Free Trade Never Was — what Hilary, Ricardo and I got wrong about trade, and Trump got dead right.
November 11, 2016, revised October 26, 2018
There’s an old saying (somewhere): “If your opponent is a rabbit, you should at least admit that he has bigger ears than you do.” I might mention a newer saying: “Even a blind squirrel stumbles over a nut now and then.”
So here goes. There’s something the abominable Mr. Trump got right before I did. Namely “Free Trade” — which, since Japan and China never played by the rules, never was free. You might suppose that objecting to Free Trade is just a convenient issue position for Trump, since he’s eager to be on all sides of all issues, but no — this is a position he took many years ago, in print. It may be the only, or almost the only, consistent position he holds. Perhaps, being a consistent cheater himself, it was natural for him to conclude that trade without cheating was never, ever going to happen.
But however he got it right, he got it right; and I got it wrong. I swallowed the Free Trade Kool-Aid, dear readers. For decades. When I was a young man majoring in economics I accepted the famous 19th century economist Ricardo’s argument that international free trade was almost always a good thing. That argument says that trade allows everyone to do what they are most efficient at, and so makes everyone richer. It’s at the very center of free trade ideology to this day — although ironically, Ricardo wanted free trade in order to keep workers from starving because the one-percenters of that day, the agricultural aristocrats of Britain, were blocking food imports and reaping extraordinary profits, crimping industrialization. Britain’s real comparative advantage at that time was plenty of cheap coal near the coasts (so it could be shipped easily.) In a fair manufacturing contest the U.K. would win going away not because of skill, but because it was far cheaper back then to ship a manufactured good than all the coal that was consumed creating it. So Britain could only benefit from fewer barriers to her cheaper manufactured goods.
The view as I stated it above isn’t quite right: it’s not absolute efficiency that is favored but *relative* efficiency within any one country that equals “comparative advantage,” to use Ricardo’s term. This is why countries with disadvantaged agriculture have tended to industrialize faster and remain in the lead.
Therefore I advised — in a paper I gave to a Chinese friend way back when — that China set up special economic zones which didn’t include agriculture and had their own separate currency. China did subsequently do just this, briefly (not necessarily because I advised it, but who knows.) The idea was that a separate currency for some regions would help them avoid “The Dutch Disease.” But China dropped the idea of special currencies for such zones rather quickly, I believe. Given China’s dependency on food imports, today, that probably makes sense. Whereas, introducing additional regional currencies is something the Canada could still benefit from, perhaps more than any country on earth, if it wants to develop a world-class high tech sector; given how much oil and wheat we produce. Oddly, the Wikipedia page on Dutch Disease doesn’t even mention Ricardo, yet there’s no logical distinction between the doctrine of “comparative advantage” and “The Dutch Disease” — you can’t possibly have the first without the second.
However, it took me until 2016 to realize that Ricardo, and Hilary, and I missed something far more important when considering free trade and globalization. Both rich and poor countries have seen their GNP go up as a result of free trade (and greatly reduced shipping costs) — but the poor in poor nations have done well, and the very rich in rich nations have done extremely well; while large numbers of people in the richer nations have been shafted, and may have no job at all to go to. Their jobs have been given away, and for tens of millions of workers, there simply are no jobs that they can be retrained to do which a young, bright Vietnamese citizen, or rural Indian worker can’t be trained to do roughly as well, while living much more cheaply. Not everyone can be a dazzling programmer or an opera singer who is irreplaceable. That’s life.
Not only that, but outsourcing turned out to be a great way to mask tax avoidance, through all sorts of schemes that the EU and UK (and soon the U.S., I hope) are belatedly getting around to calling outright fraud. See the UK settlement with Google, and the EU case against Ireland’s sweetheart deals with such companies as Facebook. I didn’t anticipate how ripe an opportunity for widespread (almost uniform) corporate fraud globalization would become, or how silent well-funded legislators would be about that.
Still, the heart of my epiphany these last few months (during the 2016 Presidential campaign) has been the realization that the overwhelming benefit of free trade to advanced countries has inevitably gone to the very rich, and that this was unavoidable. Unskilled workers in the West genuinely can’t compete — not because they aren’t willing to try harder but because their food and rent costs so much more, here. The cost of globalization is that unskilled workers in India and Wisconsin end up with rather similar incomes — which is not a good outcome if you’re paying for rent and food in Wisconsin, but excellent if you’re paying rent and shopping at the food stalls of Kerala. (Of course, if you’re a stockholder, this is not a cost: every dime not paid to workers in Wisconsin is pure profit to you.)
Similarly, there are vast tracts of English countryside that were once farmland, but which haven’t been farmed since Ricardo’s policies were adopted there, and grain began to flood in from Canada, the US and Australia. There are also huge areas of land in Tennesee and adjacent States that were farmed at the time of the Civil War, but have gone back to woods, now. For some time those farmers switched from crop to crop, assuming that there would always be something they could grow profitably. Until suddenly, there wasn’t. Eventually, other flatter and more fertile land, elsewhere, was so much more economical to farm that countless Eastern farms nestled in those mountains became woods again. So even though we need more food now than then, these farms have been forever sidelined. Other land is easier to till, or a bit more fertile. But setting aside land is one thing. Setting aside whole populations, another.
