Free Trade Doesn't Work

Interview With Economist Ian Fletcher
Wednesday 08 December 2010

by: Michael Hughes | The Huffington Post

Free trade doesn't work, the global economy is a myth and the U.S. has been duped during trade negotiations for the past 40 years according to Ian Fletcher, an adjunct fellow with the U.S. Business and Industry Council and author of Free Trade Doesn't Work: What Should Replace It and Why, who relayed these concepts to me in an exclusive interview.

During our exchange I discovered that Mr. Fletcher certainly is not opposed to capitalism, underlined by his experience working for hedge funds and private equity firms as an economist, but what he is opposed to are bad economic policies that have led to an ever-burgeoning U.S. trade deficit well on its way to hitting $500 billion this year.

You argue that protectionism is more "American" than free trade. How would you respond to libertarian types who might see this as an assault on America's deeply-held capitalistic values?

IAN FLETCHER: Libertarians simply don't know their history. Take out a $10 bill and have a look at the portrait on it. Alexander Hamilton, founding father and intellectual architect of American capitalism, was a protectionist, and protectionism was American policy from Independence until after WWII. The reality is that a blend of government support for economic growth along with vigorous market-oriented competition has been the American tradition from the transcontinental railroad to the Internet. Entire industries like semiconductors and aircraft were effectively launched by Cold War military industrial policy. Is it an accident that nations, like China, that still do this sort of thing are cleaning our clock right now?

You thoroughly and convincingly document, supported by countless inconvenient facts, how protectionism has been much more beneficial to the U.S. throughout history than free trade. If protectionism is clearly the better economic policy, why is the U.S. so resistant to change?

IAN FLETCHER: The U.S. isn't totally resistant to change on this issue, and it is, in fact, changing. Since the late 1990s, one can trace public opinion and congressional majorities inexorably turning against "free" trade, which has really been a distinctive, offshoring-focused approach to trade policy to benefit multinational corporate interests. Why has it taken so long? Corruption, both the obvious kind driven by campaign finance, and the subtler kind deriving from the laziness, complacency, and intellectual arrogance of economists.
The "American" multinationals, which are no longer American corporations but find this fiction convenient on Capitol Hill, and other free trade advocates have prevailed because a critical mass of American voters has not yet seen through the delusional economics of free trade, and because America can still borrow money abroad and sell off assets to cover its trade deficit. But this music is going to stop fairly soon.

But doesn't foreign competition force U.S. corporations to become leaner and more productive?

IAN FLETCHER: Sure, but I'm not against foreign competition. I'm not against trade either. I'm against free trade and the ersatz version thereof we are being subjected to, neither of which are the same thing as trade per se. Companies need enough competition to keep them on their toes, but not so much as to knock them off their feet. The U.S. color TV industry hasn't exactly been driven to heights of efficiency by foreign competition--because foreign competition killed it. And a lot of that competition wasn't free at all; it was subsidized by foreign nations seeking a foothold in strategic industries, i.e. those with a future.

India's prime minister recently suggested offshoring processes to India makes American corporations more productive overall. Is there any validity to this statement?

IAN FLETCHER: This is a mirage created by the fact that if you offshore the low-productivity jobs from an American company, the jobs remaining in the U.S. will have, by definition, higher productivity--creating the illusion that the company is now more productive. But jobs have still been lost, and there is, pace laissez-faire economic theory, no guarantee that the workers who formerly held them will find new jobs of equal or greater value. What works on the level of the individual company is a net loss for the economy as a whole.
And it's erroneous to suppose that merely upgrading skill sets will be enough to protect American wages and employment levels if we do nothing to fix our employment situation. Educating people for jobs that don't exist because they've moved abroad will not magically cause jobs to come into existence.

Which products should the U.S. target immediately for protectionist measures?

IAN FLETCHER: I don't advocate industry-specific tariffs, which obviously could lead to all kinds of political mischief. I prefer a flat tariff. But if America imposed, say, a flat 30% tariff on all imports, this would tend to bring back to the U.S. high-value industries like producing flat-panel displays, not the cheap-labor stuff like T-shirts.

Can China sustain its unprecedented growth through free trade, and what would happen to China if America woke up one day and became protectionist?

IAN FLETCHER: Free trade does not even remotely characterize what China practices. China practices industrial policy and mercantilism, which are the systematic manipulation of the domestic economy and foreign trade to increase economic growth. Right now, the interests of China's ruling elite are far more closely aligned with the interests of the Chinese economy as a whole than in the U.S. China's elite wants to build up its own country; the American elite is quite happy to let America gradually decline so long as they can make investments and money overseas. At some point, America's ability to absorb China's trade surpluses will end, and it doesn't look like China can smoothly segue to satisfying domestic demand quickly enough. Their manufacturing base is set up to produce goods, like fax machines, pitched at the income levels of their trading partners, not their own people.

Explain how free trade actually leads to artificial pricing (i.e., dubious assumption #2 in your book: "there are no externalities").

IAN FLETCHER: An externality is a missing price tag. For example, this means that products produced in environmentally-harmful ways impose economic costs on the environment that ought to show up in their price and don't. To take another example, buying so many cheap imports that you kill off an entire domestic industry will deprive America's economy of the future value of that industry and everything that would have grown out of it. Because we lost the color TV industry, we've never had a flat-screen TV industry either--but the cost of that wasn't factored into all those cheap color TVs in 1981.

Countless jobs have been lost from corporations procuring parts, relocating or outsourcing entire manufacturing operations overseas. Why is manufacturing important to America?

IAN FLETCHER: Because Americans want to consume manufactured goods, which means that either we must make them, or we must make something else to trade for them. And there just aren't enough other things we can offer the rest of the world, to keep them supplying us manufactured goods forever. Exporting soybeans and investment-banking services just won't cut it; the numbers (which are easy to look up) aren't nearly big enough. Non-elite service-industry jobs are also much more productivity-constrained than manufacturing, so you're never going to be able to pay most people decent wages there.