Free trade doesn't work, the global economy is a myth and the U.S. has been duped during trade negotiations for the past 40 years according to Ian Fletcher, an adjunct fellow with the U.S. Business and Industry Council and author of Free Trade Doesn't Work: What Should Replace It and Why, who relayed these concepts to me in an exclusive interview.
During our exchange I discovered that Mr. Fletcher certainly is not opposed to capitalism, underlined by his experience working for hedge funds and private equity firms as an economist, but what he is opposed to are bad economic policies that have led to an ever-burgeoning U.S. trade deficit well on its way to hitting $500 billion this year.
You argue that protectionism is more "American" than free trade. How would you respond to libertarian types who might see this as an assault on America's deeply-held capitalistic values?
IAN FLETCHER: Libertarians simply don't know their history. Take out a $10 bill and have a look at the portrait on it. Alexander Hamilton, founding father and intellectual architect of American capitalism, was a protectionist, and protectionism was American policy from Independence until after WWII. The reality is that a blend of government support for economic growth along with vigorous market-oriented competition has been the American tradition from the transcontinental railroad to the Internet. Entire industries like semiconductors and aircraft were effectively launched by Cold War military industrial policy. Is it an accident that nations, like China, that still do this sort of thing are cleaning our clock right now?
You thoroughly and convincingly document, supported by countless inconvenient facts, how protectionism has been much more beneficial to the U.S. throughout history than free trade. If protectionism is clearly the better economic policy, why is the U.S. so resistant to change?
IAN FLETCHER: The U.S. isn't totally resistant to change on this issue, and it is, in fact, changing. Since the late 1990s, one can trace public opinion and congressional majorities inexorably turning against "free" trade, which has really been a distinctive, offshoring-focused approach to trade policy to benefit multinational corporate interests. Why has it taken so long? Corruption, both the obvious kind driven by campaign finance, and the subtler kind deriving from the laziness, complacency, and intellectual arrogance of economists.
The "American" multinationals, which are no longer American corporations but find this fiction convenient on Capitol Hill, and other free trade advocates have prevailed because a critical mass of American voters has not yet seen through the delusional economics of free trade, and because America can still borrow money abroad and sell off assets to cover its trade deficit. But this music is going to stop fairly soon.
But doesn't foreign competition force U.S. corporations to become leaner and more productive?
IAN FLETCHER: Sure, but I'm not against foreign competition. I'm not against trade either. I'm against free trade and the ersatz version thereof we are being subjected to, neither of which are the same thing as trade per se. Companies need enough competition to keep them on their toes, but not so much as to knock them off their feet. The U.S. color TV industry hasn't exactly been driven to heights of efficiency by foreign competition--because foreign competition killed it. And a lot of that competition wasn't free at all; it was subsidized by foreign nations seeking a foothold in strategic industries, i.e. those with a future.
India's prime minister recently suggested offshoring processes to India makes American corporations more productive overall. Is there any validity to this statement?
IAN FLETCHER: This is a mirage created by the fact that if you offshore the low-productivity jobs from an American company, the jobs remaining in the U.S. will have, by definition, higher productivity--creating the illusion that the company is now more productive. But jobs have still been lost, and there is, pace laissez-faire economic theory, no guarantee that the workers who formerly held them will find new jobs of equal or greater value. What works on the level of the individual company is a net loss for the economy as a whole.
And it's erroneous to suppose that merely upgrading skill sets will be enough to protect American wages and employment levels if we do nothing to fix our employment situation. Educating people for jobs that don't exist because they've moved abroad will not magically cause jobs to come into existence.
Which products should the U.S. target immediately for protectionist measures?
IAN FLETCHER: I don't advocate industry-specific tariffs, which obviously could lead to all kinds of political mischief. I prefer a flat tariff. But if America imposed, say, a flat 30% tariff on all imports, this would tend to bring back to the U.S. high-value industries like producing flat-panel displays, not the cheap-labor stuff like T-shirts.
Can China sustain its unprecedented growth through free trade, and what would happen to China if America woke up one day and became protectionist?
