by Ian Fletcher
Unfortunately, the concept of fairness is a political minefield. A political coalition strong enough to abolish free trade will need support on both sides of the aisle, and these sides disagree about what is fair every day. This problem is even worse when foreign societies are involved (as they must be in trade) because different societies define fairness differently. The Japanese, for example, consider it unfair to lay off workers in a recession.307 Many European countries consider America’s antiunion “right to work” laws unfair. As former trade diplomat Clyde Prestowitz has pointed out:
Because the law assumes that American-style capitalism and laissez-faire international trade are not only good but morally right, it implicitly defines deviations from such a system as ‘unfair.’ There is no provision for the possibility of a different system or for dealing with problems that arise not out of unfairness but from the grinding together of systems that simply do not mesh well.308
As a result, appealing to fairness to resolve trade disputes, or judging foreign actions by a standard of fairness, is unlikely to solve anything. For example, there is no particularly good reason why currency manipulation should be considered “unfair.” Currency manipulation is a tactic, and while the U.S. should certainly fight back to restore advantageous currency values, this is about protecting the national economic interest, not ethical justice per se.
Fairness isn’t even a particularly meaningful concept in much of trade economics, which turns on technicalities like capital flows and economies of scale. And fairness isn’t the objective of trade policy for the most part, anyhow. Prosperity (of ourselves or others) is. Decent people naturally hope these will coincide, but one can’t just a priori assume this. China’s authoritarianism, for example, is morally objectionable in a dozen different ways, but it has raised the living standards of the Chinese. If prosperity is what we want, then we need to admit that prosperity is what we’re after (subject to whatever ethical constraints we believe in).
It is similarly pointless to argue whether America’s trade mess is the “fault” of foreign nations or ourselves. Realism demands that we assume foreign nations will take advantage of any opportunities we put before them. And even if foreigners really are to blame sometimes, we don’t have control over their actions; we have control over our own.
FORGET A LEVEL PLAYING FIELD
The common plaint that “all we want is a level playing field” is just another way of asking for fair trade. A true level playing field would require not just equal rules for international trade, but also that nations have the same domestic economic policies, as these can also confer an export advantage. There are literally thousands of places in an economy where export subsidies can be hidden, from the depreciation schedules of the tax code to state ownership of supplier industries, land use planning, credit card laws, non-performing loans, cheap infrastructure, and tax rebates. So a true level playing field would require America to supervise the domestic policies of foreign nations, which is obviously not feasible. Even if we reach agreements on paper to end these subsidies, we still have to enforce these agreements on the ground.
Foreign governments often face strong domestic political pressures to keep such subsidies in place even when they want to strike a deal with the U.S. to eliminate them. China, for example, is full of effectively bankrupt state-owned companies that can’t be allowed to collapse for fear of unleashing a tidal wave of unemployment. In other nations, subsidies are products of the day-to-day political bargaining that goes on in every country as governments buy political support and buy off opposition, so eliminating subsidies just to keep America happy would risk unraveling the balance of power. Our own difficulties abolishing unjustified agricultural subsidies illustrate just how hard it is to repeal entrenched subsidies.
Level playing fields tilt the other way, too: Americans tend not to realize how many subsidies our own economy contains. But judging by the same standards the Commerce Department applies to foreign nations, they are legion.309 Agricultural subsidies are just the beginning, and already a flashpoint of international trade disputes. (They basically scuttled the Doha round of WTO talks in 2008.) But there are thousands of others, ranging from the Import-Export Bank (cheap loans for exporters) to the Hoover dam (cheap electricity). And that is just on the federal level; states and localities constantly bid subsidies against each other to attract businesses. Every tax credit, from R&D and worker training on down, subsidizes something, and if that something is exported, then it constitutes an export subsidy. So unless we are prepared to have foreign bureaucrats pass judgment on all these policies, subsidies both here and abroad are unavoidable and a true level playing field is impossible. And if a level playing field is impossible, then no free-market solution will ever balance trade, and balanced trade will have to be some kind of managed trade.
