Review: Ian Fletcher, Free Trade Doesn't Work, 2011

In this book, Ian Fletcher provides an excellent critique of the pre-Trump "free trade" policies of the United States. His argument is backed up by copious amounts of statistics, real world examples and historical data. Happily, his writing style is accessible to the interested citizen who is not an economics geek living on some Platonic plateau. 

I can only hit the central points of Fletcher's complex thesis. One of these issues is the trade deficit. For 2017, the United States had a $566 billion trade deficit. The "free traders" generally argue that it doesn't matter for various reasons. One incredible argument is that the trade deficit with Red China is as meaningless as a trade deficit between Kansas and Nebraska. Contrary to such globalist nonsense, Fletcher argues that the nation-state is still the central political and economic player on the world stage and should remain just that. 

Fletcher introduces the "trade deficits are meaningless" crowd to a tutorial in Econ 100. He notes that as with individuals, there are only three ways for organizations and governments to pay for goods and services: "a) Goods we produce today. b) Goods we produced yesterday. c) Goods we will produce tomorrow." In concrete terms for foreign trade: "a) is when we sell foreigners jet airplanes. b) is when we sell foreigners American office buildings [or Yosemite or port facilities vital to national security]. c) is when we go into debt to foreigners" pg. 38. Obviously, both b and c result from a chronic trade deficit and equally obvious are not in the national interest.  

Fletcher provides a fascinating picture on what happens when a nation with long time preferences engages in "free trade" with a nation of short time preferences. In other words, one country (say America) prefers short-term consumption versus its trading partner (like Red China) that is famous for playing the long game. The long-term result is the hollowing out of the feckless country's manufacturing base: 

The increased well-being of both nations (as they define it, decadently or diligently) depends on the ability of the decadent nation to borrow and sell assets. And it cannot do this forever. Eventually, when it exhausts its ability to sell assets and assume debt, it ends up poorer than it would have been if it had not had free trade with its neighbor. Because it depleted its assets and saddled itself with debt, it must now divert money from its own consumption to give to its trading partner! (pg. 47)

The author observes that this process hits poor, third-world countries particularly hard. The results of evil rulers and the evil doers at the IMF and World Bank can be seen most readily in Africa. Thanks to their own rulers and "free trade" dogma, these countries are doomed to being indebted primary and agricultural producers that provide little "value added" for its workers. Little wonder that third-world activists call such policies "neo-colonialism." 

Free trade tends to mean that the industrial sector of developing nations either "make it to the big time" and become globally competitive, or else get killed off entirely by imports, leaving nothing but agriculture and raw materials extraction, dead-end sectors which tend to not grow very fast. Free trade eliminates the protected middle ground for economies, like Mongolia and Peru, which don't have globally competitive industrial sectors but were still better off having such sectors, albeit inefficient ones, than not having them at all. (pg. 157)

Ghana Gold Mine

An important part of Fletcher's argument is the economic differences between manufacturing and primary production to a nation. Without the "high value" manufacturing base, economic activity that can't be outsourced will be poorly paid and the entire wage rate dragged down to bare subsistence. It is for this reason that free trade often results in the death of the middle class. Politically, it must be noted, all form of "liberal democracy" depend on such a middle class for its long term success.

Fletcher devotes a chapter to debunking the free trade arguments of David Ricardo (1772-1823). He views Ricardo's "law of comparative advantage" as an abstract construct largely devoid of real world referents: 

It enables a lone economist with a blackboard to prove that free trade is best, always and everywhere, without ever getting her shoes dirty inspecting any actual factories, dockyards, or shops. She does not even need to consult any statistics on prices, production, or wages. The magnificent abstract logic alone is enough. It is actually rather a pity the theory isn't true. (pp. 103-104, links added by yours truly)

He examines seven "dubious assumptions" of Ricardo's theory that even if true two-hundred and twenty years ago are no longer operative: 1. Trade is sustainable; 2. There are no externalities; 3. Factors of production move easily between industries; 4. Trade does not raise income inequality: 5. Capital is not internationally mobile; 6. Short-term efficiency causes long-term growth; 7. Trade does not induce adverse productivity growth abroad. Regarding item 7, one example is the "offshoring" of high-tech manufacturing in Red China. The result is a hostile foreign power's ability to "hack" sensitive US industrial and government computer systems. But, the free traders, in and out of government, have a long tradition of selling out the American people to their Red Chinese paymasters.

The author provides much elaboration on each of these points. He also notes that comparative advantage in trade is the exception and that absolute advantage is the rule in trade. He also argues that Ricardo assumed the existence of nation-states with strong borders when formulating his theory. Ironically, it's these same national frontiers (or barriers to capital and labor mobility) that the free trade globalists seek to eradicate. 

Absolute advantage is really the natural order of things in capitalism, and comparative advantage is a special case caused by the existence of national borders that factors of production can't cross. Indeed, that is basically what a nation is, from the point of view of economics: a part of the world with political barriers to the entry and exit of factors of production. This forces national economies to interact indirectly, by exchanging goods and services made from those factors, which places comparative advantage in control. Without those barriers, nations would simply be regions of a single economy, which is why absolute advantage governs economic relations within nations. (pg. 110)

I've only touched on a few of the key arguments made by Fletcher in this excellent book. I have no doubt that free traders will remain unconvinced. However, they should take Fletcher's thesis seriously and seek to provide a coherent rebuttal. Simply reciting Ricardo will not do. 

The author's solution to America's chronic trade deficits and declining industrial base is an 30% across the board tariff. I'm not sure if this is the best policy. But, it may be better than "free trade" agreements between connected cronies on the one hand and hostile foreign powers on the other. Perhaps, President Trump's policy of renegotiating bad trade agreements will be of some benefit. But it is clear that the trade, and other economic, policies of the last several administrations have not been in the interests of the American people.