by Ian Fletcher
—Brian O’Shaughnessy, Co-Chair, Coalition for a Prosperous America; Chairman, Revere Copper Products
Ian Fletcher is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933. He was formerly an economist in private practice, serving mainly hedge funds and private equity firms. Educated at Columbia University and the University of Chicago, he lives in San Francisco with his wife and daughter.
More information about this book can be found at FreeTradeDoesntWork.com; more information about the U.S. Business and Industry Council can be found at usbic.net
1 Margaret Thatcher, speech to Scottish Conservative Conference, Perth, Scotland, May 8, 1981.
2 “U.S. Trade in Goods and Services - Balance of Payments (BOP) Basis,” U.S. Census Bureau, June 10, 2009, http://www.census.gov/foreign-trade/statistics/historical/gands.pdf.
3 Author’s calculation based on “U.S. International Trade in Goods and Services: November 2009,” U.S. Census Bureau, January 12, 2010. America’s trade deficit may even be 10-15% larger than this, due to a 1988 lawsuit that forces the U.S. government to calculate the value of imports based on their value when they left their foreign factory, as opposed to their value when they enter the U.S. See Richard McCormack, “The Plight of American Manufacturing” in Richard McCormack, ed., Manufacturing a Better Future for America (Washington: Alliance for American Manufacturing, 2009), p. 61.
4 Author’s calculation from “U.S. International Transactions Accounts Data,” Bureau of Economic Analysis, http://www.bea.gov/international/xls/table1.xls, accessed November 28, 2009.
5 Five percent.
6 “Employees on nonfarm payrolls by industry sector and selected industry detail,” Bureau of Labor Statistics, http://www.bls.gov/webapps/legacy/cesbtab1.htm.
7 Paul Craig Roberts, “The New Face of Class Warfare,” Counterpunch, July 2006.
8 Judith Banister, “Manufacturing Employment and Compensation in China,” Beijing Javelin Investment Consulting Company, November 2005, p. vi.
9 Louis Uchitelle, “As Output Gains, Wages Lag,” The New York Times, June 4, 1987.
10 “ADB’s Poverty Reduction Strategy,” Asian Development Bank, April 18, 2008, p. 1.
11 “Bush Decision on Chinese Imports Leads to Loss of 500 Very Good Jobs,” Manufacturing & Technology News, March 29, 2007, p. 6.
12 Polyurethane Foam Association, written testimony submitted to hearing on “Aiding American Businesses Abroad: Government Action to Help Beleaguered American Firms and Investors,” Committee on Foreign Affairs, U.S. House of Representatives, July 17, 2008.
13 Dan Fuller and Doris Geide-Stevenson, “Consensus Among Economists: Revisited,” Journal of Economic Education, Fall 2003, p. 372.
14 John Maynard Keynes, The General Theory of Employment, Interest and Money (Hamburg: Management Laboratory Press, 2009), p. 395.
15 Paul Krugman, Strategic Trade Policy and the New International Economics (Cambridge, MA: MIT Press, 1986), p. 3.
16 About 20% of economists surveyed support free trade “with provisos,” according to Dan Fuller and Doris Geide-Stevenson, “Consensus Among Economists: Revisited,” Journal of Economic Education, Fall 2003, p. 372.
17 Henry George, Free Trade or Protectionism: An Examination of the Tariff Question With Especial Regard to the Interests of Labor (New York: Doubleday, 1905), p. 169.
18 One exact figure, for example, is $326,000 for the steel industry, reported by Pete DuPont in “Bush’s Steel Crucible: Will He Help Big Industry at Consumers’ Expense?” The Wall Street Journal, January 2, 2002.
19 There is a branch of economics, public choice theory, which attempts to model these problems, but it has not vindicated its aspiration to objective expertise, tending to generate conclusions that are merely cynical and right wing.
20 “Balance of Payments (MEI): Current Account Balance,” Organization for Economic Cooperation and Development, 2009, http://stats.oecd.org.
21 “International Comparisons of Hourly Compensation Costs in Manufacturing, 2007,” Bureau of Labor Statistics, March 26, 2009, Table 1, http://www.bls.gov/news.release/pdf/ichcc.pdf.
