Ian Fletcher, an economist with the Coalition for a Prosperous America, refutes the arguments in favor of free trade:
A crisis is a social problem that has started to hurt the middle class.
Now that offshoring of white-collar work has started to sour people on free trade who were blasé about it as recently as the dot-com boom of a few years ago, it behooves us to ask whether free trade really deserves our support. Unfortunately for this policy, as Nobel Laureate Paul Samuelson put it recently, the proposition that the benefits of free trade outweigh its costs is simply "an innuendo," i.e. not provable by either theoretical arguments or empiricial data.
So what's wrong with free trade theory? Criticizing it really breaks down into two separate issues:
1. Proving that free trade isn't necessarily the best policy for a nation.
2. Deciding what is best, if it isn't.
The first involves much easier arguments, and is a logical precondition for the second, so let's look at it first.
What comes after free trade is an immensely complex question. It will be some combination, not deducible in detail today, of a dozen different policy tools. Tariffs, quotas, reciprocity agreements, offsets, fixed exchange rates ala Bretton Woods, limits on international capital flows, national-content requirements, national champions, cartels, tax incentives, environmental laws and wage policy will all be up for grabs.
Deciding this will require a debate of epic proportions, so forgive me for leaving it for later. For now, let's focus on making this debate logically possible by refuting the dogma that free trade will always produce better outcomes than any other policy.
Before anyone asks: I'm well-aware that abandoning free trade is fraught with peril because of the risk that politics will overwhelm rational policy-making and we could end up even worse off. But given the growing perils of free trade itself, we have no choice.
"Trade realism," is the best phrase to describe this critique. It is better than "fair trade" because it speaks solely to the facts of how the world does work and does not get tangled in value-judgments of how it ought to, which allow free traders to duck the question by disputing the values. We need to be discussing economics, not philosophical questions like the relative value of economic freedom vs. economic equality.
The holes in free-trade theory fall into several general categories:
Problem #1: Free trade theory is based on abstractions, not hard data.
Free trade theory, like much contemporary economics, is heavy on deductive arguments which purport to prove that certain things "must" be the case. No other social science is so skewed to theory over empricial data; a sociologist or demographer who reasoned like this would not be taken seriously. There is a whole movement in economics, called post-autistic economics, in revolt against this.
For example, free traders claim that free trade costs America low-quality jobs but brings high-quality jobs in their place, arguing that America has comparative advantage in advanced capital-intensive industries and comparative disadvantage in primitive industries. But the hard data show America losing both kinds of jobs.
And we are told that the savings in cheaper foreign goods outweigh the lost wages involved. And that we gain more from the growth of foreign nations as trading partners than we lose to them as competitors. But there is no hard data that proves this, particularly since the crucial data concerns the long-term, which by definition we have not yet had the opportunity to observe.
Problem #2: What Does Free Trade Theory Promise, Even If It Is True?
Free traders often speak as if free trade were always good for everyone. Then they admit, in the fine print, that it creates winners and losers.
Worse, the winners and losers are not random. Because free trade radically expands the supply of labor competing for the world's finite supply of capital, it radically privileges capital relative to labor, especially when combined with capital mobility and the entry into the world trading system of large formerly-socialist nations like India and China.
Free-trade theory is pretty much exclusively focused on maximizing national income; it doesn't have very much to say about who receives this income. So free trade could, even if free-trade theory is true, make America end up with a larger economy but grossly maldistributed income. Welcome to Brazil.
And remember, even this unhappy outcome is what we get if free trade theory is true, which itself controversial. If it is false, we might get this outcome without all the offsetting benefits we are promised.
Problem #3: Outdated Arguments
Free traders make outdated claims all the time, mostly about how America must win under free trade because we have comparative advantage in high-wage industries due to our superior technological base and superior entrepreneurial spirit. While the latter may still be intact, our advantage in the former is gone in a world where any new technology can be distributed around the world overnight. This is not even considering facts like half the workforce of Los Angeles county being illiterate, as recently reported.
America succeeded under relatively free trade during the Cold War, but that was a world that was half communist or socialist, and much of the rest, like Latin America, practiced an inward-looking economics that did not make them trade competitors with us. So we didn't really have to face the consequences of open competition with the entire world.
We came to believe in free trade in theory because we didn't really have to live up to it. Now we do, and it's a whole new ballgame.
