What "Free Trade" Has Cost The World

If you take a job away from someone who is paid a reasonable wage because they enjoy the protections and prosperity of democratic government, move it across a border, and give it to someone living under a thugocracy, forced to work for pennies with no protections whatsoever, it should be just plain obvious that the worker on our side of the border and the worker on the other side of the border are not going to be better off. And when you do this on a massive scale it just stands to reason that most people on both sides of the border are going to be worse off.

But propaganda being what it is we were somehow convinced to try a worldwide experiment in taking good jobs from democracies and turning them into bad jobs in thugocracies. Now, of course, the experiment has run its course and we can see the results.

Worker Against Worker

Setting worker against worker enabled a few people to get really, really really wealthy and powerful and use that wealth to become even more wealthy and powerful. Our country is in decline, burdened by massive trade deficits because the ones with vested interests in cheap labor won't let us won't take on the mercantilists, burdened by budget deficits because those vested interests have bought low taxes and government subsidies, our infrastructure crumbles because multinational business leaders refuse to invest here, with no more need of us as workers, and the resulting hollowed-out middle class can't consume anymore. Other countries also suffer from similar stresses.

Out of this situation a new global elite has emerged, contemptuous of democracy and government and any power but the power of their own money. In country after country, these top few won't share the proceeds with their own, either, while they keep the world from approaching solutions.

In January's post, Establishment Realizing: When You Close The Factory We Can't Make A Living, I wrote about how "the establishment," or as bloggers call it, "The Village" or "Versailles," are starting to realize that our trade policies just might not be working for us. Of course, they come to this realization only after our trade deficits approach the trillion mark, after we have lost millions of manufacturing jobs, after we have closed tens of thousands of factories, after we have lost the tech manufacturing industry, and after we have abandoned hopes of leading in green manufacturing as well...

(We're still waiting for them to realize that tax cuts do not increase revenue, that spending more on military than all other countries combined might contribute to deficits, that our too-big-to-fail financial sector is capable of causing problems, that the climate really is changing, that allowing corporations to pump money into politics means the end of democracy... but hey, a dollar spent by a vested interest on a politician apparently is a dollar very, very well spent.)

In the Washington Post, Steven Pearlstein recently reviewed Dani Rodrik's "The Globalization Paradox,"

It is dogma among economists and right-thinking members of the political and business elite that globalization is good and more of it is even better. That is why they invariably view anyone who dissents from this orthodoxy as either ignorant of the logic of comparative advantage or selfishly protectionist.

But what if it turns out that globalization is more of a boon to the members of the global elite than it is to the average Jose?

Right, what if?

In "The Globalization Paradox," Dani Rodrik demonstrates that those questions are more than hypothetical -- that they describe the world as it really is rather than as it exists in economic theory or in the imagination of free trade fundamentalists.

. . . The starting point of Rodrik's argument is that open markets succeed only when embedded within social, legal and political institutions that provide them legitimacy by ensuring that the benefits of capitalism are broadly shared.

And a unicorn. And a rainbow.

The paradox, as Rodrik sees it, is that globalization will work for everyone only if all countries abide by the same set of rules, hammered out and enforced by some form of technocratic global government. The reality is, however, that most countries are unwilling to give up their sovereignty, their distinctive institutions and their freedom to manage their economies in their own best interests. Not China. Not India. Not the members of the European Union, as they are now discovering. Not even the United States.

In the real world, argues Rodrik, there is a fundamental incompatibility between hyper-globalization on the one hand, and democracy and national sovereignty on the other.

Clyde Prestowitz threw a one-two punch at free trade after Senator John McCain claimed that the iPhone and iPad are Made in America. In Why isn't the iPhone made in America? at Foreign Policy magazine, Prestowitz wrote,

John McCain provided some good laughs and made himself look stupid on a recent ABC news interview by telling Diane Sawyer that the iPhone and iPad are great examples of products that are made in America.

They're not. And given the amount of high technology production in his state, McCain should certainly have known better. The fact that he didn't does make you wonder about what, if anything, they know in the U.S. Senate.

Prestowitz goes on to explain that while the iPhone is manufactured in China, parts, software, design and other components are made all around the world, not necessarily for low wages. He concludes,

So if America actually did produce the stuff it says it is good at producing, it wouldn't have a trade deficit with Asia for which China is the proxy at all. It would have a trade surplus and 20-40,000 more jobs than it has.

Prestowitz looks at a smaller picture here of the back-and-forth of trade with the US and China. Design, software and other capital and technology intensive components are not made in China. But the bulk of the jobs are in China. This could work for everyone if people there were paid enough -- and allowed by their government -- to buy things made here. That would be trade and everyone would be better off. But trade isn't really the point of "free trade."

Then, in It's not just the iPhone that America doesn't make, Prestowitz conitinues,

Okay, so yesterday I explained not only that John McCain was wrong to say the iPhone is made in America (as you already knew), but also that most of you were wrong to think it is made in China. I went on to show that the phone is only assembled in China from high-tech parts that are mostly made in Japan, South Korea, and Taiwan. I further explained that production of these parts is not labor intensive, but capital and technology intensive.

In other words, these parts are just the kinds of products American economists, Silicon Valley venture capitalists and entrepreneurs, and Washington political leaders always say America is the best in the world at making. ... Then I left you with the question of why, if America is so good at making this stuff, it doesn't.

[. . .] it was believed that unilateral free trade (keeping one's markets open, even in the face of protectionism by one's trading partners) was a winning proposition. Thus, there was no need to be concerned about things like subsidization of key foreign industries or loss of capability in these fields, and hence no need for trade measures that might upset delicate geopolitical relationships.

This economic doctrine has been based upon the assumption of Anglo/American economics that economies of scale either don't exist in most traded products and industries or are relatively unimportant. That this assumption is dramatically and demonstrably wrong and not accepted by most of the non-Anglo world has not deterred its application to the making of much American and global trade policy.

In other words, it doesn't work. But we already knew that. We can see it all around us. And it is us who have to live with the results.