Free trade is dead: how did Washington get trade policy so wrong? And what comes next?

Author:Prestowitz, Clyde
 
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Regardless of who wins the presidential election in November, the 2016 campaign has already dramatically undermined a major pillar of post-World War II American economic and foreign policy--free trade.

Hillary Clinton's current rejection of the same Transpacific Partnership (TPP) free trade agreement that earlier she had called "the gold standard" of free trade deals is a far cry from her husband's 1990s embrace of globalization as essentially the same thing as Americanization. Of course, her shift of position is a dramatic indication of how much she is feeling "the Bern," since he rejects "all the crazy trade deals" of the past forty odd years.

Even more surprising is Donald Trump's effective capture of the Republican presidential nomination on the basis of trashing the "terrible trade deals" and the free trade doctrine that have long been tenets of the conservative Republican faith. For all his bullying, narcissism, policy ignorance, and shameless self-contradictions, Trump is resonating with voters in significant part because of his willingness to break with the establishment elite on trade. Yes, his talk of slapping 45 percent tariffs on imports, forcing Apple to move iPhone assembly from China to America, and telling our allies to pay us for providing defense is uninformed and unrealistic. (Presidents don't have the authority to set tariffs. IPhone assembly is low-pay work that won't raise U.S. wages; we need to make the high-value-added parts. And allies might--and should--increase their own defense spending, but we can't make them pay us directly.) The public, however, sees in Trump's and also Sanders's comments the articulation of a possibly larger truth and the revelation of a possible giant confidence job.

Of course, it's possible that all this anti-free trade deal talk is just campaign hype and that orthodoxy will return to rule in Washington after the election. However, the fact that the top presidential candidates in both parties--conservative Senator Ted Cruz also opposes the TPP--have turned against policies upheld in bipartisan fashion since the end of World War II suggests otherwise. The public has spoken: polls show that opposition to current free trade arrangements is one of the few positions Democratic and Republican voters share.

How did we get to this point? The answer is twofold. For seventy years, leaders of both parties have pursued trade deals less to strengthen the American economy than to achieve geostrategic aims, from rewarding political-military allies to fostering development of emerging markets. And they've been encouraged in this pursuit by generations of economists who have argued that trade deals, no matter how one-sidedly generous to other nations, are also good for the American economy--which raises the second point. Globalization has changed conditions so dramatically that this orthodoxy is no longer true, if it ever was. With the public now in full rebellion and presidential candidates leading, or at least adjusting to, that revolt, change to our trade stance is coming. What we really need, however, and haven't seen from any candidate, is a comprehensive strategy that can both strengthen the American economy and meet our geopolitical needs.

It is important to understand that from the early 1800s until about 1932, America specifically rejected free trade. Washington and Hamilton were protectionists, as was Lincoln. Teddy Roosevelt famously wrote, "Thank God I am not a free trader," and Wilson squeezed the last penny out of Great Britain during World War II. So the United States got rich as a disciple of mercantilism.

The Great Depression, victory in World War II, and the outbreak of the Cold War led to a complete change of the American tune. The very high Smoot-Hawley tariffs introduced in 1930 during the Republican Hoover administration had been blamed for the outbreak of the Depression by free traders and the Democratic Party during the 1932 presidential election campaign. In fact, as the University of California, Berkeley, professor Barry Eichengreen has demonstrated, the tariff probably had a mildly expansionary impact on the U.S. economy. But the argument was about power, not facts, and after 1932 it became a given in any economic discussion that Smoot-Hawley had triggered the Depression and that "protectionism" was a wrongheaded policy.

Moreover, after the war American industry no longer needed protection; U.S. producers were the leaders in virtually every industry. Rather than protection, industrial leaders now asked for access to foreign markets. The great task was no longer for America to catch up, it was for America to help the rest of the world get up. The urgency of this was, of course, greatly heightened by the outbreak of the Cold War. The United States made the rebuilding of its ruined allies and their defense its top foreign policy objective. International economic policy was no longer so much about economics. It had become a major tool of geopolitics, and opening its markets for trade had become a major part of U.S. grand strategy.

It was particularly attractive that this free trade approach was said by economists to be always and everywhere a win-win proposition. This idea was based primarily on the insights of the British banker David Ricardo and the Swedish economists Eli Heckscher and Bertil Gotthard Ohlin. In 1817, Ricardo developed the notion of "comparative advantage" by using the example of the production of cloth and wine in Britain and Portugal. He posited that in Britain, 100 hours of labor were needed to produce a unit of cloth and 120 to produce a unit of wine, while in Portugal it was only ninety hours for cloth and eighty for wine. So Portugal was the low-cost producer of both products, but it had a bigger cost advantage in wine than in cloth. If both countries specialized in what they did best and traded for the rest, the total amount produced of both products would be greater and each country would have more of both. Even if Britain refused to specialize, Portugal would still have more by doing so, and vice versa.

In the 1930s, Heckscher and Ohlin elaborated on this by adding capital and natural resources as factors of production to Ricardo's labor. Whereas Ricardo had assumed that differences of technology within countries determine what they do best, Heckscher and Ohlin assumed that technology would spread rapidly and evenly to all players, and trade flows would be determined by endowments of land, labor, and capital.

A country rich in capital and with a high quotient of skilled versus unskilled labor would be expected to produce capital-intensive, high-technology products (computer chips, for example) and to export them in exchange for low-skill, labor-intensive, or naturally occurring products (apparel, toys, oil) from countries with a lot of unskilled labor or significant holdings of key natural resources.

It worked beautifully--at first. A...

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