This is what has happened to many tens of millions of U.S. (and Canadian and British) workers who have been sidelined. Their housing and food costs are genuinely higher than those of Bangladeshi workers: they simply can’t charge as little for their work and still physically survive (much less send their children to college.) Don’t bother suggesting that the government should give them supports, or create jobs for them, and increase taxes to pay for that — because the whole idea was to shaft workers here and save a dime to begin with; those companies who donated to legislators to let their firms outsource and to avoid taxes by stashing money overseas wouldn’t have bothered outsourcing at all if they thought they would ever have to pay even part of the costs that flowed from that decision through high taxes. To be charitable, those corporate bosses may have assumed (as I did, sadly) that there would always be work we could do better (perhaps a kind of unconscious racism, frankly.) However that isn’t so, and can’t be, for most workers. That much has now been demonstrated, as the Red State rage in the center of the U.S. attests.
Trade can be very beneficial if industrial countries trade with industrial countries — ideas flow freely, relative efficiencies can help everyone involved, in every income strata. There is some dislocation but jobs don’t flow out en mass because all workers are earning similar wages and have similar expenses. In contrast, what I used to call sarcastically “the Albanian solution”: namely insisting on absolute self-sufficiency historically hasn’t created much innovation or high living standards. (This was back when Albania was a very poor independent communist country.) But free trade between rich and very poor nations is far more dangerous, I’m sorry to say — dangerous for our poor, and for our middle class, too. Perhaps the majority of voters, here, it turns out.
“But globalization has really helped the world. It’s reduced poverty worldwide.” Yes it has. This is perfectly true. Global Trade has been good for poor Chinese and Bangladesh citizens; and very, very, very good for the one percent in China and Bangladesh.
But being generous by giving away someone else’s income, somebody else’s job, and the prospects of someone else’s children — by the millions — is not “charity.” There’s another word for that, I’m afraid. In a democracy, this is not sustainable, as we’ve seen, this year. Eventually those who have been short-sheeted will vote for anybody brave enough to stand up to the consensus and vow that they will kill the free trade snake.
We do want the rest of the world to do well and to catch up. But severely and very suddenly short-sheeting the bulk of wage-earners in the United States was not the way to do that; maintaining tariffs and transferring technology and education was.
Brexit happened because the EU (by which I mean Germany) insisted that workers from Poland and the other poorest EU countries should be freely able to work under tough conditions for low wages in Britain and then move back to Poland and buy a house and a business, both far cheaper there. This is asymmetrical because British unskilled laborers can’t do the same. They don’t speak Polish, so they wouldn’t really fit in, there. After enormous numbers of workers in England watched their incomes and prospects sink year after year they finally pulled the plug on the EU as a whole. It’s hard to entirely blame them, surely. Aside from multiplying the number of very large yachts it’s richest doyens possessed, Britain paid a heavy price for this policy of free movement. It was great for Poland, true. If British workers had decided to do this as an act of charity, that would be wonderful — wonderful to the point of sainthood, in fact. Worth celebrating. But it was the richest who gave other people’s livelihoods away and laughed all the way to the bank, hedge fund and bond market. That’s not charity. It’s a con.
I know, there’s another idea, that the “low-information” uneducated are too stupid to know how wonderful the world we intellectuals have built for them, truly is. I swallowed that Kool-Aid for a long while, but now I’m finally spitting it out, and I’ve tried to express the reasons why, here. In time, economists in general will do the same. We intellectuals got our sums wrong — it turns out that the Emperor of Free Trade really wasn’t terribly well dressed, and far too easily corrupted.
Decades ago I abandoned Economics because at that moment the field was in love with mindless computer-modeling that, as a programmer, I knew was a pointless waste of time; a mere product of physics envy. That was a good decision on my part, because I probably wouldn’t have seen the traps that lay within free trade anyway, so I wouldn’t have been much help.
Napoleon (and his rich backers) understood all too well that both military and economic power depended on protecting domestic and export markets for French manufactured goods from British competition, and were all too willing to fight for those markets. So much futile spilling of blood was an immense tragedy. But our simply handing China the bulk of the worlds electronics manufacturing capacity along with a ridiculous amount of stolen intellectual property without a second thought was a preventable tragedy in its own right, too.
I don’t honor Trump, but I do honor many of those who voted for him. It was their ox that was gored. So I offer to all those who voted for Trump, my sincerest apologies. (Just don’t do it again. Please.) Most Presidential candidates should have had reversing free trade as their first principle, but only one did. It’s not surprising that it’s often extreme personalities who are willing to take positions that seem extreme, speaking up loudly against what all the supposedly smart people — such as myself — thought. The shame is that no sensible politicians broke from the herd and did the same. The flyover states had been devastated (as is very visible as empty and near empty city blocks on Streetview, that are turning to parkland, where derelict houses have been torn down.) Who wouldn’t be angry?
Mistakes were made.
I’ll end with a couple of quotes:
“He gave me something that I was looking for,” said Settergren, a Swedish immigrant who works for General Motors. In Trump, he saw a candidate who could help unskilled workers foundering in a modern economy and fight terrorism abroad with new aggression.
http://www.latimes.com/local/education/la-me-newport-beach-trump-20161109-story.html#nt=oft07a-4gp1
“Just as much as it’s about making America great, Trump’s agenda is about making America a normal country,” he said. “A normal country doesn’t have a half-trillion-dollar trade deficit. … In a normal country, the government actually does its job.”
— Peter Thiel
http://www.cnbc.com/2016/10/31/peter-thiel-what-donald-trump-represents-isnt-crazy-and-its-not-going-away.html
