Free Trade Doesn't Work

by Ian Fletcher

  77 Free traders have employed this sort of fuzzy logic for centuries. Free trader economist Arthur Latham Perry wrote around 1883 that ,“to relax commercial systems and not to restrict them is alone in accord with the spirit of the age and the leading commercial nations, the United States alone excepted, have been relaxing their commercial systems.” Giles Badger Stebbins, The American Protectionist’s Manual (Detroit: Thorndike Nourse,1883), p. 19.

  78 See, for example, Peter Schwartz and Peter Leyden, “The Long Boom: A History of the Future, 1980 - 2020,” Wired, July 1997, or John Nye, “No Pain, No Gain: Opposing Free Trade Means Opposing Innovation,” Reason, May 1996.

  79 This law claims that the masses will always be paid subsistence wages because whenever they are paid more, they simply have more children until they are living at the subsistence level again.

  80 Thomas Friedman’s version runs thus: “Let’s face it: Republican cultural conservatives have much more in common with the steelworkers of Youngstown, Ohio, the farmers of rural China, and the mullahs of central Saudi Arabia, who would also like more walls, than they do with investment bankers on Wall Street or service workers linked to the global economy in Palo Alto, who have been enriched by the flattening of the world.” Thomas Friedman, The World is Flat (New York: Picador, 2005), p. 258. Fried-man also wrote in his column: “These anti-WTO protesters... are a Noah’s ark of flat-earth advocates, protectionist trade unions and yuppies looking for their 1960s fix.” Thomas Friedman, “Senseless in Seattle,” The New York Times, December 1, 1999.

  81 Tim Reid, “Barack Obama’s ‘Guns and Religion’ Blunder Gives Hillary Clinton a Chance,” The Times, April 8, 2008.

  82 Free traders have been playing this game for a very long time. One protectionist complained in 1883: “It is the fashion in many of our colleges to assume that free trade is the ideal of the noblest persons and the best minds in the Old World, while protection is a vulgar and selfish matter advocated by those of lesser note and narrower culture.” Giles Badger Stebbins, The American Protectionist’s Manual (Detroit: Thorn-dike Nourse, 1883), p.19.

  83 Whether free trade and protectionism are leftist or rightist positions is genuinely controversial, and is addressed in the last chapter of this book. Here, the conventional acceptation of these issues in contemporary American politics is taken as a given.

  84 David Croteau, “Challenging the ‘Liberal Media’ Claim: On Economics, Journalists’ Private Views Are to Right of Public,” Extra!, July/August 1998, p. 8.

  85 Ibid., p. 5.

  86 Speech of January 27, 1846, quoted in Augustus Mongredien, History of the Free Trade Movement in England (New York: G.P. Putnam’s Sons, 1881), p.155.

  87 Author’s calculations based on first 11 months of 2009. “U.S. International Trade in Goods and Services,” Exhibit 1, U.S. Census Bureau, January 12, 2010, “Annual 2008 Trade Highlights,” U.S. Census Bureau, http://www.census.gov/foreign-trade/statistics/highlights/annual.html and “Trade in Goods (Imports, Exports, and Trade Balance) with China,” http://www.census.gov/foreign-trade/balance/c5700.

  html#2009.

  88 Eamonn Fingleton, In the Jaws of the Dragon: America’s Fate Under Chinese Hegemony (New York: St. Martin’s Press, 2008), p. 66.

  89 Income: “Gross national income per capita 2008, Atlas method and PPP,” World Bank, 2008.

  Servants: Aakar Patel, “The Servant in the Indian Family,” The International News, May 31, 2009.

  90 Ron Hira, “The Globalization of Research, Development and Innovation” in Richard McCormack, ed., Manufacturing a Better Future for America (Washington: Alliance for American Manufacturing, 2009), p. 171.

  91 “Worldwide and U.S. Business Process Outsourcing 2006-2010,” IDC, November 14, 2006.

