12/03/2015 12:29 am ET Updated Dec 02, 2016

No, Free Trade Didn't Lift Millions Out of Poverty

One of the biggest myths one hears about free trade is that it has "lifted millions out of poverty." This thoughtless piece of happy-talk is a favorite boast of Thomas Friedman (author, The Lexus and the Olive Tree) types and those who never woke up from the late-1990s dream of uncontrolled globalization.

But it is indeed a myth, for three reasons:

  1. The economic performance of nations around the world during the post-1975 era of increasingly free trade has been decidedly mixed, despite increasingly free trade. Some countries have done well economically, but others have done badly, despite opening up their trade policies. Millions of people have not been lifted out of anything by freer trade.
  2. Those nations (China etc.) that have thrived in this era, and have lifted millions out of poverty, haven't done it by embracing free trade. They've done it by taking the free trade of other nations as a given and embracing mercantilism, the deliberate gaming of the system by way of protectionism and state capitalism.
  3. Even free traders themselves, when pressed to make credible quantitative estimates of how large are the benefits of even-freer trade to developing nations, come up with remarkably small numbers. This isn't what opponents of free trade say; it's what proponents say.

Starting with the first point, it is important to grasp that for every success story from the modern era of globalization and increasingly free trade, there have also been just as many failures. In 2003, 54 nations were poorer than they had been in 1990 ("U.N. Human Development Report 2003," p. 34), and Sub-Saharan Africa had a lower per capita income in 2003 than 40 years before (Ndulu, World Bank, 2007, p. 33). (Please forgive the footnotes, but I do want people to understand there are real numbers behind this argument.)

Granted, these figures are from over ten years ago, and refer to the first phase of post-Cold War hyperglobalization, which was pretty naive about the wonders of free markets. Since then, there has been a commodity boom in some of these nations caused by China's demand for raw materials. But this boom has lately stalled, and those nations that had done nothing but open up their markets have stalled with it. The poor nations that have parlayed this one-time windfall into sustainable growth are the ones that eventually backed away from pure free trade (a trend that went hand-in-glove with a more general worldwide souring on pure capitalism) and started to become successful mercantilists.

What is mercantilism? It is the deliberate gaming of the system by way of protectionism and state capitalism. It goes back hundreds of years, and was the basis of the original rise of the old First World to developed status. Historically, no nation has ever gotten rich on pure free markets alone.

Which brings us to the second point above. Nations like China are mercantilists, not free traders. So are Korea, Japan, Taiwan, and many others. And elements of mercantilist policy are imposed by nations from Botswana to Germany. Attributing what these nations have achieved to free trade is about as logical as attributing anything the Soviet Union did to capitalism. As recently as 1987, China and India had the same per-capita GDP, but China's is now three times India's, and successful mercantilism is a big part of the reason. (China successfully went mercantilist, India didn't.)

Economic history makes very clear that free trade per se is a bad idea for developing nations. It tends to lock them into the low-wage extractive and agricultural industries they already have, guaranteeing low wages forever. Free trade optimizes what a nation is already good at, but industrialization means becoming good at things a nation is not already good at. Even the U.S. once faced this problem, early in its history, when it was more primitive than any Third World country existing today. America embraced a deliberate mercantilist policy, designed by Alexander Hamilton (the man on the $10) to solve it.

Regarding the third point, even free traders admit, when pressed, that increasingly free trade will do little for the Third World. As I wrote in my 2010 book Free Trade Doesn't Work:

Many optimistic figures on poverty reduction as a result of trade liberalization do not survive even casual scrutiny. For a start, the World Bank standard for poverty is $2 a day, so "moving a million people out of poverty" can merely consist in moving a million people from incomes of $1.99 a day to $2.01 a day. In one widely-cited study, there were only two nations in which the average beneficiary jumped from less than $1.88 to more than $2.13: Pakistan and Thailand. Every other nation was making minor jumps in between. This is better than nothing, but still small stuff to set against the costs of trade liberalization. It is definitely not the qualitative jump from material misery to a decent standard of living that people imagine from the phrase "lift out of poverty."

The developing world's projected gains from trade liberalization are also concentrated in a relatively small group of nations, due to the fact that only a few developing nations have economies that are actually capable of taking advantage of freer trade to any meaningful extent. Although it depends a bit on the model, China, India, Brazil, Mexico, Argentina, Vietnam, and Turkey generally take the lion's share. This list sounds impressive, but it actually leaves out most Third World nations. Dirt-poor nations like Haiti aren't even on the radar. Even nations one notch up the scale, like Bolivia, barely figure.

Like it or not, this is perfectly logical, as increased access to the ruthlessly competitive global marketplace (which is all free trade provides) benefits only nations whose industries have something to sell which foreign trade barriers are currently keeping out. Their industries must both be strong enough to be globally competitive and have pent-up potential due to trade barriers abroad, a fairly rare combination. So the most desperately impoverished nations, which have few or no internationally competitive industries, have little to gain.

Another sophism dished out about free trade and world poverty is that free trade is identical with capitalism as such, and the world has grown richer since the fall of Communism, so free trade must be the reason.

But, for one thing, the successful nations of the world (even the U.S.!) aren't "capitalist" simpliciter, and haven't been for two generations: they all have mixed economies in which capitalism is merely the biggest component. They consist of pure capitalist sectors, regulated capitalist sectors, and government owned sectors.

For another, capitalism has been quite happily compatible with protectionism for hundreds of years. Free trade, and free domestic markets, just aren't the same thing.

So no, the fall of the Berlin Wall doesn't entail global free trade, either as an existing reality or as an ideal we should aspire to. And free trade isn't a solution to global poverty.