22 “International Trade (MEI): International Trade Exports,” Organization for Economic Cooperation and Development, 2009, http://stats.oecd.org.
23 These firms are named simply as examples of the industry; they are neither exceptionally bad nor good in this regard.
24 Paul Craig Roberts, “How the Economic News is Spun,” Manufacturing & Technology News, March 17, 2006, p. 10.
25 Richard McCormack, “U.S. Military Fails to Learn An Ancient Military Lesson: No Industrial Economy Equals No Army,” Manufacturing & Technology News, October 17, 2008, p. 1.
26 Joseph I. Lieberman, White Paper, “National Security Aspects of the Global Migration of the U.S. Semiconductor Industry,” Office of Senator Lieberman, June 2003.
27 Among other things. See Bruce Bartlett, Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy (New York: Doubleday, 2006).
28 “Presidential Debates: Not Much Stuff Amidst the Fluff,” Manufacturing & Technology News, October 17, 2008, p. 4. There were also a few comments that could be interpreted as obliquely touching on the trade deficit. The debate transcripts are at http://www.debates.org/pages/debtrans.html.
29 Gregory Tassey, The Technology Imperative (Northampton, MA: Edward Elgar, 2009), p. 36.
30 Ibid., p. 303.
31 Both of Paul Krugman’s books Pop Internationalism (Cambridge, MA: MIT Press, 1996) and Peddling Prosperity (New York: W.W. Norton & Co., 1994) contain extended attacks on the concept of competitiveness. Also see the Cato Institute’s Daniel T. Griswold, “The U.S. Trade Deficit: A Sign of Good Times,” testimony before U.S. Trade Deficit Review Commission, August 19, 1999.
32 There are, of course, any number of formal definitions available, even if economists do not accept them.
33 Matthew Craft, “Crash of the Rocket Scientists,” Forbes, 11 May 2009.
34 This is not to say mathematics has no place in economics, only that it is fraught with opportunities for bias masked by its objectivity. As long as production, consumption, and wealth are quantifiable, mathematics will have a place.
35 In technical terms, there is an excessive premium on closed-form solutions. Obviously, such solutions are desirable if they can be obtained, due to their great explanatory power, but their value does not justify ignoring other solutions or twisting facts to achieve closed form.
36 He was primarily referring to trade models ignoring scale economies. See Paul Krugman, Rethinking International Trade (Cambridge, MA: MIT Press, 1994), p. 5.
37 The desirability of reducing the conceptual foundations of economics to a mathematical system, as Paul Samuelson did in his era-defining 1947 book, Foundations of Economic Analysis, does not logically entail the desirability of mathematizing economics as a whole.
38 Warnings about the dangers of over-mathematizing economics go way back: in 1752 the Italian mathematician, Ignazio Radicati, wrote to some economists headed in this direction that, “You will do with political economy what the scholastics did with philosophy. In making things more and more subtle, you do not know where to stop.” Quoted in Erik S. Reinert, How Rich Countries Got Rich and Why Poor Countries Stay Poor (New York: Carroll and Graf, 2007), p. 45
39 The main problem is that some mathematical models of the economy produce equations with closed-form solutions and some don’t. Economists strongly prefer the former, and will sacrifice the accuracy of models by making simplifying assumptions in order to get them. For example, in trade models, they ignore the effects of scale economies. As discussed in Chapter 10, these are crucial.
40 For example, neither Michael Porter’s The Competitive Advantage of Nations (New York: The Free Press, 1990), nor Eamonn Fingleton’s Blindside (New York: Simon & Schuster, 1995), nor Eric Reinert’s How Rich Countries Got Rich and Why Poor Countries Stay Poor (New York: C
arroll & Graf, 2007) use any math beyond basic statistics. This is not a new phenomenon: going back a few decades, some extremely important economists, like John Kenneth Galbraith and Joseph Schumpeter, were notoriously unmathematical.
41 Their views of economics do not lend themselves well to mathematical formalism. See Eamonn Fingleton, Blindside: Why Japan is Still on Track to Overtake the U.S. by the Year 2000 (New York: Houghton Mifflin, 1995) for details.
