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What’s so free about free trade?

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The following is an interview with Ian Fletcher, CPA’s Senior Economist.  Reposted from The Washington Times, it’s the first in a two part interview series.

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What’s so free about free trade?

Joseph Cotto  |  June 26, 2012  |  The Washington Times

FLORIDA, June 26, 2012 — Free trade is something that we hear a lot about these days.

Everyone from the urban canyons of Wall Street to the corridors of Washington to the airwaves of talk radio seems to be in favor of it. Most say that it will open new doors for America. They claim the opportunities we will be afforded are simply too good to miss out on.

As with any arrangement which appears to be all milk and honey, this sort of rhetoric should raise a row of red flags.

What does free trade really mean for our economy? What, specifically, does it have to offer? Is it honestly the best way forward? Are there any alternatives?

Ian Fletcher, the senior economist at the Coalition for a Prosperous America, certainly thinks so. One of today’s most prominent advocates for a trade policy that benefits American interests first and foremost, he and I had a lengthy discussion about NAFTA, Ron Paul libertarianism, the Great Recession, and much more.

What did he have to say, specifically? Read on and find out.

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Joseph F. Cotto: Today, many people tend to confuse the concepts of free markets, free trade, and fair trade with one another. How would you describe each?

Ian Fletcher: “Free markets,” like most political terms, can be debated, but it basically just means capitalism without government regulation or private monopolies.  “Free trade” means there are no taxes on imported goods greater than those levied on domestic goods, and no quotas or other restrictions to block imports.  Obviously these are both purist concepts that don’t literally apply in the real world, and what people mean when they use these terms is minimal regulation and minimal barriers to trade.

“Fair trade” is an entirely different matter, as there are many different concepts of fairness. I would say fair trade means, above all, genuine reciprocity: when the U.S. opens its markets to foreign nations, they extend us the same privilege, for real and not just on paper—which is not what tends to happen now.  Fair trade would thus mean an end to the mercantilism of foreign nations like China, where they game the system to run up huge trade surpluses against us.  People further left than me, like Ralph Nader, would probably say fair trade has to involve not allowing trade to increase income inequality in this country, which is a legitimate concern because “free” trade has been doing that in recent decades.

Cotto: Prominent economists and politicians often say that free trade will only benefit America in the long run. You beg to differ. Why is this?

Fletcher: For a start, economic history simply does not support the proposition that free trade is best.  The U.S. was an avowedly protectionist country for most of its history, during which time it turned from a Third World backwater to the greatest industrial power in history.  The same pattern, rising to economic greatness under protectionism, has also been true for nations like Britain, Germany, Japan, Korea, and now China. So the hard data is against the free traders.  And when you look into the economics underlying this fact, you discover pretty quickly that free trade can only really be best if the absolutely pure 100% free-market model of a successful economy is true.  And that’s not something that anybody—Left, Right, or center—has practiced in domestic economics for decades now, whatever rhetoric they may employ.  There’s a good reason for that: market purism doesn’t work. We don’t have a pure 19th-century laissez faire robber baron economy domestically, so why should we have one internationally?  We’ve learned the hard way, most recently in the financial crisis, that too little regulation can do as much damage as too much.

We need to extend that lesson to international trade. The economic theories, like David Ricardo’s famous Theory of Comparative Advantage, that supposedly prove free trade is best, are riddled with loopholes, which are actually quite well-documented.  They assume you don’t have chronic trade deficits.  They assume prices perfectly reflect value, that you have no so-called externalities. They assume no unemployment.  They assume no short-term thinking, no debt binges, no bubbles.  They assume no international capital mobility. They assume free trade doesn’t help your foreign rivals take your industries away from you. They assume that short-term economic efficiency is the origin of long-term economic growth—which it isn’t.

Cotto: Libertarian economic theorists tend to believe that trade deficits are of minimal importance. What is your opinion on the subject? Do these deficits really have a great impact on America’s economy?

