There is a myth in wide circulation that the superiority of free trade is simply a settled question on which all serious economists agree. The flip side of this myth, of course, is that anyone who criticizes free trade must either be ignorant of economics, or the spokesman of some special interest which hopes to benefit from trade restrictions. Such critics are not only wrong, the story continues with admittedly impeccable logic, but profoundly worthy of public contempt, as they are necessarily either dumb or corrupt.
Unfortunately, this myth is just that: a myth, promoted by special interests which benefit from free trade, whatever the harm to the rest of the economy. Serious economists actually recognize a number of very serious criticisms of free trade -- even economists who ultimately decide that free trade is better than the alternatives. They generally don't talk about the flaws of free trade too loudly, for fear of provoking the public into supporting stupid forms of protectionism, but they certainly know they are there.
Thanks to recent developments in economics (most visibly signaled by Paul Krugman's winning the 2009 Nobel Prize), these criticisms are becoming more serious every day. There is, in fact, an inexorable erosion of the credibility of free trade going on in the academy, not that you'd know it from watching the economists who show up on TV.
The rest of this article is just a wee bit technical. The point is not to baffle the reader, but to pry open the mysterious "black box" of free trade economics a little, and let non-economists in on the big secret that economists regard as dangerous to talk about too loudly: free trade economics is a package of mechanisms that, like any piece of machinery, can and do break down all the time. And when they break down, free trade ceases to be a good idea.
Let's crack open that intimidating black box, shall we, and have a look at the machinery inside? Free trade has roughly ten very serious problems.
The first problem is the assumption that trade is sustainable. But a nation exporting non-renewable resources may discover that its best move (in the short run) is to export until it runs out. The flip side of this problem is overconsumption, in which a nation (like the present-day U.S., maybe?) borrows from abroad in order to finance a short-term binge of imports that lowers its long-term living standard due to the accumulation of foreign debt and the sale of assets to foreigners.
The second problem is that free trade increases inequality even if it makes the economy grow overall (which is itself questionable). Because free trade tends to raise returns to the abundant input to production (in America, capital) and lower returns to the scarce input (in America, labor), it tends to benefit capital at labor's expense. Economists call this the Stolper-Samuelson theorem.
The third problem is so-called "negative externalities," the economists' term for when economic value is destroyed without a price tag being attached to the damage. Environmental damage is the most obvious example, but there are others, like the cost of writing off expensively-developed human capital (otherwise known as "people") when free trade wipes out entire American industries.
The fourth problem is positive externalities, like the way some industries (mainly high technology) open up paths of growth for the entire economy. All industries are not alike, and the profits of an industry today do not necessarily predict the industry's long-term value for the economy. Free trade can allow these industries to be wiped out because it ignores this hidden value, harming the rest of the economy for decades to come.
The next four problems concern the all-important Theory of Comparative Advantage, the theoretical keystone of free trade economics. This theory, invented by the British economist David Ricardo in 1817, says that free trade will automatically cause nations to specialize in producing whatever they are relatively best at, and that this will lead to the best of all possible worlds. To wit:
Problem number five is that Ricardo's theory assumes factors of production are mobile within nations. Unemployed autoworkers become aircraft workers, and abandoned automobile plants turn into aircraft factories. But this doesn't always happen, and when it does, it is often at considerable cost.
Problem number six is the assumption, in Ricardo's theory, that the inputs used in production (like labor, capital, and technology) are not mobile between nations. His theory says that free trade automatically reshuffles a nation's factors of production to their most productive uses. But if factors of production are internationally mobile, and their most-productive use is in another country, then free trade will cause them to migrate there--which is not necessarily best for the nation they depart.
Problem number seven is that Ricardo's theory assumes the economy is always operating at full output--or at least that trade has no effect on its output level. But if trade puts people and factories out of action, this isn't true.
Problem number eight is that Ricardo's theory assumes short-term efficiency is the origin of long-term growth. But long-term economic growth is about turning from Burkina Faso into South Korea, not about being the most-efficient possible Burkina Faso forever. History has shown time and again that the short-term inefficiencies of a tariff, properly implemented, are more than compensated for by the long-term spur to industry growth it can provide, largely because growth has more to do with the industry externalities mentioned above (problem number four) than short-term efficiency per se.
Problem number nine is that Ricardo's theory merely guarantees (if true, which is itself questionable due to problems five through eight) there will be gains from free trade. It does not guarantee that changes induced by free trade, like rising productivity abroad, will cause these gains to grow rather than shrink. So if free trade strengthens our economic rivals, then it may harm us in the long run by stiffening international competition, even if it was advantageous for us to buy goods from these rivals in the short run.
The final problem is that, in the presence of scale economies, the perfectly-competitive international markets presumed by the theory of comparative advantage do not exist. Instead, industries tend to be imperfectly competitive and quasi-monopolistic. Under these conditions, outsize profits and wages accrue to nations that host such industries. And free trade will not necessarily assign any given nation these industries.