42 If this idea has any place in the discipline today, it is as a premise brought to it from outside, not as something that economics actually proves. Furthermore, the idea of prosperity tends to be reduced to satisfaction of “preferences,” which can lead, as we shall see in Chapter 2, to vindicating short-term preferences with negative long-term economic consequences.
43 Consider, for example, free traders Hugo Grotius (1612), Francisco Suarez (1612), and Alberico Gentili (1612), or protectionists Antonio Serra (1613), Edward Misselden (1623), and Charles King (1721).
44 Though Keynes has enjoyed something of a revival in real world policy decisions dealing with the financial crisis of 2008, and many of his ideas have been absorbed into the disciplinary consensus.
45 Herman E. Daly and John B. Cobb, Jr., For the Common Good (Boston: Beacon Press, 1989) p. 235.
46 A good discussion of what this means, and what issues it raises in regard to corporate America especially, appears in the first five chapters of Clinton Labor Secretary Robert Reich’s book The Work of Nations (New York: Alfred A. Knopf, 1991).
47 This phrase is the title of a book by self-described “radical free trader” Thomas Friedman, The Lexus and the Olive Tree: Understanding Globalization (New York: Farrar, Straus & Giroux, 1999).
48 Vincent Cable, a British Liberal Democrat MP, lists five kinds of antiglobalizers: nationalists (in the full sense), mercantilists (economic nationalists), regionalists (as in the EU or other blocs), dependency theorists (updated Leninism), and deep greens. See Vincent Cable, Globalization and Global Governance (London: Royal Institute of International Affairs, 1999), pp. 121-3.
49 David Hummels, “Time as a Trade Barrier,” Center for Global Trade Analysis, Purdue University, July 2001, p. 25.
50 This phrase is from Dr. Ha-Joon Chang of Cambridge University.
51 Peter Schwartz and Peter Leyden, “The Long Boom: A History of the Future, 1980—2020,” Wired, July 1997.
52 Michael Bordo, “Globalization in Historical Perspective,” Business Economics, January 2002, p. 22.
53 Prosperity measured by per capita economic output. For measures of relative globalization over time, see Michael Bordo, “Globalization in Historical Perspective,” Business Economics, January 2002.
54 Letter to Henry Cabot Lodge, 1895, quoted in Jacob Viner and Douglas A. Irwin, ed., Essays on the Intellectual History of Economics (Princeton, NJ: Princeton University Press, 1991), p. 246.
55 “Why Cessna Outsourced Manufacture of Its Skycatcher to Chinese Fighter Jet Company,” Manufacturing & Technology News, December 21, 2007, p. 2.
56 Estimate of Nobelist Gary Becker of the University of Chicago. See Gary S. Becker, “The Age of Hu-man Capital,” in Hugh Lauder, ed., Education, Globalization & Social Change (Oxford, UK: Oxford University Press, 2006), p. 292.
57 Based on Gary Becker’s estimate above subtracted from intangible capital estimate in Kirk Hamilton et al., “Where is the Wealth of Nations? Measuring Capital for the 21st Century,” World Bank, 2006, p. 20.
58 This was first rigorously documented in Kenneth French and James Poterba, “Investor Diversification and International Equity Markets,” American Economic Review, January 1991. Although it has declined since then, it remains substantial, as reported in Amir A. Amadi, “Equity Home Bias: A Disappearing Phenomenon?” Department of Economics, University of California at Davis, 2004.
