Free Trade Isn’t A Cure-All

June 10th, 2011 at 10:48 am | 5 Comments |

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The American economy has entered a period of turmoil unlike any it has seen in decades.

The solutions, to me at least, do not seem radically easy or clear, but the first step in finding a solution is to clarify our language in talking/thinking about the problem. If we are serious about finding ways of addressing some of the serious structural problems of the economy, we must be willing to offer a thoroughgoing analysis of the whole economic order.

The trends of “globalization” have had a huge impact on the American economy in the past 20 years. Yet I think there have been some confusions in our contemporary discussions of globalization, so here are a few (mildly polemical) challenges to contemporary assumptions, focusing on trade and manufacturing policies.

The decline of manufacturing is not like the decline of agriculture. The shrinking manufacturing sector is often mistakenly analogized to the drastic drop in the number of Americans working in agriculture from 1870 to 1950. The current trade deficit, driven by manufactured goods, disproves that analogy. The story of the Industrial Revolution in America is not the replacement of agriculture by manufacturing but the incorporation of agriculture into a new, broader economy. Throughout industrialization, Americans still produced enough food to feed themselves and those in other nations.

For the most part, we still do produce enough food to do so. The number of Americans working in agriculture has declined drastically, but, due to increases in productivity, the output has only increased. While it is true that productivity has increased in manufacturing and that automation has cut down on the number of needed factory jobs (the US still does produce a lot), such an increase in efficiency does not tell the whole story of the decline of American industry: if it did, we would still be producing huge quantities of shoes, computers, tools, and countless other items. The fact that factories are closing down while our trade deficit has skyrocketed over the past 20 years is a sign of how different the fates of manufacturing and agriculture have been.

We do not live in an era of free trade (or: cheap imports do not equal free trade.) Some of those who criticize the reigning trade hegemony counterpose “fair trade” to the dominant “free trade.” This criticism is mis-aimed. We may not have “fair trade,” but we certainly don’t have “free trade,” either.

The current global trade order is not free trade but actually a species of neo-mercantilism. Many developed nations have opened up their economies to an influx of goods from poorer, often autocratic, mercantilist countries. Most importantly for the case of “free trade,” there is often a great disparity in openness between trading partners. These disparities are especially stark for the United States. U.S. policymakers have in a variety of ways unilaterally opened up the American market while allowing other countries to stack the deck against U.S.0 businesses and workers.

We are told that this flood of imports is “free trade” when, in fact, numerous barriers are put up against American products.

Consider our relationship with the People’s Republic of China, our second-largest trading partner. It would be a stretch to declare that this relationship is “free trade.” The PRC manipulates its currency as a de facto tariff against U.S. goods — and piles further outright tariffs on US goods. The price of entry into the Chinese market is often, in part, a joint-venture agreement, in which a foreign company provides intellectual property and other advanced technologies while local Chinese contacts supply workers and land for factories.

Mandating that businesses open up factories in a nation in order to have access to it is not exactly classical free trade.

These agreements are very often deleterious to U.S. workers and U.S. companies. The office-supply manufacturer Fellowes, for example, opened up a joint-venture manufacturing facility in the PRC. For a few years, this factory led to some considerable profits for Fellowes.

In  2010, this stream of profit came to a sudden end, when Fellowes’s Chinese partner moved to take possession of the facility:

The dramatic moment was in early August, 2010, when Zhou, under the aegis of Shinri, blocked the gates of the joint venture facility with security guards and trucks, preventing people from going in and goods going out, effectively shutting down production. Shinri expelled and confined the managers, moved funds from the joint venture to a Shinri-controlled bank account, sent packing the 1,600 joint venture employees, and at night, drove a truck into the facility and stole Fellowes-owned injection molding tools, some of them weighing several tons.

Fellowes’s former partner now has taken possession of millions of dollars of equipment and technological know-how—all without paying a cent (or a yuan) for it. The Chinese government appears to be giving cover to what many would consider theft. Fellowes is but one of many companies that have had their investments and technologies confiscated by the politically connected of the PRC. Without a basic respect for property rights, there can be no capitalistic free trade.

Trade policy does not happen in a vacuum. In part to cope with the throes of industrialization, the United States passed various worker and consumer protections in the twentieth century: regulations for environmental protections, worker safety, wages, and other areas. When the U.S. economy was bounded by tariffs, these regulations helped ensure that an increase in industrial production went along with an increase in the standards of society. However, in our new era of neo-mercantilist globalism, the role of these standards has become considerably more troubled for U.S. workers.

Consider the case of environmental standards.

As the decades have gone on, our environmental standards have become increasingly invasive and onerous. Government more and more regulates chemical usage, energy sources, waste disposal, land use, and other aspects of environmental production that affect industrial policy. The presumed beneficiary of these regulations is the public at large through the protection of the environment. Our laws tell companies that, if you manufacture in the U.S.A., you must face numerous obligations and pay increased costs due to all these regulations. Our trade policies, however, tell those very same companies that, if they manufacture their products abroad, they need not worry about any U.S. environmental or worker regulations.

One might wonder how the environment is helped when U.S. policies incentivize heavy industry leaving a country with some environmental regulations (such as the U.S.A. or many European countries) and going to a country with far fewer (such as the PRC or India).

I recognize that economic prosperity is often correlated with an increase in environmental protections, so a wealthier India may eventually introduce further environmental protections. But there seems to be an often radical disproportion between how politicians talk about environmental policies and what our trade policies actually encourage. The debate over “global warming” reveals this disproportion at the height of its absurdity.

