Free Trade Doesn't Work

by Ian Fletcher

  One final point: a natural strategic tariff would need to include a rebate on reexported goods in order to avoid handicapping American exporters. This would include both goods that are transshipped without modification and goods that are exported after value-added processing. The latter includes everything from chocolate made from imported cocoa to computers made from imported chips. This is not an add-on to the policy, but implied by its intrinsic logic as a tax on domestic consumption. As noted earlier,799 other nations follow the same logic in rebating VAT to their exporters.

  Chapter 12

  The End of the Free Trade Coalition

  Does America have a serious chance of getting the trade policy it needs? The best way to hazard a guess at the issue’s political future is to look at its underlying social dynamic.800 The key is to grasp the way free trade is experienced by ordinary voters:

  Free trade is cheap labor embodied in goods.

  Although, as we have seen, our trade problems cannot all literally be reduced to cheap foreign labor, this is still the aspect that dominates public consciousness and thus mass political opinion. The first rift it implies is between people who obtain most of their income from work and those who obtain most of their income from returns on capital. People in the latter category obviously want all labor to be as cheap as possible. People in the former category want the labor they consume (directly or embodied in goods) to be as cheap as possible, but the labor that they produce and sell, namely their own wages, to be expensive.

  This implies the possibility of an electoral coalition in which one part of society treats itself to cheap foreign labor at the expense of another. As long as the self-perceived enjoyers of cheap labor exceed the self-perceived victims in number, this coalition is politically viable. For example, there can be a coalition of everyone who is not a manufacturing worker (91 percent of the labor force today, up from 66 percent in 1950)801 against everyone who is. While manufacturing workers suffer competition from cheap foreign labor, everyone else enjoys cheap foreign manufactured goods, so a majority is happy. The indirect effects of a decline in manufacturing are either not noticed—partly because they are not understood—or they are postponed for years by America’s ability to accumulate debt and sell assets.

  This doesn’t mean, however, that these indirect effects aren’t real. As we have seen, they are inexorable.802 So what if we go from 10 percent of the population harmed and 90 percent benefited to 20/80? Or 30/70? Or 50/50? Or 70/30 the other way? Our coalition will start to fall apart. Where are we now on this scale? It is impossible to quantify precisely, but commentator Kevin Phillips estimated in 1995 that free trade was “obviously beneficial to perhaps 10 to 15 percent of the population, detrimental to some 30 to 50 percent,” and things have clearly shifted considerably since then.803

  Free traders will respond by claiming that even if we reach 90 or even 100 percent of the population being harmed by competition with cheap foreign labor, Americans will still be better off because goods will be cheaper. The problem, as is obvious to any laid-off worker who has ever contemplated the cheap goods on sale at Walmart, is that a drop in the cost of merchandise never means as much as a lost job. How many people have voted against incumbents because they were unemployed or underemployed? Compare this to how many have done so because they couldn't buy a pair of scissors for $.99. Has there ever been a demonstration in the streets about the latter? And (as noted several times in this book) there is no law of economics that guarantees that free trade’s benefits in the form of lower prices will exceed its cost in job loss and lower wages for most people.804

  There is not much left of the American economy that is invulnerable to pressures from trade. Even large parts of the 70 percent of our economy that is in nontraded sectors are inexorably becoming tradable due to offshoring, and workers displaced from tradable sectors are driving down wages in nontradable sectors. The remaining sheltered occupations are these:

  1. Jobs that must be performed in person, such as policing, cooking, bagging groceries, teaching school, being a criminal, etc.

  2. Jobs, like construction, performed on physical objects too large or heavy to be shipped from abroad.

  3. Jobs performed on or relative to objects fixed in place: agriculture, mining, and transportation.

  4. Jobs where America enjoys significant technological superiority tied to oligopoly industries or specialized local labor pools, a shrinking category.

  5. Jobs, like law or advertising, which depend on uniquely American knowledge. But even this is breaking down as law firms, for example, start to offshore work.

  6. Jobs dependent upon sovereign power, such as the military. But given our use of “civilian security contractors” in our wars, this can be nibbled away at in surprising ways. And, as noted in Chapter Eight,805 the WTO would like to privatize even more public services, opening them up to offshoring.

  The trouble is, these categories are not enough. In particular, they don’t add up to enough high-wage jobs because most (not all) of these jobs are relatively low paid. So our beggar-my-neighbor coalition starts to fall apart. What happens next?

  LEFT AND RIGHT, WRONG ON TRADE

  The bad news for Republicans is that what we can call the psychological bourgeoisie starts to shrink. This term refers to everyone who identifies emotionally and politically with the ownership of capital, whether or not a majority of their income is investment income. Wall Street financial analysts whose jobs may get offshored are the clearest example, but there are people in this category all over the U.S. The key psychological bargain such people have had with the system until now is that economic forces are things that happen to other people. (One can take an amazingly dispassionate view of economic efficiency when this is the case.)