Hopefully, the above list should convince the reader that free trade is, at the very least, an extremely complicated question, and by no means something that anyone is entitled to consider simply settled. Therefore it is high time that free trade's critics were given the serious hearing that they deserve. America desperately needs a full-fledged debate on whether to continue with its Cold War policy of free trade or return to the protectionism we embraced from Independence until roughly the end of WWII.
Ian Fletcher is the author of Free Trade Doesn't Work: What Should Replace It and Why (USBIC, $24.95) He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933. He was previously an economist in private practice, mostly serving hedge funds and private equity firms. He may be contacted at ian.fletcher@usbic.net.
All systems require trade-offs or compromises such as between efficiency, manageability and sustainability. The more efficient a system is, the less manageable and more fragile. A robust system requires available surpluses of energy, material resources and infrastructure, which enable the distribution of its management into bite sized chunks and support vigorous recoveries from random disasters. Globalization and free-trade are the last gasps at optimizing global efficiency by consuming surpluses, thereby destroying manageability by either hierarchies or homeostasis, and reducing the ability to recover from local or global disasters.
Are there examples of global systems which have been sustained for millions of years with the same resource and energy constraints as our economic system? What are their design tradeoffs and the design rules, upon which they were structured? How do these rules compare to the design rules we use to produce and manage the economic system?
Only example: the web of life. But, Its global durability requires local, expendable subsystems: individuals and species that have designed-in term limits. A sustainable global economic system needs expendable individuals, cultures and nations; ones that are periodically replaced by others; probably not the tradeoff US citizens would willingly embrace.
Delving deeper into evolutionary processes uncovered 10 key design rules including: “Embrace Uncertainty.” Comparing them to current economic and political theories at the macro and micro levels yields fascinating and productive results. An early formulation of these ideas is contained in: http://www.elew.com/Dismounting%20Tiger.pdf
The global and national economic systems include an interactive community of four categories of subsystems: inanimate systems (buildings, cars, etc), living systems (people, plants, animals, etc.), belief systems (myths, memories and skills) and hybrid systems which are any cohesive combination of the other three (a car being driven down a road, buyers and sellers in a market, a company).
It is an accident of history that Ricardo modeled economic theory after Newtonian physics…external, objective, clockwork. The uncertain nature of people and their belief systems was overlooked. For example, the law of supply and demand is taught as a set of objective relationships when a more complete systems analysis reveals that market transactions are not based on physical realities, but upon the belief systems of buyers and sellers… which may or may not correspond to local or global physical realities, and which include the perceived relative status of buyer and seller and a host of other things unrelated to rational supply or demand; explaining, for example, advertizing which attempts to manipulate belief systems. In other words, the Newtonian model was (paraphrasing Einstein) “too simple an explanation;” but it is the model still taught today in econ 101.
We as a nation threw away so much, yet it could have worked to everyone's advantage if it had been approached differently. As it was, manufacturing people were coerced into giving away generations of hard won knowledge for nothing, as were many peripheral professional and semi-professional workers. The people on the receiving end still seem to be a generation away from knowing better than to use lead paint on toys, killer substitutions in heparin, kidney destroying melamine in food, air and water poisoning processes, and who knows what else. They may have simply exchanged one kind of poverty for another, while we watch excess profits wreak havoc on our financial system.
It riles me that large corporations seem able to offer only what assumes that we are all rich and leisurely. Not since the cell phone network have I seen a real benefit for businesses and families. If trade brought us true benefits like that, then fine, but when it simply empties pockets and fills landfills, it's not worth it.
I wish that I could find numbers that separate the wage and jobs effects of automation, off-shoring, and national chains. Businesses haven't begun to calculate the marketplace damage of automating and off-shoring jobs out of existence. Communities are only beginning to sense that there is no real gain when Wal-Mart arrives because local profits are lost. It is not clear to me that off-shoring is the worst offender. Maybe it's the effect of cheap money on automation or chain stores. Better data might lead us to surprising conclusions and solutions.
Not only does the product suffer, but so does the plight of the workers and their families.
Every worker has a right to a living wage and safe working conditions.
Free Trade is an excuse to race to the bottom, rather than uplift the world workforce, and our society, to a higher standard.
I like how Mr. Fletcher considers all American consumers to be an interest group, instead of the unions that argue for protection.
But one of my pet peeves is when people start throwing around the term "free" trade. Damn it—I don't want free trade! I want FAIR trade!
I don't want foreign governments subsidizing their industries so their exported goods are cheaper than ours; and I don't want those same government erecting artificial barriers to our exports.
Most of all, I want our government to sit down and work out an industrial policy that concentrates on rebuilding our middle-class and our devastated manufacturers.
Your concerns are legitimate, but you should know that free trade does not allow some of the unfair trade practices you posit.
I can frankly say that I'm more concerned with protecting and creating jobs here in the United States than in worrying about the workers or economy of some third-world country.
The reason they won't let anyone look into this balck box we are supposed to just take on faith, is that when you open it up the picture is not pretty - it will be proof positive that "free" trade only benefits those at the very top of the economic ladder and multinational corporations practicing labor arbitrage and regulatory avoidence - with zero benefit going to working people who see their livelihoods lost - in exchange for more access to cheap in every sense of the word consumables
If it takes protective Tariffs to recreate the manufacturing base which birthed our Middle Class then so be it. Full Stop.
