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Five Years Later, Free Trade Still Doesn't Work

On the trade issue, there's an enormous amount of editorial chatter, but almost no actual economic analysis. People argue the political aspects, and throw around vague generalizations about globalization. They don't talk about actual quantities of production, consumption and wealth.
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My book Free Trade Doesn't Work was published five years ago by the U.S. Business and Industry Council, a Washington-based think tank and lobbying organization.

If the reader will forgive a bit of inside baseball, I'd like to review what I got right and what I got wrong, now that time has given a bit of perspective.

The good news is that the actual economics of the book seems to have stood up reasonably well. I must confess that when it came out, I was genuinely nervous that somebody would immediately write to me and reveal that I had gotten everything wrong because I hadn't thought of X. I had no idea what X might be, but I was still afraid that my opponents knew something that I didn't.

But that never happened. Or that's my opinion: if anyone insists that it did, please send me the link.

I did get any number of critical responses, but they all rehashed the usual mistaken economics of free trade. I had (again IMHO) refuted the conventional arguments for free trade in the book, so this didn't prove anything.

As a matter of fact, most of the attacks on my book didn't even try to refute what I'd actually written. This was a disappointment, but upon reflection, I realized it's actually par for the course in political controversy. People rarely read what you actually write, or respond to it. They skim you, pigeonhole you, and then call you a genius or an idiot based on whether they agreed with you before they even sat down to read.

Now the above is actually the good news. Because the bad news is that the worst thing I learned from writing this book, is that almost nobody pays any attention at all to actual economics.


You'd think economics would be a popular discussion topic. After all, everyone cares about money, our political system is largely driven by economic factors, and there's this discipline "economics" that's taught in every university and that lots of obviously intelligent people claim to understand and believe in.

Unfortunately... most of that is fluff. It's not economics at all.

On the trade issue, there's an enormous amount of editorial chatter, but almost no actual economic analysis. Surprising, but true. People argue the political aspects, and throw around vague generalizations about globalization. They don't talk about actual quantities of production, consumption and wealth.

To take just one example of the unseriousness of public debate on trade economics, it is flatly impossible to say anything serious on the subject without invoking David Ricardo's famous 1817 Theory of Comparative Advantage. It's like discussing physics without gravity. This particular point is a matter of 100 percent agreement between me and every single one of my opponents who has any economics education.

Comparative advantage is the very cornerstone of trade in a market economy and yet 99.9 percent of public discussion of the issue doesn't even mention it. Let alone explain what it says. Let alone explain it correctly. (Click here if you want my explanation.)

This theory has an unfortunate reputation for being hard to understand, but it's really not. It's mildly counter-intuitive at first, but it doesn't require, at the conceptual level, any math above basic arithmetic.

A fifth-grader can do the math, and yet almost nobody pays it any attention.

When I wrote my book, I thought I would actually get somewhere by explaining in great detail what this theory really says and why it's a useful intellectual construct but doesn't actually prove free trade is the right policy, which people mistakenly think it does. Indeed, one of the reasons I wrote the book was that I went looking for such an explanation and couldn't find a good treatment of the problem.

(If you're curious, the problems with the theory turn on the fact that it rests on hidden assumptions that don't hold true in the real world, which I wrote about here.)

But no. I got basically nowhere with this project of documenting the chapter-and-verse of why comparative advantage doesn't vindicate free trade. And not because I was wrong (IMHO), but because 99.9 percent of my opponents weren't even using the concept logically entailed by their own position in the first place.

Frankly, I now suspect the same is true in a lot of other areas of economics. Famous economists like Paul Krugman pull their hair out on a regular basis over how people just casually toss off assertions like "Tax cuts cause sufficient economic growth to pay for themselves" and "The Fed is debasing the currency by expanding the money supply" without paying the slightest heed to what actual theoretical and empirical evidence says about such questions. Krugman seems to think it's a dastardly Republican plot. I strongly suspect it's something much more depressing: simply the norm.

People just don't feel they have an obligation to think. You think it's an accident that we have such a mediocre economy? What would you expect in a country where economics is never actually rationally discussed, only bandied about like so much political sloganeering?

Now here's the shocking question: does this all mean that technically substantial economics is simply a waste of time, because nobody pays it any attention? This includes seriously powerful people in Congress etc, who have said some of the most ignorant things. (Paul Ryan, I'm looking at you.)

I hate to say it, but I honestly don't know. It's entirely possible that it is. And if that's the situation, I have no solution. The best we can hope for is that irrational discussion of economic subjects somehow produces correct policy conclusions just by virtue of compromise and the balance of competing interests involved.

So my depressing conclusion is that on the pure economics of my book, I think I can say I was right, but being right didn't count for anything.

Now let's look at the politics of the book. The key section is the one at the end where I made some predictions (edited a bit for space and clarity):

Support for free trade will probably fall apart over the next few years. As of early 2011, there are four missing prerequisites for free trade to explode as an issue:

1. Everyone is still preoccupied with the financial crisis, its aftermath, and recovery from recession, especially job recovery.

2. There remains a residual sense in the minds of the public and the lawmakers that somehow free trade, despite all its problems, is still sound economics, and that perhaps we should just keep on eating our spinach because it will be good for us in the end.

3. There is no obvious alternative policy on the table. There is instead a grab bag of issues, ranging from Chinese currency manipulation to the proposed Korea, Colombia, and Panama free trade agreements. This paucity of credible alternatives feeds the attitude that nothing fundamental can be done.

4. A specific crisis has not happened to force the system out of its old way of doing things as the debacle in subprime mortgages upended our financial system in 2008 and made continuation of prior policy impossible whether anyone wanted it or not.

