Obama Drinks Friedman's Kool-Aid

Our
economy has gone into the toilet over the past 30 years, and President Obama
and his advisors think "free trade" is the solution. Like Bill Clinton and both George Bush's, he's so enamored
of it he's even recommending it to poor African nations.

Yet
"free trade" is a guaranteed ticket to the poorhouse for any nation, and the
evidence is overwhelming. The
concept was introduced, in fact, by Henry VII, as something that England should
encourage other countries to do while it maintained protectionism; a process
known as the 1485 Tudor Plan that led to the rapid industrialization of England
and the deeper impoverishment of its trading "partners."

With
no evident irony or understanding of how South Korea went about becoming a
modern economic powerhouse, on Friday, July 10, 2009, President Obama lectured
the countries of Africa from Ghana, where he was visiting. As The New York Times noted ("Obama
Wins More Food Aid but Presses African Nations on Corruption" by Peter Baker
and Rachel Donadio) on July 11:

"Mr.
Obama said that when his father came to the United States, his home country of
Kenya had an economy as large as that of South Korea per capita. Today, he noted, Kenya remains
impoverished and politically unstable, while South Korea has become an economic
powerhouse."

In
the same day's newspaper, The New York Times' lead editorial, titled "Tangled
Trade Talks," repeated the essence of the mantra of its confused op-ed writer,
Tom Friedman, that so-called "free trade" is the solution to a nation's
economic ills.

"There
are few things that could do more damage the to already battered global economy
than an old-fashioned trade war," the Times wrote. "So we have been increasingly worried by the protectionist
rhetoric and policies being espoused by politicians across the globe and in
this country."

But
South Korea did not become an "economic powerhouse" as a result of "free
trade." Indeed, the exact opposite
is the case.

South
Korean economist Ha-Joon Chang's book Bad
Samaritans describes South Korea's economic ascent in detail. In 1961, South Korea was as poor as
Kenya, with an $82 per capita annual income and many obstacles to economic
strength. The country's main
exports were primary commodities such as tungsten, fish, and human hair for
wigs.

Interestingly,
some of its largest modern-day producers of technology began by producing these
basic commodities. Samsung, for
example, started out exporting fish, fruits and vegetables. But by throwing out "free trade" and
embracing "protectionism" during the 1960s, in roughly 50 years South Korea
managed to do what it took the United States 100 years and Britain 150 years to
do.

This
economic development of South Korea started following a military coup in 1961,
where General Park Chung-Hee began South Korea's economic assent by
implementing short-term plans for economic development. He instituted the Heavy and Chemical
Industrialization program, and South Korea's first steel mill and modern shipyard
went into production. In addition,
South Korea began producing its own cars.
Electronics, machinery, chemicals plants soon followed, all sponsored or
subsidized by the government.

Between
1972 and 1979 the per capita income grew over 5 times. In addition, new protectionist slogans
were adopted by South Korean citizens.
For example, it was viewed as civic duty to report anyone caught smoking
foreign cigarettes.

All
money made from exports went into developing industry. South Korea enacted import bans, high
tariffs and excise taxes.

In
the 80's South Korea was still far from the industrialized west but it had
built a solid middle class.
South Korea's transformation was as if, in 40 years, to quote Chang,
"Haiti had turned into Switzerland."

This
transformation was accomplished through protecting fledgling industries with
high tariffs and subsides, and only opening itself to global completion slowly
and when ready. In addition, the
government ran many of the larger industries, although private industry was
allowed.

Private
industry, when allowed, was monitored carefully and taken over by the state if
found to be inefficient.

The
government ran or tightly regulated the banks and therefore the credit. It controlled foreign exchange and used
its currency reserves to import machinery and industrial imports.

On
the other hand the government tightly controlled foreign investment in South
Korea, and largely ignored enforcement of foreign patent laws. Korea focused on exporting basic goods
to fuel and protect its 'high-tech' industries with tariffs and subsides.

Had
South Korea adopted the "free trade" policies espoused by Friedman and The New
York Times, it would still be exporting fish and still have a per-capita income
like Kenya's.

Another great example of this is
Toyota's success with their luxury car the Lexus. Toyota has been touted by free traders as a clear example of
why free trade works, mostly because of the widely cited example outlined in
Thomas Freidman's book The Lexus and the
Olive Tree.

But
again, at a closer look, the reality is the opposite of what Friedman naively
portrays in his book. In fact,
Japan subsidized Toyota not only in its development but even after if failed
terribly in the American markets in the late 1950's. In addition, early in Toyota's development, Japan kicked out
foreign competitors like GM.

Thus,
because the Japanese government financed Toyota at a loss (for roughly 20
years), built high tariff and other barriers to competitive imports, and
initially subsidized exports, auto manufacturing was able to get a strong
foothold and we now think of Japanese exports being synonymous with
automobiles.

For
about 200 years, we understood this in the United States. Had the fathers of the United States
like Lincoln, Washington, Jackson or Grant applied for IMF loans, they would
have been denied: All of them believed in high tariffs and a heavy control of
foreign investment, and considered "free trade" to be absurd.

In
1791, Treasury Secretary Alexander Hamilton submitted his Report on the Subject of Manufactures to the US Congress. In it he outlined the need for our
government to subsidize new industries and subsequently protect them from the
international markets until they become globally competitive.

Additionally,
he proposed a roadmap for American industrial development. These steps included protective tariffs
on imports, import bans, subsides, export bans on selected materials, and the
development of product standards.

It
was this policy, followed largely for most of the history of our country with
average tariffs through most of the 19^th and 20^th
centuries of around 40 percent, which built our American industry. All three times we radically dropped
tariffs - for 3 years in 1857, for nine years in 1913 (just down to 25%), and
in 1987 - what followed were economic disasters, particularly for small
American manufacturers.

Since
Reagan blew out our tariffs in the 1980s (and Clinton kicked the door totally
open with GATT, NAFTA, and the WTO), our average tariffs are now around 2-4
percent. And the predictable
result has been the hemorrhaging of American manufacturing capacity to those
countries that do protect their industries through high import tariffs but
allow exports on the cheap - particularly China and South Korea.

If
President Obama and our Congress don't soon learn the lessons Alexander
Hamilton taught us in 1791, which he learned from Henry VII and were borrowed
by Japan, South Korea, and China, we'll continue to see American industry
slowly die. And with it will go
the American middle class.