  92 Alan S. Blinder, “Free Trade’s Great, but Offshoring Rattles Me,” The Washington Post, May 6, 2007, p. B4.

  93 Benno Ndulu, “Challenges of African Growth: Opportunities, Constraints, and Strategic Directions,” World Bank, 2007, p. 33.

  94 United Nations Development Programme, “Human Development Report 2003,” UNDP, 2003, p. 34.

  95 See p. 151 for details.

  96 Author’s calculation based on Y. Louise Ku-Graf, “Foreign Direct Investment in the United States: New Investment in 2007,” Bureau of Economic Analysis, 2008, p. 34. It can be argued that investment in existing companies enables American capital to be invested in creating new ones, and the situation is considerably more complex than this one statistic can measure, but this fact is strongly suggestive of problems in this area.

  97 Most recent data available; author’s calculation from “2000 National Occupational Employment and Wage Estimates,” Bureau of Labor Statistics, http://bls.gov/oes/2000/oes170000.htm and “Occupational Employment and Wages, May 2008,” Bureau of Labor Statistics, http://bls.gov/oes/current/oes170000.

  htm.

  98 As phrased by Dani Rodrik of Harvard, “There is no theorem that guarantees that the partial-equilibrium losses to import-competing producers are more than offset by gains to consumers from lower prices.” Blog entry of April 28, 2007, http://rodrik.typepad.com/dani_rodriks_weblog/2007/04/can_the_wrong_a.html, accessed November 29, 2009.

  99 “Employment, Hours, and Earnings From the Current Employment Statistics Survey (National): Manufacturing Employment - CES3000000001,” Bureau of Labor Statistics, http://data.bls.gov/cgi-bin/surveymost.

  100 Counting prison inmates as unemployed would raise the male unemployment rate by well over a percentage point, and more for certain ethnic groups. America also has a higher proportion of “McJobs” than many other developed nations.

  101 “While per capita income in the United States [in 2006] was 25% higher than the peer average, only 12 of those percentage points can be attributed to higher productivity, whereas 10 percentage points are due to the fact that U.S. workers work more annual hours on average, and 3 percentage points are due to the fact that the United States employs a larger portion of its population.” Lawrence Mishel, Jared Bern-stein, and Heidi Shierholz. The State of Working America 2008-2009 (Ithaca, NY: Cornell University Press, 2009), p. 366.

  102 Ibid. p. 380.

  103 Paul Krugman, “Trouble With Trade,” The New York Times, December 30, 2007.

  104 Wolfgang Stolper and Paul Samuelson, “Protection and Real Wages,” Review of Economic Studies, November 1941, p. 58.

  105 This is not, of course, the entire story, but close enough for purposes of the present analysis.

  106 Dani Rodrik, Has Globalization Gone Too Far? (Washington: Institute for International Economics, 1997), p. 12. Increased inequality is also the result predicted by Edward Leamer in a three-factor model (unskilled labor, skilled labor, and capital), as reported in “Wage Effects of a U.S.-Mexican Free Trade Agreement,” in The Mexico-U.S. Free Trade Agreement, P.M. Garber, ed. (Cambridge, MA: MIT Press, 1993), pp. 57-125.

  107 Joseph Stiglitz, Making Globalization Work (New York: W.W. Norton & Co, 2006), p.45.

  108 Angus Maddison, “Historical Statistics of the World Economy: 1-2006 AD,” University of Groningen, March 2009, http://www.ggdc.net/maddison/Historical_Statistics/horizontal-file_03-2009.xls.

  109 Robert C. Feenstra, Advanced International Trade: Theory and Evidence (Princeton, NJ: Princeton University Press, 2004), p. 101.

  110 See Peter H. Lindert and Jeffrey G. Williamson, “Does Globalization Make the World More Unequal?” National Bureau of Economic Research, April 2001, p. 33. This is also the upper end of the estimate in “The U.S. Trade Deficit: Causes, Consequences and Recommendations for Action,” U.S. Trade Deficit Review Commission, 2000, pp.110-18. According to William Cline in Trade and Income Distribution (Washington: Institute for International Economics, 1997), 37 percent of the recent increase in inequality is due to trade. Also see Thomas Palley, “Accounting for income inequality in the U.S.,” AFL-CIO Technical Papers, 1999, in which 34 percent of increased inequality is attributed to increased trade, taking into account trade’s negative impa
ct on unionization rates.

