Free Trade Doesn't Work

by Ian Fletcher

  145 Ibid., p. 6.

  146 Ibid., Exhibit 2.

  147 Ibid., p. 6.

  148 Ibid., p. 9.

  149 “CFIUS Annual Report to Congress: November 2009: Public/Unclassified Version,” U.S. Treasury, November 2009, p. 3. 15 transactions were withdrawn during investigation, a fact open to interpretation.

  150 Ambassador John Veroneau, “The Challenges of Foreign Investment,” speech to United States Council for International Business, February 26, 2008.

  151 Zhou Jiangong, “China on Wall Street: Buy? Yes. Lend? No,” ChinaStakes.com, October 2, 2008.

  152 China GDP: “China,” CIA World Factbook, Central Intelligence Agency, https://www.cia.gov/library/publications/the-world-factbook/geos/ch.html.

  U.S. imports from China: “Trade With China: 2008,” U.S. Census Bureau, http://www.census.gov/foreign-trade/balance/c5700.html#2008.

  153 “China Says Domestic Demand Can’t Fill Export Hole,” Reuters, May 14, 2009.

  154 “General Agreement on Tariffs and Trade,” World Trade Organization, 1947, http://www.wto.org/english/docs_e/legal_e/gatt47_01_e.htm.

  155 “Articles of Agreement,” International Monetary Fund, 1945, http://www.imf.org/external/pubs/ft/aa/aa06.htm#3.

  156 One good example for the present analysis is Joseph Stiglitz, “Factor Price Equalization in a Dynamic Economy,” Journal of Political Economy, May-June 1970, especially p. 466.

  157 Assuming, as ex hypothesi in this thought experiment, that the decadent nation is importing consumption goods. If it is importing capital goods, that is, goods which increase its future capacity to produce goods, it may do fine. America has not been doing this.

  158 For a detailed working-out of reasoning similar to this, see Joseph E. Stiglitz, “Factor Price Equalization in a Dynamic Economy,” Journal of Political Economy, May/June 1970, especially p. 466.

  159 See p. 22.

  160 Though not by billionaire Warren Buffett who calls the two nations Thriftville and Squanderville and does not examine how deep the theoretical problem goes.

  161 Max Weber’s famous point in his 1905 book, The Protestant Ethic and the Spirit of Capitalism.

  162 Robert W. Parenteau, “U.S. Household Deficit Spending,” Levy Economics Institute, November 2006, p. 8.

  163 Author’s calculation based on: Debt ($34.6 trillion): “Flow of Funds Accounts of the United States: Flows and Outstandings Third Quarter 2009,” Federal Reserve Bank, December 10, 2009, p. 2. GDP ($14.24 trillion): “Gross Domestic Product,” news release, Bureau of Economic Analysis, December 22, 2009.

  164 Don Evans, Hearing before Committee on Financial Services, “U.S. Interests in the Reform of China’s Financial Sector,” U.S. House of Representatives, June 6, 2007, http://ftp.resource.org/gpo.gov/hearings/110h/37551.txt.

  165 “The China Effect: Assessing the Impact on the U.S. Economy of Trade and Investment with China,” China Business Forum, 2008.

  166 During the Clinton administration, U.S. Trade Representative Charlene Barshefsky and Commerce Secretary William M. Daley made this argument.

  167 Henry M. Paulson, Jr., Speech before the Economic Club of Washington, March 1, 2007.

  168 Gavin Cameron and Christopher Wallace, “Macroeconomic Performance in the Bretton Woods Era, And After,” University of Oxford, October 2002, pp. 4-5.

  169 Former IMF chief economist Simon Johnson, “The Quiet Coup,” The Atlantic, May 2009.

  170 Kathleen Burke and Alec Cairncross. Goodbye, Great Britain: The 1976 IMF Crisis (New Haven, CT: Yale University Press, 1992), p. 5. Whatever economic problems Britain had in this period, excessive debt accumulation and asset sales were not among them.

  171 John Maynard Keynes, “Proposal for an International Clearing Union,” in John Maynard Keynes, The Collected Writings of John Maynard Keynes, vol. 25 (Cambridge, UK: Cambridge University Press, 1980) p. 170.

  172 Jeffrey W. Helsing, Johnson’s War/Johnson's Great Society: The Guns and Butter Trap (Westport, CT: Praeger Publishers, 2000), p. 230.

  173 Nixon tried to defend it in 1970 by raising interest rates, but the domestic political fallout proved too great in the face of the 1972 election and he asked the Fed to reverse course.

  174 Naomi Klein, The Shock Doctrine: The Rise of Disaster Capitalism. (New York: Metropolitan Press, 2007).

  175 Dani Rodrik, “The Rush to Free Trade in the Developing World: Why So Late? Why Now? Will It Last?” in Stephan Haggard and Steven B. Webb, eds., Voting for Reform: Democracy, Political Liberalization and Economic Adjustment (New York: Oxford University Press, 1994) p. 81.

  176 Eamonn Fingleton, In the Jaws of the Dragon: America’s Fate Under Chinese Hegemony (New York: St. Martin’s Press, 2008), p. 128.

  177 For example, he said upon concluding a round of GATT negotiations in 1993, “This new agreement will foster more jobs and more incomes in America by fostering an export boom.” President Bill Clinton speech, December 15, 1993, quoted in U.S. Department of State Dispatch, December 20, 1993.

