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).

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.