1. our economy is broken, not enough jobs being created to support the population
2. previous stimulus methods are not very effective
3. denial of criticism is decreasing, economists are starting to face reality
4. it could get worse before it gets better
Now take a look at the chart at https://research.stlouisfed.org/fred2/series/CE16OV?cid=12. It shows civilian employment (i.e. your much loved "jobs").
Can you see any relationship at all between merchandise imports and jobs? Are you surprised that there is not a huge dip in jobs every time there is a rise in imports? If there is any relationship at all it is that cuts in imports happen at the same time as cuts in jobs (see the 2009 recession).
From 1992 to 2000 the trade deficit as a percentage of GDP rose from 0.5% to 3.9%. Unemployment fell from 7.3% to 3.8%. From 2002 to 2006 the trade deficit as a percentage of GDP rose from 3.6% to 5.8%. Unemployment fell from 5.7% to 4.4%. And now we have the trade deficit shrinking and unemployment is close to 10%.
What conclusion do you now draw about the relationship between the trade deficit and jobs?
You know very well what Samuel Clemens said about "lies, damned lies, and statistics."
Numbers lie, because they fly in the face of common sense ... and thus become "senseless."
For example: these "unemployment" figures are a lie because the definition of the term has been officially changed at least four times over the lifetime of that graph, but the graph was not restated. We have senseless terms now like "under-employment." (If the wage-earner of a middle class family of four gets a job at Starbucks, then by this figure he is not "unemployed.")
If you want a fairer picture: use a scatter-plot, not a single line. Don't just count "family income." Instead, count "family financial position" and consider only immediate liquid assets, not someday-maybe money like retirement funds (which BTW are mostly dry and non-existent) or Social Security (ditto).
Don't count exports vs. imports by "value." Count them instead by volume. Count ships. Trade goods = +1, ballast = -2.
What you'll "count" is a house-of-cards held up by worthless currency.
On that, thank you for conceding that there is "perhaps a rise in jobs". Re your suggestion that that doesn't really count because there are more people I presume you know that before the recession unemployment was near historic lows - see http://4.bp.blogspot.com/_3bGnkNeoPxk/SZiQ1JIJUqI/AAAAAAAACag/qP1TeKCqlIQ/s1600-h/research.stlouisfed.org.png.
And there were millions of illegal immigrants holding down jobs too.
And thank you for admitting that your knowledge of the poison content of Chinese products comes only from being the recipient of media scaremongering. I trust that you caught the shows and articles about exploding US Firestone tires, salmonella in US peanut butter and e-coli in US beef. Do you agree, based on those reports, that US products are very very very very dangerous?
How about if we say this. Good paying jobs for moderately well trained workers such as Engineers and IT people for example are quickly moving offshore. The good paying jobs for people working in manufacturing are already for the most part gone. The ones that remain pay $12 to $15 an hour.
How much does it cost to earn a reasonable living? Our poverty line is quite low at under $20k for a married couple. We need to find common food items that can put pay into context with other countries. How much time does a Gallon of Milk cost? A loaf of bread? A pound of the basic meat for the region?
The race to the bottom is a painful one for those already at the bottom.
(1) "Redundancy" is essential to any real-world production system. In other words, it DOES matter that you have several sources of supply, and that some of those supply sources are domestic. A system that lacks redundancy also lacks both strength (you are "on the short end of the stick" held by your supplier), and resiliency ("what is your plan-B when something goes wrong?").
(2) Unless you are a debt-binging national government (ahem...) or a debt-binging corporation propped up by one (a-HEM!) ... in other words, if you are "a real person" ... then you can only spend the money that you make. You're employed doing one thing to generate the money you need to buy what you want. Debt is no substitute for real money.
(3) "Synergy" appears when you have a healthy culture of local domestic production, where income-producing and income-consuming activities are physically close. The whole is much greater than the sum of its parts.
It is possible to describe a real-world system in theoretical terms, but the system is greater than its theoretical, individually isolated descriptions.
My chief complaint, however, is that the argument posed in the above article is boilerplate. I support free trade, and I've researched the issue extensively. I'm always looking for counter opinions, however, to challenge my world view. At the end of the day, you can employ as many polysyllabic words as you like in an effort to sound like an academic; but when your argument derives from simply one source - The Communist Manifesto - the whole thing is just a rouse. You don't like free trade because it increases profit for the capitalist, and hurts the worker. You argument that we're pulling for short term and ignoring long term loss are partly true, but it's not that black and white. The short of it is that you're not privy to board room discussions, so these claims are merely speculative.
I assure you, Alexander Hamilton was NOT a communist, and since HE'S the one who proposed (and got passed through Congress....) the USA's first industrial plan which lasted us until Reagan and created the largest, strongest middle class in world history.....
Instead of just resorting to the kind of inane boilerplate you decry, except from the right, how about you spend your time in this comments section refuting the article point by point. Or is that too much of a hassle for you? Or are you just another blowhard corporate suck up wingnut with nothing interesting to say?