Problem #4: Short-Term vs. Long-Term Arguments
Many arguments for free trade are fallacious because they ignore the time dimension. For example, the argument that free trade is not a threat to American wages because over time, increasing prosperity in foreign countries will drive up wages overseas. This may be true in the long run, but it will take a generation or more at current rates of income growth. This isn't really that hard to quantify from published figures, if one will only make the effort.
Furthermore, free trade theory draws no distinction between maximizing our short-term consumption and our long-term economic welfare. It is entirely possible, within the mathematical equations that define free-trade theory, to vindicate a policy of selling off the country's assets to finance a short-term consumption binge followed by long-term bankruptcy. Billionaire Warren Buffet has written an article about this, as have I.
Problem #5: Failure To Quantify
Free traders often make arguments that sound good until the numbers come in, like:
1. "Free trade is good for America because it means a billion Chinese are now hungry consumers of American products." But we're running a huge trade deficit, not a surplus, with China, unsurprising since most of those Chinese have annual incomes in the hundreds of dollars.
2. "Other nations are rapidly catching up to American wage levels. India, for example, has a middle class of 300 million people." The problem is that the definition of "middle class" in the Indian context is a family income about 1/5 of what it would take to qualify as middle-class in America. Middle-class over there means the middle of their class system, not ours.
3. "Free trade brings us enormous benefits." One of the dirty non-secrets of trade theory is that the actual economic gains from further expanding free trade, in the case of a large and diverse economy like the US, are fairly small.
4. "Offshoring in a tiny phenomenon." Well, it's just getting started and will be big soon enough. Amazing what 25% per year compound growth will do!
5. Free traders tell us we can sustain the trade deficit because foreigners are so eager to invest in our wonderful business climate. They don't admit that most foreign investment just goes for existing assets. Worse, much is mere government debt.
Problem #6: Illogical Comparisons
My favorite example of this is when Bush Secretary of Labor Elaine Chao claimed that the numbers of jobs offshored must be netted against the number of Americans working for foreign-owned companies in the US.
For a start, most of these jobs don't represent new jobs brought to America by foreigners, but merely foreign companies that bought existing American companies. For a second, a net-net comparison would have to either net jobs offshored from America against jobs offshored to America, or net American employees of foreign companies against foreign employees of American companies.
Since a $500 billion-a-year trade deficit dooms either of these comparisons, it is no surprise that they were evaded.
Problem #7: Trying To Have It Both Ways
One minute, free traders are arguing that exports create jobs and that America is on the verge of an export boom. Clinton was fond of this argument. The next minute, they're arguing that the trade deficit, which is what happens when exports don't thrive, doesn't matter.
One minute, they're telling us that America's labor force is so much more skilled than other nations that we may confidently expect to cream off the best jobs in the world economy. The next minute, we're being lectured on how our lack of a competitive labor force is the cause of our import problems and we should only blame ourselves.
One minute, free traders are telling us that America is so superior in competitiveness to foreign nations that it will aways be top dog in wages. The next minute, we're being told to stop being arrogant and face up to the fact that the world isn't our oyster anymore.
Problem #8: Ad Hominem Arguments
Most of these are overt or covert varieties of the following:
"Opponents of free trade are uneducated xenophobic redneck losers."
The basic argument is that free trade is cosmopolitan, cosmopolitanism is good, therefore free trade is good and people only oppose it because they aren't cosmopolitan enough. This flatters globalists by implying that support for free trade is a kind of sophistication akin to knowing which kinds of French cheese to buy.
Why xenophobia, or fear of foreigners, should be a dirty word when foreigners are economic competitors who put Americans out of work, remains unexplained. I for one am a xenophobe, albeit a moderate and reasonable one.
Problem #9: Whatever Doesn't Kill Me Makes Me Stronger
When free-traders are confronted with some sign that America's trade policies are dangerously wrong, they re-interpret it as evidence that America's economy is so strong it can survive even this problem, so the problem can't be a problem after all. For example, America has survived a record trade deficit that would have produced a currency collapse in any other nation, so trade deficits can't matter. But that's just like saying that because the strong constitution of the patient has enabled him to survive cancer, cancer must be OK.
Problem #10: Non-Economic Considerations
In addition to all the problems with free trade as pure economic policy, we must recognize the non-economic problems it causes. Most of these, once one goes beyond obvious cases like narcotics and unsafe foodstuffs, concern the fact that free trade means handing over control over economic necessities to foreigners. The Arab oil embargo of 1973 is one example; the fact that the US military cannot put a single plane in the sky without foreign parts is another.
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http://www.tradereform.org
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