For the first prerequisite above to be supplied, all it will take is time, as recessions, even double-dip recessions (?), always eventually end, and the financial crisis of 2008 was successfully patched (albeit at astronomical cost and without fixing its underlying causes, risking a repeat).

For the second prerequisite to be supplied, all it will take is sufficient public debate, between persons perceived as credible, for free trade to become established in the public mind as an issue with two legitimate sides to it. As the reader has hopefully gathered by now, once one seriously scrutinizes the underlying economics of free trade, even if one is not disabused of the policy outright it becomes hard to deny that it is a legitimately controversial issue. The pure "100 percent free trade with 100 percent of the world 100 percent of the time" position is simply not intellectually serious. So when public debate finally cracks open, free trade will lose its innocence very fast.

Once protectionism is perceived as a legitimate choice, it will become the actual choice of large numbers of people whose protectionist instincts have been held back by the belief that it is somehow an ignorant position to take. They will not need to master the details of why it is legitimate; they will only need to know that it is legitimate. Sen. Sherrod Brown (D-OH), one of the leading opponents of free trade in the Senate, records that ever since he came to Congress in 1993, every free trade vote has been accompanied by predictions by the White House of economic disaster if it was not passed. Trade wars, stock market decline, and recession were predicted every time. The power of this rhetoric to intimidate is going to end. Protectionism will cease to be a canard and become just another policy option.

The third prerequisite above (no obvious alternative) can emerge overnight if some major political figure launches a tariff proposal that captures the public's imagination. Or the myriad individual issues that currently comprise the opposition to free trade could force the soldering together of an omnibus proposal on the floor of Congress.

The fourth prerequisite (a sudden crisis) is difficult to predict as to time, but we can rely securely upon the fact that unsustainable trends are always, in the end, not sustained. At some point, America's giant overdraft against the rest of the world must come to an end. Although our government is trying to postpone the day of reckoning as long as possible, this day will come. Secretary of State Hillary Clinton flying to China to beg its government to keep buying our bonds (as she did in February 2009) won't make much difference in the end.

Once protectionism is conceded to be a valid political position, it will eventually win the public debate, if free trade's unpopularity continues to mount at the pace it has been mounting over the last 10 years. (This pace is, if anything, likely to accelerate.) When this happens, the status quo will be sustained only by the tacit bargain of the American political duopoly, in which the two parties agree not to make trade a serious issue, whatever tactical feints they may deploy. This bargain will hold as long as the benefits of keeping it, which mainly consist in keeping the corporate backers of both parties happy, exceed the benefits of defecting from it, which consist in winning votes.

President Obama is not going to be able to support free trade forever. Crisis will eventually come, probably when the dollar finally melts, which will force the public to ask why this happened and thus force the question of whether America's trade policy has been wise. A sharp decline in the dollar would generate an inflationary shock -- and a shock in interest rates -- that would capture public attention and quite likely knock the economy back into recession.

Ironically, an outright crisis would probably benefit Obama politically, as it would give him room to maneuver out of his earlier free-trade position without looking foolish. It would also help break up the logjam of special interests that currently locks free trade in place. These interests seem impregnable even today in early 2011, but the ground is shifting under their feet for two reasons: first, the present trading order depends financially upon America's inexorably doomed international credit and second, it depends politically upon the public continuing to believe that free trade is sound economics.

Now obviously President Obama hasn't ceased supporting free trade. So my first prediction was wrong.

A crisis may, of course, still happen, so the jury must remain out on the second. (How long? I don't know, but at some point this one should be considered wrong, too, if a crisis doesn't appear.)

Of course, predicting politics, which depends on the vagaries of individual personalities and on events as well as trends, is a notoriously difficult thing to do. People far more important than me get it wrong all the time. If I wrote the book again, I would probably stick to trends, which can be predicted because they depend upon underlying causes which have some stability once identified, and leave events as implied.

But what's actually more interesting is the way that, despite matters not playing out as I predicted, trade has indeed boiled over as an issue in American politics, albeit in a different way.

I'm referring, of course, to the fact that, as of today, the front-runner for one party's nomination, Donald Trump, is openly against free trade, denouncing trade agreements and proposing tariffs on, for example, imports of cars from Mexico. The front-runner of the other party, Hillary Clinton, after having been an enthusiastic supporter of free trade for decades, has been spooked by pressure from her left into at least pretending to oppose the free-trade agreement that's currently under discussion: the TPP. And the man who is that left, Bernie Sanders, is as much of a trade hawk as Trump, albeit for socialist, rather than economic-nationalist, reasons.

So trade has indeed exploded as an issue, as I predicted.

Now this may all, of course, turn out to mean nothing in the end. The inflammatory and eccentric Mr. Trump may flame out tomorrow and the actual Republican nominee may be someone who takes a conventional Republican position on trade, as the other Republican candidates do. And Hillary Clinton, whom I have already accused of lying about opposing the TPP, may revert to what I believe is her sincere opinion if elected.

But free trade has still garnered opposition in American politics the likes of which hasn't been seen since the 1920's, when this country was explicitly protectionist.

The lesson is that the public's political sentiments require actual candidates who espouse them, if these sentiments are to get expressed. All the pure public opinion in the world doesn't count for anything unless there's a specific action, namely "vote for Mr. or Ms. X," for the public to engage in. Then sentiments that have been corked up for years can explode into political significance very fast.

Naturally, preventing the emergence of such figures is one way that party establishments corral and tame public opinion. The Republican establishment thought they had matters under control because they control the supply of money to Republican primary candidates. Then somebody showed up who had even more money than they did. Ooops!

Even they didn't predict that.

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