59 Mitchell L. Moss, “Why Cities Will Thrive in The Information Age,” Urban Land, October 2000, p. 2.
60 See, for example, Richard Florida, “The World is Spiky,” The Atlantic Monthly, October 2005, p. 48.
61 Michael Porter, The Competitive Advantage of Nations (New York: Free Press, 1990), p.19.
62 Winfried Ruigrok and Rob van Tulder, The Logic of International Restructuring: The Management of Dependencies in Rival Industrial Complexes (New York: Routledge, 1996) p. 159. Although this study and the one cited immediately below are from the mid-1990s, matters do not appear to have shifted significantly since then. According to one 2003 study, “Therefore, in the overall set of 20 highly inter-nationalized MNEs, the case of a global strategy and structure can be made for only six firms, with the additional observation that even these firms exhibit regional elements. The others are either strongly home triad-based or are from small countries peripheral to the triad and are focused in one of the other triad markets. Most of the other 80 of the top 100 MNEs are even less global and are either domestic or home-based MNEs. Location and region matter even to MNEs.” Alan M. Rugman and Alain Verbeke, “Regional Multinationals and Triad Strategy,” Research in Global Strategic Management, vol. 8 (Greenwich, CT: JAI Press, 2003). According to a 2008 study, “There is no evidence of a trend towards the globalization of international business activity.” Alan Rugman and Chang H. Oh, “Friedman’s Follies: Insights on the Globalization/Regionalization Debate,” Business and Politics, August 2008, p. 12.
63 Paul Hirst and Grahame Thompson, “Globalization,” Soundings, Autumn 1996, p. 56.
64 Alan Rugman and Chang H. Oh, “Friedman’s Follies: Insights on the Globalization/Regionalization De-bate,” Business and Politics, August 2008, p. 13.
65 Remember distance counts as an incremental barrier to trade, even if it is not a discrete one.
66 2008 figure, from “U.S. International Trade in Goods and Services: Exports, Imports, and Balances,” Bureau of Economic Analysis, 2009, http://www.bea.gov/newsreleases/international/trade/trad_time_series.xls.
67 John McCallum, “National Borders Matter: Canada–U.S. Regional Trade Patterns,” The American Economic Review, June 1995, p. 616.
68 James E. Anderson & Eric van Wincoop, “Trade Costs,” Journal of Economic Literature, September 2004, p. 694.
69 Graham Dunkley, Free Trade: Myth, Reality, and Alternatives (New York: Zed Books, 2004), p. 88. With respect to multinationals, see Alan M. Rugman and Alain Verbeke, “Regional Multinationals and Triad Strategy,” in Research in Global Strategic Management (Stamford, CT: JAI Press, 2003), p.1.
70 Stephen Tokarick, “Quantifying the Impact of Trade on Wages: The Role of Nontraded Goods,” International Monetary Fund, 2002, p. 14.
71 Paul Krugman, “A Global Economy is not the Wave of the Future,” Financial Executive, March 1, 1992.
72 World Trade Organization Annual Report, 1998 (Geneva: WTO Publications, 1998), pp. 37-38.
73 Just over a week after 9/11, U.S. Trade Representative Robert Zoellick used counter-terrorism as an argument for expanding presidential fast-track authority to negotiate trade agreements, in an editorial in the Washington Post: “Countering Terror With Trade,” September 20, 2001. See also, for example, Brink Lindsey, “The Trade Front: Combating Terrorism with Open Markets,” Cato Institute, August 5, 2003.
74 Not that trade policy should always be used as a political tool (a problem discussed in Chapter 8), but the WTO is giving us the worst of both worlds: trade concessions without political good behavior in exchange for them.
75 “Global Trends 2015: A Dialogue About the Future With Nongovernment Experts,” Central Intelligence Agency, December 2000, pp. 10, 38.
76 John Cavanagh, Jerry Mander et al, Alternatives to Economic Globalization: A Better World is Possible (San Francisco: Berrett-Koehler, 2002), p. 118. To be fair, the WTO has not yet formally ruled on this question, though the language of its agreements appears to prohibit treating different nations differently in trade for political reasons. Brussels certainly thinks so: in 1998, the European Union brought a case before the WTO against the U.S. over a Massachusetts
law prohibiting that state from doing business with companies that operated in Burma due to Burma’s human rights record. The U.S. Supreme Court struck down the Massachusetts law before the WTO heard the case, so no WTO ruling was made. It can, of course, be argued that such sanctions are WTO-compliant, but the best arguments turn on such weak reeds as the WTO’s “protecting public morals” clause. See “Are EU Trade Sanctions on Burma Compatible With WTO Law?” Robert L. Howse and Jared M. Genser, Michigan Journal of International Law, Winter 2008, pp. 184-188.