Free Trade Doesn't Work
The problem with free trade
By Dr. Joseph L. Martos
In 1992, presidential candidate H. Ross Perot predicted there would be "a giant sucking sound" of jobs being siphoned to Mexico if Congress passed the North American Free Trade Agreement (NAFTA) lowering trade barriers between the three countries on the continent. Within 10 years, the United States had lost over a half million jobs. By then, Perot's prediction had been forgotten.
Free trade is good for investors. It is good for international transportation. It is good for multinational corporations. But it is not good for America. It is not good for the U.S. economy or for most working Americans.In the first two parts of his book Free Trade Doesn't Work: What Should Replace It and Why, Fletcher explodes the myth (or rather the multiple myths) of free trade, based on the economic ideas of David Ricardo, a British financier who lived in the early nineteenth century, around the time of Napoleon, when international trade was a fraction of what it is today. Many of Ricardo's ideas (such as the labor theory of value, and comparative advantage) no longer work—and they never really did, except in theory—but they sound good, and so Republicans and Democrats continue to pursue free trade policies that eviscerate American industry.
According to Fletcher, the United States does not have an industrial policy. Other countries do, and so Germany, Japan and China protect their industries while we keep losing ours. America became a powerful economy in part because for decades we protected our industries from European competition, but after World War II American politicians believed that the U.S. economy was so strong that it would be best to remove all trade barriers and encourage all countries to trade with us. Not only were the politicians wrong, but the European Union and other countries maintained trade barriers that hurt American competitiveness. As a result, the U.S. continues to lose high-paying manufacturing jobs, replacing them with low-paying service jobs, or, more recently, with unemployment.
Fletcher uses a combination of history, charts and graphs, mathematics and anecdotes to make his case. He pokes fun at economists, pointing out that they "have often favored free trade simply because the math is neater," (11) even though it does not hold up in the real world. But he also uses a lot of common sense, showing why globalization is more an idea than a reality, why national economies are both real and important, any why some types of jobs are more valuable than others. These are some of the reasons why the U.S. economy cannot be saved by greater productivity, increased education (a.k.a. retraining) or more creativity if American manufacturing continues to decline.
For manufacturing, especially the production of high-value goods that are made in large quantities, leads to the creation of large support industries either on the fabrication side (e.g., machine tools and component parts) or on the service side (repair and replacement). The expansion of manufacturing and its ancillary industries raises the economic well-being of the bulk of the population, creating and maintaining a large and stable middle class. Without a vibrant manufacturing sector, the national economy tends to pull the national work force apart into a small minority of overpaid workers (e.g., financiers) and a huge majority of underpaid workers (e.g., retail associates).
If this analysis is on target, the next question is what to do about it? What are the industries that produce wealth and spread it around, and hence ought to be protected? Fletcher argues that protecting old technologies doesn't do the job, so it is too late to protect the auto and computer chip industries. The trick is to identify and protect the industries of the future.
What exactly are those industries? And what policies will protect them? Is this an argument for a value added tax (VAT) such as Europe's? Is it an argument in favor of finding and protecting the industries of the future, for example, green technology?
Actually, Fletcher rejects all prognostication and micromanaging in favor of a trade policy that is both simple enough to implement and flexible enough to work in the long haul even if it does not produce miracles in the short run.
Will his proposals work? To decide that, you will have to read the book for yourself and prepare to be persuaded.
Dr. Joseph L. Martos teaches at Bellarmine University in Louisville, KY. This is his first contribution to Enter Stage Right. © Dr. Joseph L. Martos, 2010
Buy Free Trade Doesn't Work: What Should Replace It and Why at Amazon.com for only $24.95