LABOR STANDARDS ARE NOT ENOUGH
Trying to solve the problems of free trade by going after low foreign labor standards is understandable. The AFL-CIO not unreasonably asserted in 2004 that China’s repression of labor rights gives its exporters a 43 percent cost advantage.310 Chinese workers are denied the right to form unions, are often paid less than China’s own very low minimum wage, and are denied overtime pay. And if they really get out of line, there is always China’s network of laogai (“reform through labor”) prison camps—which conveniently supply slave labor for the manufacturing of goods for export.311
But if free trade is bad for labor, then we should end it, not patch it up, as its fundamental economic defects are too profound for a few labor agreements to fix. These agreements are worth having, as they will (if actually enforced) improve matters somewhat, but they are not the fundamental solution. As United Steelworkers president Leo Gerard puts it:
The fact of the matter is you can’t fix NAFTA by putting in environmental rights and labor rights and pretending that will fix it. In fact, Canada’s environmental and labor standards are higher than America’s. Mexico’s are also higher, but they’re not enforced.312
Another problem with using trade as leverage to raise foreign labor standards is that some nations with lower labor standards than the U.S. are democracies, so this amounts to telling foreign nations that they don’t have the right to set their own labor laws. Imagine if nations like Ger-many and Sweden, where unions enjoy rights undreamed of in the U.S., such as guaranteed board representation, were to demand that Alabama, Texas, and similar states rescind their right-to-work laws as a prerequisite for being allowed to export to the EU! And what about poor countries where unions are legal, like India? Reasonable labor rights there haven’t changed the fact that wages are still desperately low.
A RACE TO THE BOTTOM?
The notorious “race to the bottom,” in which free trade causes the lowest standard in the entire world for wages, working conditions, or environ-mental protection to become the global norm, is a half-truth that needs to be carefully untangled.
The good news is that it is highly unlikely that free trade will ever literally cause the world’s lowest standard for wages, worker rights, or environmental protection to become the world standard. While there are indeed pressures in that direction, there are also considerable countervailing pressures. If there weren’t, South Korea would still be poorer than Zambia, as it was as recently as 1970.313 And if a small and relatively powerless nation like South Korea can buck this tide, then America certainly can—if we play our cards correctly, which we have not been doing.314 This is the real scandal: not that we have been caught in a hopeless situation, but that we have failed to cope with a situation we should have been able to manage reasonably well.
Free trade certainly generates downward pressure on wages for most Americans, but it is vanishingly unlikely ever to reduce American wages to present Chinese levels. Among other things, 70 percent of America’s economy is in industries (from restaurants to government) that are not internationally traded.315 So the vast majority of our economy has no direct exposure to international trade. Since averag
e wages are determined by average productivity316 and nothing low-wage foreigners do can reduce productivity in the nontraded parts of our economy,317 there is no plausible way the entire American economy can be dragged down through trade alone.
The economic mechanism implied by the idea of a race to the bottom is real, but not infinitely powerful. Standards don’t automatically hit bottom simply because one country has lower standards. That country also has to be a sufficiently successful competitor to push countries with higher standards out of the industry in question. So if countries with higher standards have a productivity advantage, a quality advantage, or some other factor balancing the cost of their higher standards, the lower standard won’t win out.318 It is success or failure in bringing these countervailing factors together that determines the fate of advanced economies like the U.S.; industrial policy (which we will look at in Chapter Nine) is about doing precisely that.
The industrial sectors in which a race to the bottom really does occur are generally low-value sectors where most of the cost of production is un-skilled or semiskilled labor. These are intrinsically low-wage industries that are of little value to American workers, simply because they don’t pay the kind of wages it takes to live in a developed country. The far bigger problem is America’s eroding global position in high skill, high-wage industries—a race we are losing largely to other developed nations.
It is definitely a mistake to reduce all of America’s trade problems to cheap foreign labor. Cheap labor would indeed explain our problems with China, India, and the rest of the developing world, but it cannot explain our huge deficits with other high-wage countries such as Japan ($74.1 billion in 2008)319 and the EU ($95.8 billion).320 If trade were merely about cheap labor, Bangladesh and Burundi would dominate the world economy.
Note, as a corollary to the above, that because most of our economy is nontradable, weak domestic productivity growth has actually done America more harm in recent decades than free trade. Turning free trade into a catch-all explanation for all our economic problems will draw attention away from needed solutions to our other economic defects. Foreign competition must not become an excuse for all of our economic failures from short-termist finance to bad secondary education and crumbling infrastructure.
FREE TRADE DOESN’T GUT GOVERNMENT
Another popular half-truth is that free trade guts government by destroying its ability to tax. But the hard fact is that over the 1965-2006 period of increasingly free trade, government revenue has simply not fallen in any of the advanced economies. The table below tells the story.
