Review of “Free Trade Doesn’t Work” by Ian Fletcher

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.

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28 Responses to Review of “Free Trade Doesn’t Work” by Ian Fletcher

  1. tschafer says:

    An excellent summary. I’m looking forward to reading the book.

  2. aretae says:

    1. I’m going to say it here for the 47th time…

    A simple model of free trade with japan looks like this:

    Americans grow corn better than they make cars
    Japan makes cars better than it grows corn.
    Americans send wheat to Japan, and get back cars.

    This is 100% indistinguishable from a machine that turns corn into cars.

    If you object to free trade, you are objecting to productivity improvements as well.

    2. Lose the “we”.

    If you alter this:
    “Nations will always have an incentive to deviate from free trade to better-manage their trade policy and gain ground on other nations.”

    to

    “RICH PEOPLE will always have an incentive to deviate from free trade to better-manage their status and maintain position against other COMPATRIOTS.”
    then we’re in agreement.

    Free trade ALWAYS benefits the consumers.
    Trade restrictions have been measured to (on average) NOT benefit even the protected industries at all.
    ONLY reliable benefit to unfree trade is protecting monied interests.

    • Foseti says:

      No disagreements, from me or from Fletcher. Unfortunately the simple model is not immediately transferable to the real world. As I tried to make really clear, in the real world a country is more concerned about future growth prospects. In your simple model, the arrangement between the US and Japan is not indistinguishable from a machine that turns corn into cars *and * equalizes future growth prospects for the US and Japan.

      I agree that *in the short-term* objecting to free trading is objecting to * global* productivity improvements. But if you remove “in the short-term” and “global” from that sentence, then I disagree.

      Finally, if the goal is undermining “monied interests” (a strange goal, but whatever, you’re free to choose your own goals), it’s not clear to me that free trade does a better job than a fixed, flat tariff. Frankly, both seem to be targeted at different goals.

    • sardonic_sob says:

      Free trade always provides a lower price for the goods being traded. This is accepted by almost all economists, largely due to a principle known as Comparative Advantage. I’ve never really been 100% sold on CA as a Law of Nature, but then I’m not a professional economist and I have no pressing reason to challenge it, either.

      That is NOT the same thing as “always benefiting consumers.” The first and most obvious detriment is the people in the other country whose production is superseded by the cheaper products, but that is merely our old friend Creative Destruction at work and while it is a very real detriment, it is not one which it benefits us all to try to avoid in the long run. There are, however, many others.

      For instance, we decided long ago in the US that we were going to have certain limitations on the kind and amount of waste products producers were allowed to release into the environment. This inevitably results in higher prices for the goods produced (unless and until it stimulates producers to come up with what turn out to be even cheaper alternatives, but that’s not guaranteed and there are still transition costs.) We did this because it is detrimental to everyone to have these waste products floating around.

      If we encourage free trade with a country which does not have the same restrictions, we end up having the waste products dispersed anyway: cheaper widgets is a benefit to widget consumers, but releasing waste into the atmosphere is a detriment both to widget consumers and to everybody else. And that’s just one example of the difference, I can come up with many more.

      • sconzey says:

        That’s quite possibly the first cogent argument against free trade I’ve read on this thread.

        The counter-argument of course goes that the detrimental effects of pollution are local (pace AGW) so it’s perfectly legitimate for the US to export its pollution (by outsourcing polluting industries) in this fashion.

  3. wm tanksley says:

    The over-arching good points are that the theory ignores long-term growth and assumes that all comparative advantages are equal.

    The first point is clearly true — the Ricardan analysis (as far as I know) seems to assume a steady state. On the other hand, I don’t see any reason to believe another approach will work better in a dynamic state, and many economists have elaborated on dynamic technologies.

    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.

    I shudder at the implications of the phrase “is a nation really better”. Better than… What? By what standard? _Why_?

    I’d like to assume Fletcher has read “Wealth of Nations”, but I don’t see any evidence; his arguments that you’re quoting here seems to simply assume that where modern economics is wrong, mercantilism would be the obvious innovation we need. Perhaps mercantilism DID have some advantages, but I’d be comforted to know that the author actually knew that modern economics has already been compared to mercantilism, and the latter did very, very poorly in comparison.

    -Wm

  4. tenkev says:

    Even if it is conceded that economic growth is path dependent and that a wise ruler could forsee the correct path for future economic growth and with wise application of differential tariff rates could steer the country’s industries into the best paths for future growth; that, still leaves two major problems:

    1. Democracies are not wise rulers. Never have been and never will be.

    2. Assuming the perfect foresight of the ruler, why not just act as a venture capitalist and long-term fund those industries you think will lead to future growth? This way you don’t have to deal with trying to police smugglers and other tax avoidance strategies.

    • Foseti says:

      Fletcher believes that you can remove the politics by going with a flat, fixed tariff.