  111 Josh Bivens, “Globalization and American Wages: Today and Tomorrow,” Economic Policy Institute, October 10, 2007, p. 2. Technically, this paper quantifies the impact of larger trade flows as such, not free trade per se.

  112 “New Wage and Benefit Structure for Entry-Level Employees,” United Auto Workers, http://www.uaw.

  org/contracts/07/gm/gm03.php.

  113 Peter Whoriskey, “UAW’s Sacrifices Look to Some Like Surrender,” The Washington Post, December 20, 2008.

  114 Louis Uchitelle, “Two Tiers, Slipping Into One,” The New York Times, February 26, 2006.

  115 For an example of free traders depicting trade deficits as a positive good, see the Cato Institute’s Daniel T. Griswold, “The U.S. Trade Deficit: A Sign of Good Times,” testimony before U.S. Trade Deficit Re-view Commission, August 19, 1999.

  116 Obviously, this limit can change over time, but that is not the same as its being infinitely elastic at any given time. Bond rating agencies exist for a reason.

  117 There is an exception to this fact if we are running a deficit to import capital goods rather than consumption goods. But this just means we are importing goods that make more goods, so we are back to 3a.

  118 Gross, not net.

  119 These are gross, not net, jobs. The workers who would have been employed building aircraft will presumably (pace cyclical and frictional unemployment) find jobs doing something.

  120 James K. Jackson, “Foreign Ownership of U.S. Financial Assets: Implications of a Withdrawal,” Congressional Research Service, January 14, 2008, p. 1.

  121 “U.S. Net International Investment Position at Yearend 2008,” Bureau of Economic Analysis, June 26, 2009, http://www.bea.gov/newsreleases/international/intinv/2009/intinv08.htm.

  122 Greg Jensen and Jason Rotenberg, “Bridgewater Daily Observations,” Bridgewater Associates, March 25, 2003, p. 1.

  123 “International Investment Position of the United States at Yearend, 1976-2008,” Bureau of Economic Analysis, 2009, http://www.bea.gov/international/xls/intinv08_t2.xls.

  124 Source: Author’s chart from “U.S. Trade in Goods and Services - Balance of Payments Basis,” U.S. Census Bureau, http://www.census.gov/foreign-trade/statistics/historical/gands.txt.

  125 2004 data; author’s calculation from David Ratner’s appendix to Robert Scott’s paper, “Revisiting NAFTA,” Economic Policy Institute, 2006, Tables 1-1a, 1-1b. Note that these are gross jobs, not net jobs (jobs gained minus jobs lost), as workers who lose their jobs due to imports will presumably eventually find some other jobs, however ill paid. The unemployment rate is primarily a function of the economic cycle and the de facto minimum wage, not gains and losses due to trade.

  126 Raymond L. Richman et al., Trading Away Our Future: How to Fix Our Government-Driven Trade Deficits and Faulty Tax System Before It’s Too Late (Pittsburgh: Ideal Taxes Association, 2008), p. 2.

  127 “China’s Financial System and Monetary Policies: The Impact on U.S. Exchange Rates, Capital Markets, and Interest Rates,” hearing of U.S.-China Economic and Security Review Commission, August 22, 2006, p. 93.

  128 William Bahr, The Economic Consequences of Blind Faith in Free Trade (Draft), Ch. 5. William A. Lovett in 2004 estimated that, “With stronger, reciprocity-based trade policy, U.S. GDP could have been 10 to 20 percent higher,” in William Anthony Lovett, Alfred E. Eckes & Richard L. Brinkman, U.S. Trade Policy: History, Theory and the WTO (Armonk, NY: M.E. Sharpe & Co., 1999), p. 130. Another estimate of the size of the problem, by economist Charles McMillion of MBG Information Services, notes that in the 25 years up to 1980, our real GDP grew at an average of 3.8 per year. But in the 25 years afterwards, as our trade deficit ballooned, it grew at only 3.1 percent. Charles McMillion, “Guest Editorial: Forever in Their Debt,” Manufacturing & Technology News, October 25, 2006, p. 5.

