright terrible, even process innovation exhausts itself and the industry just seeks cheaper labor.  One can trace this process in individual industries over time.  The shoe business, for example…

He notes that there is good and there is bad industrial policy.  It’s not necessary to try to keep bad industries.  But we don’t even try to keep good industries.  America’s industrial policy is–and don’t be fooled, we have one, it’s impossible not to have one–is de-industrialization.

Fletcher is clearly excited by recent work he calls the Multiple Equilibrium Revolution.  The field of economics is in such a sorry state that only a mathematical characterization can succeed in changing the tone, and economists Ralph Gomory and William Baumol have done so, Fletcher believes, successfully.  It will take many years, but theirs is an excellent start.  It’s a bit technical at times, but the end result is win-win situations in trade.  America is stuck in win-lose, where every other nation is free-trading us to death.

Next he presents the simple “Natural Strategic Tariff”, clearly a protectionist measure, and why it works.  It’s necessary because protectionism is necessary for a healthy industrial policy.  Keeping it simple is the only way to make it work, otherwise protectionism is doomed due to the political culture in America.  We cannot embrace a byzantine Japanese-style industrial policy; we need something that is politics-proof.

Fletcher deals with some reasonable objections to a tariff, and some alternatives to the natural strategic tariff.  In the end, he is elaborating a wise, pro American industrial policy–that will help Americans and American businesses.  Global businesses are going to have to adjust, and they will.  Foreign business will adjust.

The last chapter deals with the End of the Free Trade Coalition.  This is where things really get interesting.

The first rift this implies is between people who obtain most of their income from work and those who obtain most of their income from returns on capital.  People in the latter category obviously want all labor to be as cheap as possible.  People in the former category want the labor they consume (directly or embodied in goods) to be as cheap as possible, but the labor they produce and sell, namely their own wages, to be expensive.

This implies the possibility of an electoral coalition in which one part of society treats itself to cheap foreign labor as the expense of another.

Discussing how both left and right are wrong on trade,

The ideal political position from which to oppose free trade would be a kind of nationalist liberalism, but this Trumanesque or Jacksonian position does not exist in American politics today.

Said Fletcher in 2011.  But it’s the current year!  Someone may have read Fletcher’s book.

The fact that wildly different partisan figures ranging from Patrick Buchanan on the right to Ralph Nader on the left oppose free trade is a strength for protectionism, not a sign of ideological incoherence, as it means that protectionism can be credibly sold to voters from one end of the political spectrum to the other.  Protectionism can plausibly be packaged as anything from a right-wing tub-thumping America First appeal to a left-wing tie-dyed hippie sob story.  Even better, it can be packaged as a moderate and reasonable “commitment to a middle class society” that will appeal to voters in the center.

In a section on how free trade will fall apart:

Once protectionism is conceded to be a valid political position, it will eventually win the public debate… When this happens, the status quo will be sustained only be the tacit bargain of the American political duopoly, in which the two parties agree not to make trade a serious issue, whatever tactical feints they may deploy.  This bargain will hold as long at the benefits of keeping it, which mainly consist in keeping the corporate backers of both parties happy, exceed the benefits of defecting from it, which consist in winning votes.  Once on party defects, protectionism will…almost certainly be sufficiently successful in practice (and therefore popular) that the other party will have no choice but to follow.  The alternative, if one party insists on handicapping itself by clinging to an unpopular position on such a major issue, is an era of one-part political dominance like 1860-1932 or 1932-80.

He traces recent history of candidates statements and actual positions on trade, with false starts and missed opportunities (all tactical feints), and the zeitgeist on trade.  He gets to the 2010 mid-term election:

The big unexpected event of this election cycle was the sharpening turn of mass conservative opinion against free trade.  For example, though given to libertarianism on many domestic issues and heavily funded by pro-free-trade economic interests, 61 percent of Tea Party members surveyed said free trade agreements have hurt the U.S.  This right-wing populist movement is thus now more opposed to free trade than the average voter…..

Obviously this sets up a battle inside the Republican Party.  The Republican establishment has already lost battles in Republican primaries to the Tea Party, so if a fight breaks out, it well may lose.  The establishment’s best hope is to fob off opponents of free trade with paper concessions which leave its substance intact, but they will be constrained by the risk that the Democrats will outbid them in general elections with authentic opposition to free trade.

To read these things is electrifying.  If I had read this book in 2011, I would have stood agape watching things unfold as they have, even being the free trade skeptic that I’ve been.  I would be hailing Fletcher as an economic prophet.  I look forward to seeing how things continue to develop.

One point writer Vox Day has added to the whole picture is that free trade requires the free movement of not just capital, but of labor.  Hence the fanatical devotion of free traders to open borders.  If you are going to deal with the open borders problem or with the free trade problem, you are going to have to deal with both.