In the last week of September the House of Representatives passed legislation aimed at imposing trade sanctions against China unless it lets its currency appreciate, thereby reducing its export advantage. In a subsequent speech clearly aimed at China, Japan and Brazil, Treasury Secretary Timothy Geithner attacked currency policies likely to result in “short-term distortions in favor of exports.” In the meantime the U.S. dollar has hit a record low against most major currencies.


Who is to blame? Whatever you do, Professor Douglas A. Irwin of Dartmouth College says in The Wall Street Journal, don’t blame Free Trade. In a long feature on October 9, he bewailed the fact that a recent WSJ-NBC News poll found that 53 percent of the American public now believes that free-trade agreements have hurt America, up from 46 percent three years ago, and under a third in 1999. In his view, far from erecting trade barriers and “blaimng other countries,” we need a mix of continued free trade and a host of measures by the Fed to stimulate growth.

Ian Fletcher, the author of Free Trade Doesn’t Work (U.S. Business & Industry Council, 2010) begs to differ. In his view, “free trade” is slowly bleeding America’s economy to death and the standard economic arguments free traders use all the time are false. In the meantime the U.S. economy is hemorrhaging quality export industry jobs at an astounding rate. Almost half of our manufacturing workforce has disappeared since 1987 and more than a third of large factories just since 2001. Not coincidentally 2001 is the year China joined the WTO.

In the Problem section of his book, Fletcher tears apart the standard arguments for free trade and some of the snake-oil remedies to the US trade problem (more “education” etc). He suggests a “natural strategic tariff” that would level the playing field between US and foreign exporters in the key manufacturing and service export sectors. It is necessary because “free trade” is unsustainable. Nauru, a small Pacific island nation that had huge deposit of phosphate, opened up to free trade, “became one of the richest countries in the world,” and duly collapsed when the phosphorous soil run out. If it had not opened up to free trade, it would have sold its reserves of phosphate slowly, and it would not have collapsed. Even though free trade may result in gains, the gains are to the economy as a whole and not to an individual, which results in increased income inequality.

It is essential to distinguish between trade and “free trade,” Fletcher says. They are not the same thing at all. Trade brings many benefits and, properly reckoned, also many costs. If these are properly understood, nations have a reasonable hope of managing their trade so that the former exceed the latter:

Free trade means giving up this attempt at managing trade in favor of the 19th-century laissez faire assumption that the free market, on its own, will automatically produce an optimal result. As we have most recently seen in the financial crisis, this is an unreasonable expectation in the context of domestic economics, and the same rule applies internationally. Under conditions of free trade all of the developed nations are ceasing to be competitive in many industries. It is nevertheless noteworthy that some highly developed nations like Germany and Japan continue to register huge trade surpluses despite the rise of China. They have done well by practicing a combination of mercantilism abroad and industrial policy at home. They frequently do this covertly, which is why nations like the US and UK, and their supposedly sophisticated economists, are baffled by their success. And this means repudiating free trade.

That is anathema to the mainstream media and global economic forums. While it is unsurprising that free trade is supported by big commercial companies, because they have benefited from it, there is no ready explanation for the fact that it is supported by the politicians who got their positions from the votes of the citizens… and then, by supporting trade liberalism, leave them without their jobs. So what are the powerful, supranational economic and political structures, which favor free trade, despite many negative effects on national economies of many countries? Fletcher finds the answer in the toxic combination of America’s campaign finance laws—which make corruption perfectly legal—and the shocking cultural naiveté of the American people about the benevolence of raw capitalism. Multinationals worldwide favor international institutions like the WTO because they are beyond the reach of democratic accountability and enable corporations to play different nations off against one another. In the meantime, Fletcher says, “America has ceased to be a powerful nation because America no longer has an industrial base. Foreign nations, starting with China, are not going to sell America the weaponry needed to be a superpower, even assuming America remains solvent enough to buy it.”

The solvency cannot be maintained, however, by re-applying the 1930’s tool of Keynesian reflation. Too much of America’s domestic demand leaks abroad due to the trade deficit, thanks largely to Clinton-era free trade agreements. In addition, America ran such huge budget deficits during non-recessionary times under Bush that the ability of the government to borrow money was wasted when it was not needed simply to enable politically-popular tax cuts. The trade crisis will force politicians to find real solutions, Fletcher concludes, clean or dirty as they may be: the solution, for both the developed nations and the Third World, is a gradual return to the moderate protectionism and domestic-led growth that economic history vindicates.

Germany, and by extension the rest of Germanic and Scandinavian Europe, has shown that developed nations need not fear the rise of Third-World competitors like China, so long as they do not fall prey to the delusions of free trade and laissez faire. It is high time America grasps the perils of such delusions. This is not a matter of ideological preference. It is a matter of survival.