In the name of “global warming,” the federal government has banned the classical incandescent lightbulb in order to cut down on carbon emissions; meanwhile, through trade policies, it has encouraged a gross increase in carbon emissions through encouraging manufacturing to move to nations with radically less efficient and more polluting forms of industrial production.

“Global warming” advocates often stress that the world is at a tipping point for carbon emissions and forecast the deaths of potentially hundreds of millions of people if carbon patterns do not change right now. Many of these same advocates, however, seem to see no problem with the continued destruction of American manufacturing.

A “cap-and-trade” scheme or carbon tax, without any attention to broader global industrial questions, would do little for American employment or lower carbon emissions. If environmentalism is more than NIMBYism and self-righteousness, we need to consider the effects of our current trade policies upon domestic policies.

To acknowledge (or to wonder about) the limits of neo-mercantilist globalism is not to embrace isolationism; on the contrary, this kind of critique opens up further ways of engaging with the broader community of nations. It would be foolish to turn our economic or political backs on the world, and a tariff war would very likely create more problems than it would solve.

But it would equally foolish to allow our thinking to be frozen by hazy myths and knee-jerk assumptions.

The theory of free trade does have much of value to it. Under the right conditions, trade between nations does lead to a rising tide for all boats. There have also been many benefits to the current neo-mercantilist order, though some of the implicit tensions of this order have risen to the surface during the last few years of economic turmoil.

Yet, living within this order, the United States must find ways to renew its competitive edge and successfully compete with mercantilist powers. It might also, with its allies, consider how best to revise this order so that it better advances the ideals of freedom and prosperity.

Originally published at A Certain Enthusiasm.

Recent Posts by Fred Bauer

5 Comments so far ↓

  • valkayec

    This analysis is fine as far as it goes. However, I’d like some policy prescriptions. I want solutions, not just complaints.

  • jg bennet

    YES!! Fort Frum has fired on the Confederates!!! :)

    Keep firing Frum and you just might get republicans to return to being republican.

  • SSteamers

    One can read Ian Fletcher’s book “Free Trade Doesn’t Work” for some more good insights, for example the use of VATs as a tariff by ALL of our major trading partners.

    Much attention and concern has recently been focus towards the Chinese monopoly of the misnomered rare earth elements that are vital to such items as strong (neodymium) magnets. These materials are very much of strategic national importance not just for the military, but very many key manufacturing sectors and advanced medical equipment. China, until very recently, had control over all the mines producing the ore and does all the refinement. The one mine they don’t own was just reopened by Molycorp in Colorado, but the ore is sold to China. The press, hell even Congress, has recognized the monopolization of these elements as a serious threat. The reason no one else refines these elements has to do with the cost and hassle of waste byproducts (fairly intensive to clean up), NIMBY too. The ‘china price’ forced out every other refiner who had to consider environmental costs.

    The US and the rest of the world’s response to this risk has been pathetic. 1) Idly watch third world mines be monopolized. 2) Allow all other mines and refiners to close. 3) Do nothing when China blatantly violates obligations to WTO and cuts off Japan’s supplies as a form of political retribution. 4) Bitch mightily and do nothing because basically they have the best price.

  • Nanotek

    good points, Mr. Bauer

    “As the decades have gone on, our environmental standards have become increasingly invasive and onerous. Government more and more regulates chemical usage, energy sources, waste disposal, land use, and other aspects of environmental production that affect industrial policy.”

    industrial pollution is not free-trade — corporations that throw their industrial waste into the air we breathe and the water we drink — is simply handing others the cost of responsible disposal to bolster their own profits.

    People forced to breathe or drink industrial pollution aren’t doing so voluntarily — and voluntary interactions are the basis of freedom and free trade.

  • Frumplestiltskin

    I dunno about this post, it is all over the place. Incandescent light bulbs? Really? Why continue this stupidity? Why not bring back the cathode ray tube. LED lights are vastly more efficient and cheap over the long haul.

    I don’t know all the details about Fellowes but they have recourse through the courts in the US and the WTO. A lot of small joint ventures get shafted because the partners are crooks and mobsters, however SGM sold more cars in China in 2009 and 2010 than GM sold in the US. In addition, American products sell far better than local products, the crooks who took over Fellowes (if this is an accurate portrayal) will not have any lasting success. Chinese companies lack transparency and since they don’t they invariably crash and burn (unless they are SOE’s) and the private ones that don’t rely heavily on having good relationships with western trading partners, ripping them off burns good guanxi.
    As to the Yuan, Bauer truly has no idea what the Yuan should be valued at, I don’t think anyone can. No one knows how much debt SOE’s are in, what the true rate of inflation is, the long term effect of environmental degradation, the boy-girl imbalance and its explosive ramifications, or even the true state of most Chinese companies (has Bauer ever worked in Lujiazui? I have, trust me the Shanghai Market makes the 1920′s US stock market look rational)

    And I don’t understand Bauers point about global warming. Since the Chinese and Indians will contribute to it, we should as well? That is simply nuts. Burning fossil fuels simply is not a viable long term strategy for the world, the sooner we develop alternatives in enough quantity to drive down prices the better off we all will be. The first computers were enormous machines that cost millions of dollars and did nearly nothing, but we made the investment. France produces 70% of its electricity from Nuclear, we only produce 20%. Certainly we can do more. We can also offer serious tax credits for flex fuel and hybrids, this will lessen our dependence on jihadi oil, and if we don’t piss away electricity burning incandescent bulbs will have the capacity for such things as electric cars. I could go on, but eh.

    As I said, this was just a weak effort by Bauer.