  The bad news for Democrats is that, at the level of the presidency and party leadership, they sold out so completely to free trade under Bill Clinton (and never came back) that they threw away their natural position, earned over 70 years, as the party that protects Americans from the rougher edges of capitalism. They should be capitalizing on the economic mess following eight years of Republican rule right now, but they’ve largely squandered their ability to do so.

  Both Right and Left are playing a double game on trade in America today.

  Right-of-center Americans generally want to hear that America’s trade problems are caused by unfair distortions of free markets by our trading partners. To some extent, they are, but, as we have also seen, even genuine 100 percent free trade would not solve America’s problems. And our trading partners are mostly just ruthless players of the game, as we used to be. The corporate Right (other factions exist, but have no power over Republican economic policy) claims, on ultimately Ricardian grounds, that free trade is in the national interest. But when pressed by contrary evidence, its corporate chieftains fall back on the position that their companies owe no loyalty to the U.S. Indeed, they often say they aren’t even capable of having such a loyalty, so internationalized are their operations and diverse the nationalities of their shareholders and employees.

  Left-of-center Americans generally want to hear that America’s trade problems are caused by greedy corporations and exploitative capitalism. But the problem is not that corporations are greedy (which people have al-ways been), it is that the rules they currently operate under make that greed unnecessarily destructive. And although economics certainly shows that exploitation in trade is possible, it doesn’t show that exploitation must occur for free trade to do harm. The American Left is also as conflicted as the Right: at some point, it must choose between opposing free trade in the interests of ordinary Americans, and opposing it in the interests of the world as a whole. Intellectually and emotionally, the latter is its obvious choice, but this is unlikely to play in Peoria. The ideal political position from which to oppose free trade would be a kind of nationalist liberalism, but this Trumanesque or Jacksonian position does not exist in American politics today.806

  It is often disputed wheth
er protectionism is a left- or a right-wing policy. It puzzles people in this regard because it has deep ideological and historical roots on both sides. The truth is that while protectionism obviously contradicts the free-market Right, the dominant strand in the U.S. since the collapse of the old protectionist Taft wing of the Republican party in 1952, it is perfectly in tune with old-school “paleo” conservatism, the nationalist Right, and bourgeois paternalism. And while protectionism contradicts the modern, Clintonite, Blairite (as in Tony) globalist Left, it is perfectly in tune with any Left that cares about American workers, the global environment, democratic control over the economy, or the depredations of free trade upon poor nations abroad. If one accepts the basic contention of this book that correctly implemented protectionism is beneficial, then it is probably most accurate to think of protectionism as leftist if its benefits are captured primarily by labor, rightist if they are captured primarily by capital, and centrist if they are divided.

  The fact that wildly different partisan figures ranging from Patrick Buchanan on the right to Ralph Nader on the left oppose free trade is a strength for protectionism, not a sign of ideological incoherence, as it means that protectionism can be credibly sold to voters from one end of the political spectrum to the other. The policy can plausibly be packaged as anything from a right-wing tub-thumping America First appeal to a left-wing tie-dyed hippie sob story. Even better, it can be packaged as a moderate and reasonable “commitment to a middle class society” that will appeal to voters in the center. Believe it or not, the following quote is from the Republican platform of 1972:

  We deplore the practice of locating plants in foreign countries solely to take advantage of low wage rates in order to produce goods primarily for sale in the United States. We will take action to discourage such unfair and disruptive practices that result in the loss of American jobs.807

  How far we have fallen! If Barack Obama had said this in 2008, he’d have been accused of being an economic ignoramus, if not a closet socialist. (If John McCain had said it, he’d have been considered a candidate for the psychiatric ward.) However, what is reasonable can be redefined overnight—mainly by the media—when the underlying constellations of perceived self-interest shift among the elite. A single cover story in Time magazine or The New York Times Magazine could make protectionism a respectable conversation topic again. A single speech by a cabinet-level official, if openly supported by the President, could do it.

  HOW FREE TRADE WILL FALL APART

  Support for free trade will probably fall apart over the next few years. As of mid 2010, there are four missing prerequisites for free trade to explode as an issue:

  1. Everyone is still preoccupied with the financial crisis and recovery from recession.

  2. There remains a residual sense in the minds of the public and the lawmakers that somehow free trade, despite all its problems, is still sound economics, and that perhaps we should just keep on eating our spinach because it will be good for us in the end.

  3. There is no obvious alternative policy on the table. There is instead a grab bag of issues, ranging from Chinese currency manipulation to proposed labor and environmental side agreements of NAFTA. This paucity of credible alternatives feeds the attitude that nothing fundamental can be done.

  4. A specific crisis has not happened to force the system out of its old way of doing things as the debacle in subprime mortgages upended our financial system in 2008 and made continuation of prior policy impossible whether anyone wanted it or not.

