Our economy has gone into the toilet over the past 30 years, and President Obama and his advisors think "free trade" is the solution. Like Bill Clinton and both George Bush's, he's so enamored of it he's even recommending it to poor African nations.
Yet "free trade" is a guaranteed ticket to the poorhouse for any nation, and the evidence is overwhelming. The concept was introduced, in fact, by Henry VII, as something that England should encourage other countries to do while it maintained protectionism; a process known as the 1485 Tudor Plan that led to the rapid industrialization of England and the deeper impoverishment of its trading "partners."
With no evident irony or understanding of how South Korea went about becoming a modern economic powerhouse, on Friday, July 10, 2009, President Obama lectured the countries of Africa from Ghana, where he was visiting. As The New York Times noted ("Obama Wins More Food Aid but Presses African Nations on Corruption" by Peter Baker and Rachel Donadio) on July 11:
"Mr. Obama said that when his father came to the United States, his home country of Kenya had an economy as large as that of South Korea per capita. Today, he noted, Kenya remains impoverished and politically unstable, while South Korea has become an economic powerhouse."
In the same day's newspaper, The New York Times' lead editorial, titled "Tangled Trade Talks," repeated the essence of the mantra of its confused op-ed writer, Tom Friedman, that so-called "free trade" is the solution to a nation's economic ills.
"There are few things that could do more damage to the already battered global economy than an old-fashioned trade war," the Times wrote. "So we have been increasingly worried by the protectionist rhetoric and policies being espoused by politicians across the globe and in this country."
But South Korea did not become an "economic powerhouse" as a result of "free trade." Indeed, the exact opposite is the case.
South Korean economist Ha-Joon Chang's book Bad Samaritans describes South Korea's economic ascent in detail. In 1961, South Korea was as poor as Kenya, with an $82 per capita annual income and many obstacles to economic strength. The country's main exports were primary commodities such as tungsten, fish, and human hair for wigs.
Interestingly, some of its largest modern-day producers of technology began by producing these basic commodities. Samsung, for example, started out exporting fish, fruits and vegetables. But by throwing out "free trade" and embracing "protectionism" during the 1960s, in roughly 50 years South Korea managed to do what it took the United States 100 years and Britain 150 years to do.
This economic development of South Korea started following a military coup in 1961, where General Park Chung-Hee began South Korea's economic assent by implementing short-term plans for economic development. He instituted the Heavy and Chemical Industrialization program, and South Korea's first steel mill and modern shipyard went into production. In addition, South Korea began producing its own cars. Electronics, machinery, chemicals plants soon followed, all sponsored or subsidized by the government.
Between 1972 and 1979 the per capita income grew over 5 times. In addition, new protectionist slogans were adopted by South Korean citizens. For example, it was viewed as civic duty to report anyone caught smoking foreign cigarettes.
All money made from exports went into developing industry. South Korea enacted import bans, high tariffs and excise taxes.
In the 80's South Korea was still far from the industrialized west but it had built a solid middle class. South Korea's transformation was as if, in 40 years, to quote Chang, "Haiti had turned into Switzerland."
This transformation was accomplished through protecting fledgling industries with high tariffs and subsides, and only opening itself to global completion slowly and when ready. In addition, the government ran many of the larger industries, although private industry was allowed.
Private industry, when allowed, was monitored carefully and taken over by the state if found to be inefficient.
The government ran or tightly regulated the banks and therefore the credit. It controlled foreign exchange and used its currency reserves to import machinery and industrial imports.
On the other hand the government tightly controlled foreign investment in South Korea, and largely ignored enforcement of foreign patent laws. Korea focused on exporting basic goods to fuel and protect its 'high-tech' industries with tariffs and subsides.
Had South Korea adopted the "free trade" policies espoused by Friedman and The New York Times, it would still be exporting fish and still have a per-capita income like Kenya's.
Another great example of this is Toyota's success with their luxury car: Lexus. Toyota has been touted by free traders as a clear example of why free trade works, mostly because of the widely cited example outlined in Thomas Freidman's book The Lexus and the Olive Tree.
But again, at a closer look, the reality is the opposite of what Friedman naively portrays in his book. In fact, Japan subsidized Toyota not only in its development but even after if failed terribly in the American markets in the late 1950's. In addition, early in Toyota's development, Japan kicked out foreign competitors like GM.
Thus, because the Japanese government financed Toyota at a loss (for roughly 20 years), built high tariff and other barriers to competitive imports, and initially subsidized exports, auto manufacturing was able to get a strong foothold and we now think of Japanese exports being synonymous with automobiles.
For about 200 years, we understood this in the United States. Had the fathers of the United States like Lincoln, Washington, Jackson or Grant applied for IMF loans, they would have been denied: All of them believed in high tariffs and a heavy control of foreign investment, and considered "free trade" to be absurd.
In 1791, Treasury Secretary Alexander Hamilton submitted his Report on the Subject of Manufactures to the US Congress. In it he outlined the need for our government to subsidize new industries and subsequently protect them from the international markets until they become globally competitive.
Additionally, he proposed a roadmap for American industrial development. These steps included protective tariffs on imports, import bans, subsides, export bans on selected materials, and the development of product standards.
It was this policy, followed largely for most of the history of our country with average tariffs through most of the 19th and 20th centuries of around 40 percent, which built our American industry. All three times we radically dropped tariffs - for 3 years in 1857, for nine years in 1913 (just down to 25%), and in 1987 - what followed were economic disasters, particularly for small American manufacturers.
Since Reagan blew out our tariffs in the 1980s (and Clinton kicked the door totally open with GATT, NAFTA, and the WTO), our average tariffs are now around 2-4 percent. And the predictable result has been the hemorrhaging of American manufacturing capacity to those countries that do protect their industries through high import tariffs but allow exports on the cheap -- particularly China and South Korea.
If President Obama and our Congress don't soon learn the lessons Alexander Hamilton taught us in 1791, which he learned from Henry VII and were borrowed by Japan, South Korea, and China, we'll continue to see American industry slowly die. And with it will go the American middle class.
Thom can be heard daily on his radio show 12pm-3pm ET. Visit www.thomhartmann.com to stream live or find a station near you.