      I’m not sure who’s right, but there would be some benefits to tariffs instead of free trade and income and other sales taxation.

      • tenkev says:

        Oh, I definitely agree that a tariff as a revenue source is much preferable to income tax or other sales tax; but, not that a tariff qua tariff is on average more beneficial than not.

      • wm tanksley says:

        That is an interesting claim… What’s really interesting is that the Republicans won their first-ever election on the platform of replacing the tariff tax with a national income tax.

        Now, I’m not against anything that involves eliminating the income tax. Grin. But it’s a little odd that this suggestion so precisely unwinds what was done before.

  5. sconzey says:

    I should start out with saying that I’m not a “free trade uber alles” kinda chap. Mubarak, for instance, as part of regaining control of Egypt should tax FDI, and levy a tariff on imports of manufactured goods. This would increase the cost of capital relative to labour, making the Egyptian economy more labour intensive (and less wealthy in strict economic terms) but the greater employment levels should give all these young men rioting in the street something productive to do with their time.

    With that said I’m not sure I buy Fletcher’s criticism of free trade (although I’ll certainly read the book myself — or a better one if you care to suggest one). Further, I’m not entirely sure how those eight assumptions you outline (some of which are obviously untrue; some are debatable) relate to free trade.

    For me the killer argument is a reductio-ad-absurdum: if a tariff is a good idea for the US to levy against cheap imports from China, is it a good idea for Georgia to levy against cheap imports from Arkansas, and is it a good idea for Arlington to levy against cheap imports from Fairfax and is it a good idea for me to levy against the cheap laundry that my fiancée does?

    Just saying “free trade is bad mmmkay” isn’t enough, because clearly me taxing my fiancée is ludicrous; a Theory of Optimal Tariffs would be more complicated than the Theory of Free Trade, as it needs to describe precisely when free trade is and isn’t optimal, what we mean by optimal.

    So I guess this is a “woah there! just go back a step…” rather than a critique per se. 😀

    • Foseti says:

      But the reductio works both ways – no country seems to have been able to develop industry without resorting to tariffs. Surely if free trade were the best, some country would have managed to move up the value chain using free trade?

      • sconzey says:

        I’ve read too much Austrian economics to ever be satisfied with “economic experiments.” Neither am I convinced that “industry” matters more than general economic growth.

        I don’t know much about Hong Kong, but they didn’t seem to need tariffs to build their industrial base in the 1960s. Shenzen etc. started to develop as the Chinese dropped tariffs on foreign capital. Further: I’ve no doubt there are examples of countries that raised tariffs on foreign goods to the detriment of their own economies.

  6. Handle says:

    I finished “Free Trade Doesn’t Work” a few weeks ago, and I thought it was overlong for the few basic points it was trying to make. It was thorough without being technical, but almost too aggressively comprehensive.

    Perhaps the whole attempt to critique the idealized assumptions behind free trade theory wasn’t addressed to those with a formal Econ background but instead targeted at a lay audience in an attempt to provide them with “intellectual ammunition” against the simplistic claims of demagogues and certain public intellectuals.

    At any rate, I thought it could be basically summed up in the short-term vs long-term argument, and the fact that technologies, competitive advantages, and trade-patterns are dynamic and *evolving* phenomenon, not static ones. Because they are dynamic, one can make strategic decisions that maximizes economic welfare in one’s own nation that may come at the expense of another. That is to say, the optimal pathway for any particular nations is not necessarily the one that is simultaneously optimal for all nations.

    There is also the reality of phenomena like cross-innovation, human capital, and the advantage of having certain synergistic techno-friendly industry-research nexus communities like Silicon Valley.

    I thought the most powerful argument was the famous and familiar problem of the trade deficit and issues of foreign-held national debt, currency manipulation, and foreign acquisition of a nation’s productive assets.

    But the weakest part of the book was it’s cursory mention of Warren Buffet’s “Import Certificates” “Free *and balanced* Trade” idea. Import Certificates provide a simple and elegant non-tariff way to single-handedly remedy over half the problems Fletcher discusses. For as thorough and heavily-end-noted book as FTDW is, this strangely and almost dismissively brief mention of the idea was surprising and disappointing.

    • Foseti says:

      “I finished “Free Trade Doesn’t Work” a few weeks ago, and I thought it was overlong for the few basic points it was trying to make. It was thorough without being technical, but almost too aggressively comprehensive.”

      I completely agree.

  7. Gian says:

    For certain people, free trade is a moral issue. So the consequencentlist arguments based on long-term growth would not matter.

    But the managed trade as in your review suffers from the knowledge problem re: long term growth.
    How to show that the managed trade policies will maximize the long-term growth?
    Unless the writer is able to show that his prescription maximizes the long-term growth relative to free trade (and I dont see how he can), why should we listen to him when he says that the free trade can not maximize the growth-rate?