IAN FLETCHER: Free trade does not even remotely characterize what China practices. China practices industrial policy and mercantilism, which are the systematic manipulation of the domestic economy and foreign trade to increase economic growth. Right now, the interests of China's ruling elite are far more closely aligned with the interests of the Chinese economy as a whole than in the U.S. China's elite wants to build up its own country; the American elite is quite happy to let America gradually decline so long as they can make investments and money overseas. At some point, America's ability to absorb China's trade surpluses will end, and it doesn't look like China can smoothly segue to satisfying domestic demand quickly enough. Their manufacturing base is set up to produce goods, like fax machines, pitched at the income levels of their trading partners, not their own people.
Explain how free trade actually leads to artificial pricing (i.e., dubious assumption #2 in your book: "there are no externalities").
IAN FLETCHER: An externality is a missing price tag. For example, this means that products produced in environmentally-harmful ways impose economic costs on the environment that ought to show up in their price and don't. To take another example, buying so many cheap imports that you kill off an entire domestic industry will deprive America's economy of the future value of that industry and everything that would have grown out of it. Because we lost the color TV industry, we've never had a flat-screen TV industry either--but the cost of that wasn't factored into all those cheap color TVs in 1981.
Countless jobs have been lost from corporations procuring parts, relocating or outsourcing entire manufacturing operations overseas. Why is manufacturing important to America?
IAN FLETCHER: Because Americans want to consume manufactured goods, which means that either we must make them, or we must make something else to trade for them. And there just aren't enough other things we can offer the rest of the world, to keep them supplying us manufactured goods forever. Exporting soybeans and investment-banking services just won't cut it; the numbers (which are easy to look up) aren't nearly big enough. Non-elite service-industry jobs are also much more productivity-constrained than manufacturing, so you're never going to be able to pay most people decent wages there.
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The FED is another such ecenomic institution that came from the British. Between the fractional reserve banking con job and the free trade con job, our country is finished. British Imperialism extends to its former colonies such as the United States. It isn't the British people but the Winsors and others in the British Oligarchy.
Wall Street itself is anti-American in the sense that it shells out huge sums of money to lobbyists and campaigns to maintain the economic drain on America for their own personal profit.
If we lose the scientific and technology lead to China or any other country, the USA will rapidly decline into a third world nation, and our citizens will have to work for the Yuan equivalent of US pennies per hour after the total economic collapse of the USA and the buying power of the US dollar goes to zero.
The USA is no longer the scientific and technical world leader that it once was just a few decades ago.
There is very little economic incentive for US citizen college students to major in any of the science or engineering fields at this time.
The jobs for science and engineering graduates are being eliminated from the USA and relocated overseas or filled by H1b immigrants. This situation needs to change for the benefit of the US economy.
I believe that most US students today want to study business and/or economics in order to become one of the wealthy Wall Street (master criminal) business tycoons.
No person in his or her right mind would major in science or engineering since the pay scale has eroded so much in the last few decades, the jobs are being eliminated by outsourcing, and the study is so demanding compared to several other less demanding and more rewarding fields of study.
We need to do something!
The congress of the USA instituted (extremely) high import tariffs to encourage the industrialization of the USA, and it was successful in establishing a positive balance of trade, accumulating Gold reserves, creating a manufacturing base, creating a technical data base, and making the USA independent from England for technology, and this was successful.
One way or another we must stop the exchanging title to everything of value that is privately owned in America as required to get US dollars back from industrious foreigners in foreign countries to pay for government expenditures, and also to pay for more things that we continue to import with US dollars shipped to foreigners.
We must create a positive balance of trade by any means possible. If not, we will destroy the purchasing power of the US dollar.
Without import tariffs, most all products will continue to be available for less US dollars if they are manufactured in foreign countries where labor costs are minimized than if the same products are manufactured in the USA with higher paid US labor and higher US environmental compliance costs.
The US labor force has no future without high import tariffs to prohibit foreign imported products.
The members of that industrious family can then reflect their real wealth and financial security with the net positive accumulation of grain, gold, cattle, jewels, land, buildings, hotels, casinos, factories, commodities and/or other marketable products for reserve use in times of emergency and/or also to raise the standard of living for the members of that family.
This continuous stream of newly created wealth is available to be taxed in order to create funds to spend for pork barrel projects, green projects, infrastructure projects, water & sewer, wars, streets, bridges, highways, welfare, unemployment, school teachers, policemen, fire fighters, and other additional government services.
The USA needs to generate wealth, not re-distribute the remainder of the existing wealth by selling assets to foreigners and distributing that wealth to the poor!
