On one hand, economists famously believe that there’s no such thing as a free lunch. On the other hand, they also famously believe that free trade is a free lunch. Fletcher appears to be the rare one-handed economist who believes that the first statement is correct (dismal science indeed!).
I decided to read this book quickly after the nice discussion of free trade in the comments to this post.
I have two significant reservations about Fletcher’s book.
At times his arguments are very reasoned. For example, I agree with the following, which I think is a summary of the good arguments in Fletcher’s book:
The fundamental message of this book is that nations, including the U.S., should seek strategic, not unconditional integration with the rest of the world economy. . . .
Economic growth, that is, is ultimately less about using one’s factors of production than about transforming them—into more productive factors tomorrow. The difference between poor nations and rich ones mainly consists in the problem of turning from Burkina Faso into South Korea; it does not consist in being the most efficient possible Burkina Faso forever. The theory of comparative advantage is not so much wrong about long-term growth as simply silent. . . .
Fairly open trade, most of the time, is a good thing. But the theory was never intended to be by its own inventor, and its innate logic will not support its being, a blank check that justifies 100 percent free trade with 100 percent of the world 100 percent of the time. It only justifies free trade when its assumptions hold true . . .
When Fletcher sticks to this argument – which is essentially that the costs of trade should be balanced against the benefits – the book shines. Occasionally though he goes too far and ends up sounding like the free-trade-uber-alles economists that he’s criticizing.
I’m also not sure he justifies his trade proposal, which is a flat tariff of 20% on all imports. He does seem to hint at the case that this trade policy could allow the government to become much smaller – less welfare would be required as well as lower income taxes.
My second complaint is that Fletcher never defines free trade. Sometimes he seems to consider agreements like NAFTA free trade and sometimes he uses a strict libertarian definition of free trade (i.e. that free trade can only happen between totally free economies).
My criticisms aside, a criticism of free trade is fundamentally a criticism of comparative advantage. Here are some of his criticisms of the mainstream thinking on comparative advantage, the theory assumes that:
- short-term efficiency causes long-term growth.
- trade is sustainable.
- there are no externalities.
- factors of production move easily between industries.
- trade does not raise income inequality.
- capital is not internationally mobile.
- trade does not induce adverse productivity growth abroad.
- there are no scale economies.
I think some of these points are stronger than others. Sustainability, for example, is a useless term – no one has any idea what is and what is not sustainable.
The over-arching good points are that the theory ignores long-term growth and assumes that all comparative advantages are equal. Is a nation really better if it’s only advantages are in agriculture? Obviously not, yet the simplistic theory of trade that dominates modern economists cannot explain why.
Fletcher points to work by Gomory and Baumol (which is detailed in this pdf, for example), which shows that countries do not necessarily benefit most from fully free trade. In economic terms, it seems that they show that increasing free trade has negative returns beyond a certain point. Pay attention to Figure 2 in the pdf in particular. Fully free trade may still result in the highest level of global output but it will create winners and losers among various countries in the world.
Fletcher spends a lot of time critiquing American trade policy, which seems as if it’s designed by an evil genius seeking to make things as bad as possible. We’re losing jobs in industries that offer good potential for long-term economic growth and gaining mainly lame service jobs. It’s also not clear that the US is paying for imports with actual economic wealth but instead we are paying with more borrowing (from our trading partners!).
Fletcher makes many of the same points that Friedrich List makes. Fletcher extends List’s analysis in an interesting way. List believes that free trade will be best for a developed economy. Fletcher seems to believe that even developed economies are changing enough that they’ll need to continue to protect important (i.e. growth producing) industries. As he puts it:
. . . economic growth is path-dependent. To grow, an economy must continually break into new industries. But to do this, it needs strong existing positions in the right industries.
Nations therefore needs to protect “the right industries.” To avoid politicizing trade, Fletcher proposes a flat 20% tariff on all imports. (That sound you hear is the collective economic profession fainting).
I should probably end here, but I can’t resist saying a few words about most economists failure to analyze things from the perspective of a country – instead of from the perspective of some nebulous “global” position. The more I think about free trade, the more I believe that free trade does not and cannot exist outside of the mind of the free market economist. Nations will always have an incentive to deviate from free trade to better-manage their trade policy and gain ground on other nations. Perhaps this point is best illustrated with an example.
When the English-speaker thinks of free trade, he often thinks of 19th Century England. England defended free trade, the world prospered and everyone was happy, so the story goes. But what did the “free trade” look like from the other side? Let’s ask a German (quoting myself):
In Reventlow’s telling . . . the industrial revolution didn’t really start in England. It started elsewhere, but since England controlled the seas, England prevented any other country from becoming truly industrialized. Instead, England stole technology from others and ensured that markets around the world were opened to its [own] goods. In other words, if you want to industrialize, you should: 1) steal others’ technological advancements, 2) prevent their goods from being sold abroad, and 3) prevent anyone from closing off other markets to you. Actually, this sounds like it would be highly effective.
A moment’s reflection will show that “free” trade required a lot of force – including the world’s largest navy and the world’s largest empire.
Of course, you object that I’m quote German war propaganda. But is it really so absurd to suggest that England used it’s overwhelming advantage of naval power for the benefit its own economy instead of for the benefit of mankind? If you really believe that England sought only to benefit mankind, I’m not the only one quoting war propaganda.
What we see then is that nations have every incentive to cheap free trade. They engage in trade for their own benefit. When you accept this basic point, it’s hard not to agree with Fletcher’s more reasonable arguments against free trade.