July 30, 2010    Volume 17, No. 12

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Book Review: Ian Fletcher's 'Free Trade Doesn't Work'

By Paul Carson

In Ian Fletcher's recent book Free Trade Doesn't Work, the author carefully dismantles one of economics most fundamental beliefs -- that free trade based on comparative advantage is good for all people, everywhere and all the time. Fletcher has written an accessible and easy-to-understand book about trade economics that is a great contribution to the ongoing debate about the benefits and costs of the current practice of free trade.

Free trade theory is one of those theories that is difficult to support with the evidence. By examining the data, Fletcher finds the theory of free trade to be fundamentally flawed and shows that it does not work as claimed, and in fact causes harm to many people.

A majority of academic economists believe that free trade makes every nation better off. But that stands in contrast to the public's views reported in a recent Pew survey, which found that a majority of Americans believe free trade has caused job losses, job insecurity and led to a decline in real wages. Only 13 percent of Americans believe free trade is a net benefit to the United States. Is it possible so many economists are right and so many Americans are wrong?

Free Trade Doesn't Work explains the flaws in free trade theory and how to make the benefits of trade available to more people, not just a few.

Fletcher has done a great service for academic economists and anyone interested in understanding how economic theories drive the policy debate in the United States and Great Britain. He has not resorted to pure populist rhetoric. Instead, he carefully dissects the assumptions in free trade theory and analyzes them.

In the first section of the book, Fletcher lays out his argument for the problems that the current free trade orthodoxy has caused. He provides evidence against each of the various positive "spins" that mainstream economists use to support their current interpretation of free trade -- from the myth of moving "up the value chain," to the mistaken belief that trade deficits are a sign of strength at best or meaningless at worst. He describes how academic institutions are vested in preserving the theory and are working to defend it.

In the second part of the book, Fletcher goes about investigating how the United States got to its current economic position. He brings down the mythology of free trade theory step by step, with diligent research and data. He presents a clear case of how free trade can destroy economies, along with the historical perspective of how free trade actually performed for the countries that practiced it. If history damns those who ignore it to its repetition, then we certainly haven't learned from the historical record.

Fletcher picks apart the assumptions and simplifications of the theory of competitive advantage, which is the theoretical framework used by most economists in favor of free trade. These models are based on a theory that has gone through no fundamental re-evaluation since it was developed in 1817 by David Ricardo.

Fletcher shows that almost all economically powerful countries today protected and preferred the development of their own industry over being dependant on others for goods and services. Indeed, the United States used very high tariffs through most of its history. The Republican Party was the party that most supported the development of a strong American manufacturing base, while Democrats from the southern states mostly supported free trade because they were exporting commodities and importing capital and goods.

During the Civil War, the resulting difference in trade models practiced by the different states yielded a manufacturing powerhouse in the North against commodity traders in the South. The South was dependant on the mercy of other nations for weapons and manufactured goods. Even with superior military leadership, the South could not overcome the industrial capability of the North, which was created almost entirely from the protectionism that Alexander Hamilton vigorously defended in the early years of the country.

The United States needs to question whether it is reasonable for 80 percent of the world's semiconductors and over 90 percent of the world's electronics to be manufactured in Taiwan and China.

In the final section of Free Trade Doesn't Work, Fletcher's explanation of "multiple equilibrium" theory of trade provides a more readable version of the important work of William Baumol and Ralph Gomory in their book Global Trade and Conflicting National Interests. The subject of "multiple equilibrium" trade theory is a key area where economists should focus future efforts on explaining the benefits and costs of trade.

Finally, Fletcher recommends a natural strategic tariff -- a flat tax on imports that would protect high-value-added industries in which the United States should be competitive, while not providing infinite protection on lower value-added industries.

It's not clear that this approach would work, however, with the potential of creating too many unintended consequences. Other methods could achieve the same goals, such as incentives for investment and saving along with disincentives for investment abroad and spending. Additionally, a method to deal with chronic currency manipulation could better serve the goal of moving toward fewer imports, rebuilding U.S. manufacturing and balancing trade.

It's clear that if unbridled free trade is the path to riches, then Asian economies would have followed that path. Instead, they developed economic models that benefit their own national interests first, before worrying about global interests. The United States would do well to learn by this observation.

The United States is living out a grand economic experiment based on a theory that may not be right. We should educate ourselves. Free Trade Doesn't Work is a great place to start.

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