The USA cannot continue to live on borrowed money to pay for our US government expenses that are in excess of our tax revenues, and also to pay for our imported consumer purchases!
Economics, Trade Deficit, Government Spending Deficit, Jobs for Americans, and the Buying Power or value of the US Dollar are all interrelated. Each of these principles generally affect each of the others, and each is very important.
Economics is not that complicated. It is interlocked with understandable cause and affect principals of various economic action options that can be totally understood by almost any High School Graduate, and/or most High School Drop outs.
If you build a factory to build widgets and sell these widgets to people outside of this country and collect foreign currency from outside of this country then your family, island, and/or nation becomes more wealthy.
Yes, this is oversimplified, but the principal of accumulation of wealth (marketable things) is basic.
Future wars will be industrial wars where the nation with the most wealth creating industry will win the economic war!
"The principle of spending US dollars to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." - Thomas Jefferson
A) The historical arguement IMO is nil and void. Whatever "Founding Fathers" did or not, isn't a logical arguement telling what to do now. By the same logic you would say that "Balance of Power" or national competion (including "war as a way and means of politics" [v. Clausewitz]) would be better than the developements in Europe after WWII.
B) I doubt that the US is able to mix both necessary adjustments into policy: In comparison, the "missing price tag" currently - if compared to Europe is much higher. So, I think, it would end up trying to reap the benefits without accepting the costs. Or, to produce irresponsibly but blame everyone else. ... Like "We don't accept any limits to carbon emissions for the US at all, but anyone else who produces under conditions weaker than what Greenpeace suggests will be penalized with import tariffs."
C) You lack (as a nation, not as a corporation based in the US) many IPR. Just look at the GM - Opel case. The US lack - regarding what we consider modern, manufactoring growth markets - a decade at least where the patents went to other ppls. That would make this approach hard; especially if you raise walls against friends and foes alike.
Never before in our history has so much of our war-fighting efforts been farmed out to foreigners. World War II pulled us out of the depression precisely because it put so many American workers to work. We are now engaged in two wars, using a minimum of American workers. If a real war broke out, if America were attacked and political alliances shifted, as they tend to do in wartime, we will not have a manufacturing base to defend ourselves.
The present wars are good for the bottom lines of international conglomerates like Halburton and friends. But a real war for the American homeland could be lost before we ramp up production.
"If we purchase a ton of steel rails from England for twenty dollars, then we have the rails and England the money. But if we buy a ton of steel rails from an American for twenty-five dollars, then America has the rails and the money both."
--Abraham Lincoln, quoted in the YouTube video "College Girl, Economy, Jobs." http://www.youtube.com/watch?v=j6iqTHJHW5o
I graduated from college with a BSME in 1961, almost 50 years ago. Economics was a required course. I learned a lot about how economists thought. I remember most of it today. They taught us that nobody needed to work, and that we could all be rich by just manipulating economic factors.
I believe that everything that was taught to me in my college economics course was totally wrong!
People cannot just manipulate the economy and stop working to make the things that we consume. I do think that most of my fellow students thought that his ideas would bankrupt the country if anybody paid any attention to him.
He and his fellow instructor/professors might be the ones that got the USA into this bankrupt de-industrialized position where we can no longer re-create any national wealth!
Definitely required remedial free-trade reading.
Free trade agreements, and the handing over of national sovereignty peace by peace to international trade and financial organizations are the stepping stone to international financial hegemony, i.e., corporate oligarchy.
The antidote is not socialism but economic nationalism or dirigism, whereby a sovereign government regains control over the issue of credit and currency, regulates banks and financial institutions so that they operate as members of a system in harmony with the general interest or common good, not as malignant states within states.
A sovereign government will establish policies of fair and reciprocal trade, protection of domestic manufacturing and agriculture, and carefully balance the rights of capital with those of labor; it will engage in national projects of economic development through the construction of productive infrastructure, the promotion of technological development and social improvement.
For too long, the US has been caught in the middle of a false economic dichotomy- the either/or of free trade and globalization or what is called "communism" or "socialism".
The fact that it was the via media of nationalist economics, known in the US as the American System, and not a slavish adherence to Adam Smith, that built the greatest economic powerhouse in the world is something that should be remembered by all Americans.
I cannot think of any other beneficiaries, can you?