Trade is good; all trade is good; more trade is better than less trade; maximum possible trade. This rhetorical progression has propelled policy discussion about US trade policy for at least two decades.
Ian Fletcher's new book, Free Trade Doesn't Work:
What Should Replace It and Why, takes a step back and asks an important question. Why have we chosen the freest possible trade as our policy goal? Surely, we should be more interested in the promised outcomes of free trade: mutual gain and improved standard of living for communities in America and abroad.
In remarkably readable prose, caustically funny in places, Fletcher challenges the prevailing wisdom that additional free trade agreements and greater global economic integration are inevitable and desirable. He starts by carefully cataloging the highly idealized conditions that must apply before the benefits promised by free trade will accrue. As he rigorously demonstrates, free trade theory is a very poor description of global commerce as it is practiced today.
Policymakers in China, Japan, Europe and elsewhere, who are not bound by free trade orthodoxy, can choose policy options that take advantage of our ideological blind spots. Our policy weaknesses thus become their opportunities.
Free trade remains our conventional wisdom, in spite of its weak foundations. If free trade economics were moved from the economics departments in universities to mathematics departments, it would be discredited on logical grounds some time during the first day. Similarly, its half-life in a physics, astronomy, or chemistry department would be a week or two--the time it would take to send graduates students to the lab to collect data. It is worth noting that conventional free trade theory is considered largely irrelevant in business schools, where students learn the practice of moving capital and production around the world.
Free trade theory sustains itself, not because of academic rigor, but because of strong political and economic interests it its favor. Fletcher acknowledges this reality, and he warns of the risks we run when we allow political and financial interests to distort policies in their favor.
Economists are careful to qualify some of their conclusions, which should give policy-makers fair warning. Trade theory acknowledges that inequality is likely to widen as barriers are removed. Millions of workers will suffer loss, while a small fraction of the population will gain. Economists predict gain overall, but their analysis is indifferent to how gains are distributed. Equity and fairness are concerns for policy-makers, so economists deny responsibility for failures in that area.
Free trade theory is also blind to the dynamics that are reshaping the economies of rich and poor countries. This may be Fletcher's strongest criticism of free trade policy. As we lose our electronics industry, China gains the advantage in developing solar panels, flat screen TVs and cell phone technology. We send aircraft manufacturing to China, and they build their own aerospace industry, using our capital, our technology and our expertise. Trade theory accepts that outcome in the name of efficiency, without assigning a value to future competitive advantage.
Free trade advocates accept closing a factory in Indiana, saying the closure frees up resources to invest in something better. We can innovate our way to prosperity through education and productivity improvements, and move up the value chain. In a perfect world, that would be so. In fact, as Fletcher notes, "America's share of 'sunrise' industries continues to drop."
While free trade advocates imagine that freed up resources could be invested in Indiana, the industrialists who closed the factory are more likely to create the new jobs in Shanghai or Honduras. Nothing in trade theory requires the freed resources to be invested in Indiana. Rather, global mobility of capital makes that outcome unlikely.
It is worth pausing from time to time to recognize a simple observation. No country in the world is pure free trade or pure protectionism. Every country finds its own balance point. Fletcher observes that China, Japan, Korea, England and America all enjoyed strong growth under protectionist policies. No country can show comparably strong growth under free trade policies.
America's history is instructive in this respect. When America industrialized, we structured our domestic economy under policies that expressed our democratic values and goals. We established the Environmental Protection Agency, we insist on clean air and clean water, we have strong child labor laws, workplace protections, minimum wage, subsidized public education, unemployment insurance, deposit insurance for banks, and other policies that helped build a strong middle class. We take pride in our own strong civil society.
For some reason, when we design rules for global commerce, we choose free trade policies that place highest priority on investor rights, and push the interests of civil society into the shadows. History and analysis show instead that better results come from a combination of industrial policy and protectionism.
Said differently, the "sweet spot" in trade, where the promise of mutual gain is actually realized, probably comes at a level of trade that is less than what we have now. Our pursuit of maximum possible trade seems to have taken us past the optimal level of trade. We can trade less and do better. Other countries have done better with a combination of industrial policies and protectionism. In our history, we have, too.
Once we are released from free trade ideology, we can see industrial policy as a desirable strategic tool.
Free market advocates raise a fundamental objection to industrial policy that can be stated in various ways. Markets are more efficient; special interests will distort outcomes; industrial policies will cling to dying industries; and government should not pick winners and losers.
Fletcher's response is also fundamental. "There is no such option as 'not having' an industrial policy. There is only good and bad industrial policy." Fletcher cites James C. Miller, Federal Trade Commission Chairman under Ronald Reagan: "Any discussion of industrial policy should begin with the recognition that we have one. The issue is what type."
The cornerstone of Fletcher's proposal is a flat tariff in the range of 30%. This is close to historic levels of tariffs, and comparable in scale to the Value Added Tax used in Europe. The flat tariff would be combined with other public investments and industrial policies. A flat tariff is a compromise that recognizes political and practical realities, while approximating conditions needed for better economic performance.
Fletcher builds a case to rehabilitate use of tariffs. He considers objections, consequences and alternatives in some detail. He argues that the prospect of trade war is overstated. The starting point in favor of the tariff is that we consume more than we sell abroad. Net exporting countries do not want or need a tariff. Our trading partners have more to lose than gain in a trade war. Furthermore, one premise of Fletcher's proposal is that the optimal level of trade will be lower than it is, now. His goal is not maximum possible trade. We are looking for the optimal level of trade for growth, mutual gain, and prosperity.
Ian Fletcher's book serves two important functions. It breaks free trade's stranglehold on public discussion about trade and industrial policy. Secondly, it presents a strong argument for an alternative policy direction. We are facing the failure of neo-liberal policies. Fletcher's book is a starting point for refocusing our goals and designing new trade and industrial policies that move us toward economic strength and long-term growth. It is one of the most user-friendly introductions to this vital emerging controversy.