  For the first prerequisite above to be supplied, all it will take is time, as recessions do always eventually end, and the financial crisis of 2008 does appear to have been successfully patched, albeit at astronomical cost.

  For the second prerequisite to be supplied, all it will take is sufficient public debate, between persons perceived as credible, for free trade to become established in the public mind as an issue with two legitimate sides to it. As the reader has hopefully gathered by now, once one seriously scrutinizes the underlying economics of free trade, even if one is not disabused of the policy outright it becomes hard to deny that it is a legitimately controversial issue. The pure “100 percent free trade with 100 percent of the world 100 percent of the time” position is simply not intellectually serious.808 So when public debate finally cracks open, free trade will lose its innocence very fast.

  Once protectionism is perceived as a legitimate choice, it will become the actual choice of large numbers of people whose protectionist instincts have been held back by the belief that it is somehow an ignorant position to take. They will not need to master the details of why it is legitimate; they will only need to know that it is legitimate. Sen. Sherrod Brown (D-OH), one of the leading opponents of free trade in the Senate, records that ever since he came to Congress in 1993, every free trade vote has been accompanied by predictions by the White House of economic disaster if it was not passed.809 Trade wars, stock market decline, and recession were predicted every time. The power of this rhetoric to intimidate is going to end. Protectionism will cease to be a canard and become just another policy option.

  The third prerequisite above (no obvious alternative) can emerge overnight if some major political figure launches a tariff proposal that captures the public’s imagination. Or the myriad individual issues that currently comprise the opposition to free trade could force the soldering together of an omnibus proposal on the floor of Congress.

  The fourth prerequisite (a sudden crisis) is difficult to predict as to time, but we can rely securely upon the fact that unsustainable trends are always, in the end, not sustained. At some point, America’s giant overdraft against the rest of the world must come to an end. Although our government is trying to postpone the day of reckoning as long as possible, this day will come. Secretary of State Hillary Clinton flying to China to beg its government to keep buying our bonds (as she did in February 2009) won’t make much difference in the end.

  Once protectionism is conceded to be a valid political position, it will eventually win the public debate, if free trade’s unpopularity continues to mount at the pace it has been mounting over the last 10 years. (This pace is, if anything, likely to accelerate.) When this happens, the status quo will be sustained only by the tacit bargain of the American political duopoly, in which the two parties agree not to make trade a serious issue, whatever tactical feints they may deploy. This bargain will hold as long as the benefits of keeping it, which mainly consist in keeping the corporate backers of both parties happy, exceed the benefits of defecting from it, which consist in winning votes. Once one party defects, protectionism will, if rationally designed and competently implemented, almost certainly be sufficiently successful in practice (and therefore popular) that the other party will have no choice but to follow. The alternative, if one party insists on handicapping itself by clinging to an unpopular position on such a major issue, is an era of one-party political dominance like 1860-1932 or 1932-80.

  FREE TRADE’S POPULARITY IS WANING

  Free trade’s popularity has been declining for years. Polls show that even affluent voters have been inexorably losing their dotcom-era enthusiasm for it for some time. For example, a 2004 poll by the University of Maryland revealed nearly three-fourths of Americans earning over $100,000 per year opposing additional free trade agreements.810 (As late as 1999, a similar percentage had been in support.) These people are disproportionately influential and they, if anyone, should be beneficiaries and thus supporters of free trade. In a September 2007 NBC-Wall Street Journal poll of likely Republican primary voters, respondents favored the proposition “foreign trade has been bad for the U.S. economy because imports from abroad have reduced demand for American-made goods, cost jobs here at home, and produced potentially unsafe products” over a free-trade alternative by 59 to 32 percent.811 So free trade’s natural constituency is falling into doubts. And if it can’t hold these people, it won’t be able to hold anyone.

  Nevertheless, the public remains quite conf
licted on trade.812 Another 2007 survey revealed a plurality of Democrats, Republicans, and independents saying free trade is good for the country even though they also said that it costs jobs and lowers American wages.813 But this incoherent position is obviously not particularly stable, is going to have to break one way or the other eventually, and is highly unlikely to break in favor of free trade. For now, the public mainly just has a profound sense that something is deeply wrong with U.S. trade policy, to the extent that one 2006 poll found that protecting American jobs against foreign competition was the single foreign policy issue on which the public was most dissatisfied with government performance.814 But the public doesn’t really know what to think or do about it. According to the same poll:

  The public also seems frustrated about where to place responsibility. Close to eight in 10 (78 percent) say the government could do something about protecting American jobs. But a majority (52 percent) do not think it’s realistic for the government to control corporate outsourcing. However, those surveyed don’t hold American companies responsible either. Close to three-quarters (74 percent) think it’s unrealistic to expect that companies will keep jobs in the United States when labor is cheaper elsewhere.815