Tax Revenue as a Percentage of GDP321
Country
1965
1980
1990
2000
2006
Change
1965-2006
US
24.7%
27.0%
26.7%
29.6%
28.0%
+3.3%
Japan
18.3%
25.1%
30.1%
27.1%
27.9%
+9.6%
Germany
31.6%
37.5%
35.7%
37.9%
35.6%
+4.0%
France
34.5%
40.6%
43.0%
45.3%
44.2%
+9.7%
Italy
25.5%
30.4%
38.9%
42.0%
42.1%
+16.6%
UK
30.4%
35.2%
36.8%
37.4%
37.1%
+6.7%
Canada
25.6%
30.7%
35.9%
35.8%
33.3%
+7.7%
Denmark
29.9%
43.9%
47.1%
48.8%
49.1%
+19.2%
Sweden
35.0%
47.5%
53.6%
54.2%
49.1%
+14.1%
Australia
21.9%
27.4%
29.3%
31.5%
30.6%
+8.7%
So whatever else increasingly free trade has been doing, withering away the state has not been it. Neither has the tax burden shifted from corporations: developed nations’ average taxation of corporate income rose from 2.2 percent of GDP to 3.5 percent over the 1965-2004 period.322
But isn’t it axiomatic that higher taxes render nations less competitive, something they cannot afford now that free trade enables their economic bases to pack up and flee elsewhere? Doesn’t the state wear a “golden straitjacket,” as they say, these days?323 Yes and no. Above all, taxes are not in themselves an economic drag, as the people and corporations that pay them get something back: public services. It is the cost-benefit relationship that determines the competitiveness of a nation’s tax regime, not the cost alone. Incompetent public services, misguided social programs, and military adventures unrelated to real national security needs indeed impose an economic burden. But taxes well spent do not. A weak welfare state certainly does not confer an export advantage, as comparison between the United States and the European Union makes clear: the relatively spartan U.S. is running the huge trade deficit, not the relatively generous EU
Unwise government spending indeed makes a population poorer by wasting its money. It undermines incentives for work and investment. High-tax countries where taxes are badly spent, such as Britain, have indeed damaged their quality of life. But they remain roughly as internationally competitive as they otherwise would be. This logic breaks down at the extremes, but is valid within the range of taxation present in most major countries. It is simply not the case that high-tax countries where taxes are well spent, like Sweden, are internationally uncompetitive, according to the standard rankings.324
Even when taxes are misspent, the cost appears to come mostly out of the hide of the taxpayer and the vitality of the domestic economy, not out of the economy’s international competitive position. It is easy enough to see why. If taxes get too high in Britain and London banks try to charge more in order to compensate, their foreign customers can take their business elsewhere far more easily than London bankers can pack up and move. So bankers will have to shave their own salaries, rather than raise their fees, to pay the tax; the cost of excessive taxation tends to get shifted to the least-mobile party.
Among advanced industrial nations, the more open economies, where trade is a higher percentage of GDP, actually have more welfare spending, not less.325 This suggests that the welfare state is a needed buffer for people coping with an open economy and, conversely, that the welfare state may actually advance rather than retard trade openness. (This also makes free trade, contrary to the ideological predilections of many of its promoters, an enlarger rather than reducer of big government.)326
FREE TRADE WON’T AMERICANIZE THE WORLD
It has often been suggested—if less frequently as America has economically declined in recent years—that free trade will Americanize the rest of the world’s economies. But it won’t. Free trade can only cause diverse economies to converge on a single model, American or otherwise, if its underlying economics implies that one economic model is always best. But as we shall see, the same insights that enable us to grasp why free trade isn’t always best also imply that no single domestic economic model is always best, either.327 The world will not converge on the American variety of capitalism simply because it is unlikely to converge on any single variety. The only caveat is the basic fact that all developed nations, whatever their ideological rhetoric, are mixed capitalist-socialist economies with public sectors between a quarter and a half of GDP.328
This doesn’t mean that all the different national varieties of c
apitalism are destined to be equally successful. They aren’t now, and won’t be in future. But it does mean that a great many of them will be sufficiently successful that foreign competitive pressures will not be strong enough to force them to change. American, Chinese, Japanese, Russian, German, Brazilian, and United Arab Emirates capitalism are meaningfully different. They will remain so. It is emphatically not the case that, in the words of one celebrated commentator, “today there is only free-market vanilla and North Korea.”329 Economic diversity will remain a fact of life.
In fact, given the mess the U.S. is sliding into, the American version of capitalism will probably increasingly be viewed abroad as a cautionary tale and as a paradigm of what not to do. The global economy will probably de-Americanize somewhat as our closer imitators, such as Canada, Australia and the UK, drift away from us and towards more successful models visible in Continental Europe and East Asia.
HOW NOT TO END FREE TRADE
Any future protectionist policies must work well in practice if they are to endure. So they must avoid the mistakes of past protectionist measures, many of which have been counterproductive.
For example, the Voluntary Restraint Agreement (VRA) between the U.S. and Japan on automobiles (official from 1981 to 1994 and since continued unilaterally by Japan) is a case study in how not to end free trade. Despite its popularity—it cost consumers billions, ultimately failed to save the American auto industry, but attracted little opposition—this agreement was a mess.
The VRA’s most obvious mistake was to limit the number of cars imported, but not their value. The result was that Japan indeed limited their number, but moved upmarket and started exporting more expensive cars. As the ability of the American auto industry to provide jobs is not a function of the number of cars it makes, but of the amount of money they bring in, this was counterproductive.
