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FREE TRADE AND COMPARATIVE ADVANTAGE – ARE THEY WORKING OR ARE THEY MYTHS?

August 15, 2013

FREE TRADE AND COMPARATIVE ADVANTAGE – ARE THEY WORKING OR ARE THEY MYTHS?

(Background information for this essay is found in The Squandering of America, by Robert Kuttner.)

They are not working in this age of globalization and probably do not exist outside professorial lectures and seminar rooms. These hide-bound economic theories, like the theory that trade partners are not likely to go to war with one another- a theory destroyed by two world wars – have had their day. Ricardo’s hallowed view of the law of comparative advantage persists, even though the conditions for its application have dramatically shifted, and free trade (if it exists, and I say it doesn’t) is also a victim of East Asian and others’ economic nationalism fleshed out into mercantilism. One economics professor at MIT, Alice Amsden, noted correctly in challenging the core premises of comparative advantage that the most successful Asian nations violated just about every premise of the Ricardian model.

Thus until WW I American industry thrived on protectionism; we had to “catch up” industrially. Lincoln was rightly a pro-tariff and protectionist president. The policy fit the times. If, as Kuttner notes, America had followed Ricardo’s law of comparative advantage, we would have imported goods that Britain made more efficiently and continued to exploit our natural comparative advantage in cheap land, farm products, and raw materials, a policy which would have allowed Britain to maintain its industrial lead indefinitely. We didn’t. We embraced protectionism with our own form of 19th and 20th century mercantilism, a policy we deplore now as practiced by East Asian countries when the shoe is on the other foot. With innovations and resources (and free land for railroads and universities etc.) we have become the Britain of the 19th century in this 21st century, and other countries are playing “catch up” with us, employing some of the same mercantilist tactics we employed earlier but now deplore.

Free trade as a concept, in my view, has no existence, and never did. The law of comparative advantage at one time did have some validity, but now (in my view) has no application in a new non-classical world with government interventionism and other policies of mercantilism as currently redefined by the Wall Street financial elites and their political toadies in government. The value of specialization (the heart of comparative advantage) has been undercut by self-interest. Thus if your economy can produce a widget cheaper than mine, then I should abandon production of widgets and import yours, while working on other products that I can more successfully produce than you can, and sell such products to you, all of which will make for efficiency of the market and parity of exchange over time, the theory goes.

That is not how it works today with politicized trade in which I can ban imports of your widgets on other grounds and for other purposes – perhaps political or from pressure of domestic widget makers. Ricardo’s gospel might have worked in a world of closed economies in an idealized setting free of externalities, but that is not the world we inhabit these days – and probably never will. I accordingly assign free trade and comparative advantage to the realm of myth as measured by today’s realities.

We have been trying to play out our laissez faire views of trade against a background of myths in various trade documents to which we are party. Our East Asian trade partners sign such documents and then do as they please in following their own view of how to practice capitalism (one, parenthetically, which seem to be working). It boils down to a free trade for you but mercantilist mindset for me, from Japan’s failure to open its markets for our products to slave wages paid in other countries, both mercantilist and at bottom anti-competitive practices usually proscribed by the trade agreement(s) to which they are signatory (as they are today, though ignored by mercantilists).

Kuttner lists some, which are clearly (if they existed) anti-free trade and anti-comparative advantage and in any event trade atrocities which we should never allow with or without a trade pact. They are: (1) Government subsidies and allocation of cheap capital to help domestic producers develop technologies, gain a foothold, and increase domestic and global market share; (2) the pricing of exports below the cost of production in order to gain a foothold: (3) Market-closing measures or favoritism for domestic enterprises to keep U.S.-based producers from competing in the East Asian nations’ home markets, except as purchasers or partners; (4) The use of cartels to carve up markets and set prices; (5) The coercive capture or outright theft of U.S. intellectual property; (6) Domestic content requirements, sometimes coupled with subsidies, to coerce or entice U.S. producers to locate their advanced production in the local country, often including the compulsory licensing or transfer of proprietary technologies in partnership with local companies; and in the Chinese case, (7) working conditions that are often akin to slave labor.

The above are only some of the burdens we must endure in continuing to trade with these cheap labor (or in Japan’s case – closed market to U.S. goods) venues. There is also currency manipulation (used by both Japan and China) to further cheapen the price of their exports to us, immense government subsidies to lure U.S. plants to relocate, and demands for technology transfer and location of production as a condition of selling to local markets. Talk about aggressive protectionism!

Wall Street’s response? Don’t disturb this wonderful “free trade” system we have going. My response: What free trade? Instead of buckling under to Wall Street’s enormous influence over our trade negotiators and its cozy relationship with Chinese state capitalists, we should let these “trade partners” know in plain language that the party is over, that if they do not abandon some if not all of the atrocities listed above, we will close our markets to them. Why should they be able to close their markets to us if we do not bow to their demands but deny us the same opportunity? Why are we daily propagandized that so-called “free trade” is the only way to go when its practice is so one-sided? Why, in short, are we putting up with this charade? Why are we acquiescing to their demands for relocation of our industries to such venues which are costing us millions of jobs?

Answer: Because that is the wish of Wall Street and its multinationals, aided and abetted by its puppets in the Congress and our trade negotiators. Our trade negotiators have their instructions: roll over and play dead. Result? Gigantic trade deficits for us and gigantic trade surpluses for China. Kuttner concludes that “Our government spends far more diplomatic effort on exporting ideology than on exporting American products.” He is right; we are giving away the store while being told that we must NOT even think tariffs or closed markets. That would be anti-free market and protectionist, you know, and would upset our “trading partners.” With Wall Street’s agenda of enrichment of China while impoverishing America in the course of giving away our jobs, our money, our technology and our export markets resulting in massive unemployment, deficits, long-term debt, tattering of our social programs and insane trade deficits – China would be upset? Why? They’re buying billions of our treasuries (debt), and with OUR money! So who’s upset? I am. We need protectionism FROM protectionism. Think tariffs. GERALD E

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