Free Trade Fails in Both Theory and Practice
By Ian Fletcher
Free trade is gradually bleeding America’s economy to death, and the much-promoted myth that economics vindicates it does not survive serious scrutiny.
To debate this issue without bogging down in semantics, we need to make a few things clear at the outset. For a start, the phrase “free trade” has two meanings, which are often confused:
1) The purely theoretical concept of perfectly free trade as analyzed in economics text-books.
2) The current free trade policy of the U.S. This is about 99%, not 100%, free on America’s part, and much less so on the part of our major trading partners.
Free traders often make arguments that would vindicate 1) if valid and then, assuming these arguments to be true, demand that we practice 2). This obviously does not follow. (Sometimes they say the solution is to make trade genuinely free all around the world, but this is infeasible, because the U.S. does not have sufficient political leverage to force this to happen.)
Some of the problems with free trade concern 2): foreign trade barriers, currency manipulation, and mercantilism generally. These are already fairly well-known.
The deeper problems concern 1) because – unbeknownst to most free traders and indeed many economists – even the theoretical foundations of free trade have been crumbling in recent years. The most recent scholarship on the issue casts huge doubt on traditional theoretical justifications for free trade and makes clear why the mercantilism that is being practiced against us can be such an effective economic strategy. It is gradually realigning theoretical economics with both economic history and the common-sense experience of ordinary Americans.
Free traders often duck the hard economics of whether free trade is best by simply resorting to skepticism about whether the U.S. is capable of honestly and competently implementing an alternative. Because the political problems of implementing a tariff varying by industry are well-known, let me be clear at the outset that the alternative I am arguing for is a flat tariff of, say, 30 percent, on all imports, both goods and services. Because there would be no discretion by Congress or the Executive to vary the tariff, these problems are not relevant to our debate here.
It is also necessary to be clear that when protectionists like myself speak of free trade as job-destroying, this refers to gross, not net, jobs, because workers who lose jobs to imports will generally find other jobs eventually. The national unemployment rate is primarily a function of labor laws and the business cycle, not trade or trade deficits. The problem is that free trade is currently destroying high-value-added and high-wage jobs (particularly in manufacturing) and driving Americans into nontradable sectors. Unfortunately, most nontradable jobs are low-value-added, low-wage jobs like security guards, waitresses and the like. It follows that a low unemployment rate does not, on its own, vindicate free trade.
Finally, we must distinguish between free trade being the optimal policy in the long run and the short run. In the short run, it is indeed true that free trade can maximize our consumption: in economic language, it maximizes satisfaction of consumer preferences. But this analysis takes no account of the long-term effects of imports upon our productive base. This is ultimately the big issue. David Ricardo’s theory of comparative advantage, the intellectual keystone of free trade, is a narrow theory which (although commonly misunderstood and vindicating free trade simpliciter) only speaks about optimizing present consumption. It does not even pretend to say anything about optimizing a nation’s long-term productive base, and thus leads to erroneous con-clusions when misused in this way.
Ian Fletcher is an Adjunct Fellow at the U.S. Business & Industry Council, a Washington-based think tank founded in 1933, and author of the new book Free Trade Doesn’t Work: What Should Replace it and Why, available on Amazon.com. USBIC’s web site is at americaneconomicalert.org; the website for Ian’s book is at freetradedoesntwork.com; Ian’s page at USBIC is at usbic.net/ianfletcher; he may be contacted at email@example.com.
(For the free trade view, see Dan Griswold's post here)