  129 “The Budget and Economic Outlook: Fiscal Years 2009-2019,” Congressional Budget Office, January 2009, Table 5, http://www.cbo.gov/ftpdocs/99xx/doc9957/01-07-Outlook.pdf. Includes off-budget spending.

  130 James K. Jackson, “Foreign Ownership of U.S. Financial Assets: Implications of a Withdrawal,” Congressional Research Service, January 14, 2008, p. 1.

  131 Net international obligations, per Mark Whitehouse, “U.S. Foreign Debt Shows Its Teeth As Rates Climb: Net Payments Remain Small But Pose Long-Term Threat to Nation’s Living Standards,” The Wall Street Journal, September 25, 2006, p. A1.

  132 Matthew Higgins, Thomas Klitgaard, and Cédric Tille, “Borrowing Without Debt? Understanding the U.S. International Investment Position,” Federal Reserve Bank of New York, 2006, p. 7.

  133 As stated in a recent report by BRUEGEL, a think tank in Brussels, the Korea Institute for International Economic Policy in Seoul and the Peterson Institute for International Economics in Washington: “A market-led adjustment might involve global recession, abrupt and excessive changes in key exchange rates and assets prices, and, as a consequence, aggravated trade friction. The recent volatility in global financial markets is a reminder of the dangers of failing to act promptly.” Alan Ahearne, William R. Cline, Kyung Tae Lee, Yung Chul Park, Jean Pisani-Ferry, and John Williamson, “Global Imbalances: Time for Action,” Peterson Institute for International Economics, March 2007, p. 3.

  134 Robert A. Blecker, “The Ticking Debt Bomb: Why the U.S. International Financial Position is Not Sustainable,” Economic Policy Institute, June 1, 1999, p. 11.

  135 Lawrence Mishel and Jared Bernstein, “Economy’s Gains Fail to Reach Most Workers’ Paychecks,” Economic Policy Institute, August 30, 2007, Figure A.

  136 Most recent data available; strictly speaking, this personal consumption spending. “National Economic Accounts,” Bureau of Economic Analysis, http://bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&FirstYear=2008&LastYear=2008&Freq=Qtr and http://bea.gov/national/nipaweb/TableView.asp?SelectedTable=5&FirstYear=1980&LastYear=1980&Freq=Qtr.

  137 Diana Farrell, Susan Lund, Eva Gerlemann, and Peter Seeburger, “The New Power Brokers: Gaining Clout in Turbulent Markets,” McKinsey Global Institute, June 2008, p. 20.

  138 Ibid., p. 8.

  139 Ibid., p. 7.

  140 Testimony of David Marchick before U.S.-China Economic & Security Review Commission on “The Extent of the Government’s Control of China's Economy, and its Impact on the United States,” May 24, 2007.

  141 Diana Farrell, Susan Lund, Eva Gerlemann, and Peter Seeburger, “The New Power Brokers: Gaining Clout in Turbulent Markets,” McKinsey Global Institute, June 2008, p.7.

  142 Testimony of David Marchick Before U.S.-China Economic & Security Review Commission on “The Extent of the Government’s Control of China’s Economy, and its Impact on the United States,” May 24, 2007.

  143 “The CPP Fund and CPP Investment Board are not Sovereign Wealth Funds,” Canada Pension Plan In-vestment Board, December 10, 2007, http://www.cppib.ca/files/PDF/SWFBkgr_Dec10_2007.pdf.

  144 Diana Farrell, Susan Lund, Eva Gerlemann, and Peter Seeburger, “The New Power Brokers: Gaining Clout in Turbulent Markets,” McKinsey Global Institute, June 2008, p. 6.