  8. Thomas says:

    I think the main problem with economics in general and free trade in particular is that there is no way to integrate coercion into any of the models. So every model just assumes that transactions will happen only if the actors believe them to be win-win.
    In the real world, there is no way to protect property without the implicit threat of force. Violence is asymetric after all.
    Hence, a sovereign entity that would allow its industry to concentrate on, say, wheat production would find itself awfully fast to be not sovereign anymore if the trading partner concentrates on producing stealth bombers. The same goes with other strategic goods like energy, information technology ect.
    As Foseti said in regard to the British Empire, the only way to have so called “free trade” is if you’re willing and able to protect it against people who take the short route of appropriating instead of producing.

    • sconzey says:

      the main problem with economics […] is that there is no way to integrate coercion into any of the models

      Not true. Praxeology is the study of human action, based on the simple axiom that “humans act to trade the current situation for one that they believe will be superior”. When applied to voluntary trade in a free market we get Austrian economics, but there’s no reason not to apply this same thesis to coercive practices as well.

      Mencius Moldbug has attempted a pseudo-praxeological analysis of coercive dispute and corruption. David D Friedman wrote an essay for Blood and Iron called The Economics of War which — nevertheless — takes a behaviourist and utilitarian approach.

    • sconzey says:

      There are others but I don’t recall them offhand.

      • Thomas says:

        Yes, it’s true that given several options, an actor will pick the one he deems to be the best. But to call that choice “voluntary” is often a very strange use of the word.
        Consider this great Dilbert scenario:
        http://dilbert.com/strips/comic/2007-06-01/
        Is that “voluntary” or is it an offer you can’t refuse?

        Thanks for the link to the Friedman piece though, didn’t know that one.

    • sconzey says:

      My general point was that there’s nothing inherently contradictory in an economic analysis of non-voluntary action.

      A choice between being raped and shot is a choice nonetheless; and reveals the actors preference between rape and a gunshot wound. That both choices are pretty shit or that it’s immoral to force someone to make that decision doesn’t change the fact that a person faced with the dilemma will choose, and that choice will reveal their preferences.

      • Thomas says:

        Yes, I understand your general point. What I’m saying is that this point is moot as long as there is no existing legal system that prevents one actor from unilaterally shifting the other actors incentive structure whichever way the first actor pleases. I’m 100% sure, that if you were to become Mike Tysons cellmate in prison, you wouldn’t tell people that you’ve made the choice to be his bitch. Instead, you would tell your mom that “the bastard left you no choice”. And of course you would be right.

        That is the reason why Moldbug (and of course everybody before the 20th century) thinks that in order to allow freedom, you need law. And for law, you need security. Security, law, freedom. In that order and not the other way around as basically every libertarian, liberal, hell just about everybody would tell you today.

      • sconzey says:

        Hmmm. I think we mainly agree with eachother, we’re just misunderstanding.

        I agree with your original point that “conventional” economics assumes the existence of some violent property-defending, contract-enforcing organisation. Like Newtonian Physics only works at large masses travelling significantly less than the speed of light, traditional economics (and by extension, traditional Libertarian political policy) only works within the domain of Rothbard’s category B.2b.

        What I object to (which, reading your last comment, is probably just me misreading your original comment) is the implication that when the State fails, for whatever reason, an “economic” analysis is impossible.

        What I’m not so sure about is whether a State needs to patriate the manufacture of it’s arms.

  9. pdimov says:

    Let’s assume that country A wants to produce more touch screens and adopts a flat 20% import tax (which I agree is the least harmful form of protectionism). Let’s further assume that the rest of the world trades freely, except for a reciprocal 20% tax on coutry A’s exports, and that the price of a touch screen on the world market is 100. The price in A will be 120, and the price of an A-made touch screen in the rest of the world will be 144, which obviously can’t compete. Still, A will have a touch screen industry, right? For a while. The 20% difference in price will lead to inefficiencies in A’s production – unionized inflexible wages, higher minimum wage, environmental taxes, safety regulations, compliance costs. When the world drops its price to 90, A’s touch screen industry will no longer be able to compete, even domestically. Enter a 34% import tax, stage left.

  10. sardonic_sob says:

    If you really want to know if someone honestly believes that Free Trade is a priori always a beneficial thing, ask them this question:

    “What is your opinion of a proposal to change the tariff schedule of a country so that the tariff on goods imported from any other country is equivalent to the highest tariff that country imposes on ANY imported good from the first country?”

    When I was a fairly pure economic libertarian, I would have argued that was a spectacularly brilliant idea. I *still* like it, but that is because I am a troublemaker and I would find its implementation Amusing beyond words.

  11. […] will improve economic growth in the long run, it only says that it will boost economic benefits in the immediate-term. In other words, free trade is not about improving economic growth, it’s about making the […]

  12. […] produced a terrific book exposing the fallacy of free trade, which was reviewed by Master Foseti here. Ironically, Edward Luttwak wrote the forward to the book, proving that, after over a decade and a […]

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