Fletcher: Libertarianism is not a school of economics.  It is a philosophical position that says maximizing freedom is always the right thing to do, in economics and every other policy arena.  Libertarians are entitled to believe any philosophy they like, but political ideology and economics are simply not the same thing. Trade deficits are important because there is no free lunch in this world.  When we import more than we export, we are consuming more than we are producing, and the difference has to come from somewhere.  It comes from selling off our accumulated national wealth and from sinking deeper into debt.  Americans are worse off because we own less and owe more. Libertarians are indifferent to this because they say, “Hey, we freely chose to live irresponsibly. So it must be OK.”  But freely choosing to stick your head in the oven doesn’t mean it won’t kill you.

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What about NAFTA? How are those new free trade agreements with South Korea and several Latin American countries going to play out for the United States? China and its currency manipulation schemes are wrecking havoc on our trade deficit; is there any way to seriously address this?

Stay tuned for part two.

6 Responses to “What’s so free about free trade?”

  1. Frank Shannon says:

    Fletcher provides some much-needed definitional clarification in the trade policy debate.

    Good work, Ian.

  2. Tom T. says:

    Every time one of these guys gets any air time and talks up free trade the reporter needs to ask whether or not we have free trade right now and then follow it up with intelligent questions. If reporters made politicians look dumb, they would quickly get a lot smarter. As it is, it seems neither is very smart on these issues and want to just use the buzz words as if they know what they are talking about.

    Tom T.

  3. Maggie says:

    Nobody even mentions at all the systemic risk and contagion factors in free trade and massive trade imbalance. They frame everything in traditional econ-speak. If this was an engineering system it would get an F- in safety, not a AAA rating.

  4. Bruce Bishop says:

    I agree with Fletcher that our trade deficit is a drain on our jobs, our economy and our wealth. I agree that we must do something to reduce the trade deficit. I would favor imposing “balanced trade,” which would simply limit our imports from China to an amount equal to what China imports from us — thus a zero (balanced) trade deficit. Warren Buffett recommended this back in 2003. You can Google “Balanced Trade.”

    As to the term “free trade,” Paul Craig Roberts, former Assistant Treasury Secretary, in his book, “How The Economy Was Lost,” says, “The offshoring of American jobs is the ANTITHESIS (my emphasis) of free trade.” “Jobs offshoring . . . is an activity that David Ricardo, the originator of the free trade theory, described as the betrayal of one’s own country.”

    This distinction is important because the “progressives,” socialists, and Marxists, are using this “crisis” to declare that “free trade” doesn’t work; the free market doesn’t work; and capitalism doesn’t work. Guess what they are going to be pushing as the alternative?

  5. Tom T says:

    I think we can all agree that capitalism has to have rules to prevent it from destroying the economy. This doesn’t mean capitalism has to be socialist or Marxist.

    Fixing the rules of capitalism in the case of trade will reduce communism as we see it from the Republic of China. Hopefully they will change away from their fringe— for the benefit of their people.

    Going from one extreme to another isn’t what is needed but we definitely need to change the present course.

    Those who are benefiting from the present course will of course call it “socialism” or “communism”. That is how seems to always play out. ANY tax or change in the rules that prevents monopolists from using market power to capture the economy will be called socialism. Any action that takes away gains that Wall Street has attained will be called “socialism” and government control of the economy. It is the best argument they have and I hope it doesn’t succeed. They have robbed the nation’s economy already but we haven’t seemed to learn the lesson.

    Tom T.

  6. Tom T says:

    I think we can all agree that capitalism has to have rules to prevent it from destroying the economy. This doesn’t mean capitalism has to be socialist or Marxist.

    Fixing the rules of capitalism in the case of trade will reduce communism as we see it from the Republic of China. Hopefully they will change away from their fringe— for the benefit of their people.

    Going from one extreme to another isn’t what is needed but we definitely need to change the present course.

    Those who are benefiting from the present course will of course call it “socialism” or “communism”. That is how seems to always play out. ANY tax or change in the rules that prevents monopolists from using market power to capture the economy will be called socialism. Any action that takes away gains that Wall Street has attained will be called “socialism” and government control of the economy. It is the best argument they have and I hope it doesn’t succeed. They have robbed the nation’s economy already but we haven’t seemed to learn the lesson.

    Tom T.

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