  178 “U.S. International Trade in Goods and Services, 1992 - Present,” U.S. Census Bureau, http://www.census.gov/foreign-trade/statistics/historical/exhibit_history.xls, 1992 figure adjusted to 2008 dollars using “Gross Domestic Product: Implicit Price Deflator,” Bureau of Economic Analysis, http://research. stlouisfed.org/fred2/data/GDPDEF.txt. 2009 figure: author’s calculation based on first 11 months of 2009 from “U.S. International Trade in Goods and Services,” Exhibit 1, U.S. Census Bureau, January 12, 2010.

  179 Author’s calculation based on 2008 imports and exports.

  180 In 1992, exports to Mexico were $40.6 billion; in 2008, they were $151.2 billion. “Trade With Mexico,” U.S. Census Bureau, http://www.census.gov/foreign-trade/balance/c2010.html#2009. Mexico supplies only 3% of primary materials and packaging, according to, “How Much Maquiladora Output is Made in Mexico,” Cross-Border Economic Bulletin, June 2001.

  181 Author’s calculation based on first 11 months of 2009. “U.S. International Trade in Goods and Services,” Exhibit 1, U.S. Census Bureau, January 12, 2010.

  182 Manufacturing: “Value Added by Industry as a Percentage of Gross Domestic Product,” Bureau of Economic Analysis, 2009, http://www.bea.gov/industry/gpotables/gpo_action.cfm?anon=108681&table_id=24753&format_type=0.

  Imports: “U.S. International Trade in Goods and Services: Exports, Imports, and Balances,” Bureau of Economic Analysis, 2009, http://www.bea.gov/newsreleases/international/trade/trad_time_series.xls.

  183 See also David Hale, “Don’t Rely on the Dollar to Reduce the Deficit,” Financial Times, January 25, 2005.

  184 Author’s full-year estimate based on first 11 months of 2009. “U.S. International Trade in Goods and Services,” Exhibit 1, U.S. Census Bureau, January 12, 2010.

  185 Author’s calculation based on “Total Value of U.S. Agricultural Trade and Trade Balance, Monthly: updated 1/12/2010,” U.S. Dept. of Agriculture, http://www.ers.usda.gov/Data/Fatus/DATA/moUStrade.xls.

  186 In any case, this correlation is only true, even in theory, in equilibrium. Given gigantic exogenous shocks like the sudden entry of billions of new workers into the global trading system due to the decline of socialism, the world can potentially be out of equilibrium for decades.

  187 Data from “World Cost Curve for Steel Sheet Plants,” World Steel Dynamics, quoted in “Steel Industry Trends,” International Steel Group, 2004, p. 37.

  188 This is not to imply, of course, that direct labor is the only production cost. If it were, American steel makers could obviously never be competitive with these numbers.

  189 “Major Sector Productivity and Costs Index,” Bureau of Labor Statistics, http://data.bls.gov/PDQ/outside.jsp?survey=pr.

  190 10.7%, to be precise. Author’s calculation from “Major Sector Productivity and Costs Index,” Bureau of Labor Statistics, http://data.bls.gov/cgi-bin/surveymost.

  191 Madeline Zavodny, “Unions and the Wage-Productivity Gap,” Federal Reserve Bank of Atlanta Economic Revie
w, Q2 1999, Chart 2. See also Lawrence Mishel, Jared Bernstein, and Heidi Shierholz, The State of Working America 2008/2009 (Ithaca, NY: Cornell University Press, 2009), Chapter 3, Figure 30.

  192 William Greider, One World, Ready or Not (New York: Touchstone Press, 1997), p. 75.

  193 For one fairly negative evaluation of TAA’s effectiveness, see General Accounting Office, “Trade Adjustment Assistance: Trends, Outcomes, and Management Issues in Dislocated Worker Programs,” GAO-01-59, October 2000. TAA is also a deeply dysfunctional program. According to a recent ruling by the U.S. Court of Inter-national Trade (Former Employees of BMC Software Inc. v. the United States Secretary of Labor), it routinely denies legitimate assistance requests by workers.

  194 Organization for Economic Cooperation and Development, “Education at a Glance 2009: OECD Indicators,” OECD, 2009, Tables A1, 2a.

  195 Ibid., Chart A3.1.

  196 Stéphane Baldi, Ying Jin, Melanie Skemer, Patricia J. Green & Deborah Herget, “Highlights from PISA 2006: Performance of U.S. 15-Year-Old Students in Science and Mathematics Literacy in an Inter-national Context,” National Center for Education Statistics, December 2007, p. iii.

  197 “State & County Estimates of Low Literacy,” National Assessment of Adult Literacy, http://nces.ed.gov/naal/estimates/StateEstimates.aspx.

  198 Census Bureau figure, reported in Michael Mandel, “College: Rising Costs, Diminishing Returns,” BusinessWeek, September 28, 2009, p. 20. The raw data is at (for 2000) “Educational Attainment–People 25 Years Old and Over, by Total Money Earnings in 2000, Work Experience in 2000, Age, Race, Hispanic Origin, and Sex,” http://pubdb3.census.gov/macro/032001/perinc/new03_021.htm and (for 2008) “Educational Attainment–People 25 Years Old and Over, by Total Money Earnings in 2008, Work Experience in 2008, Age, Race, Hispanic Origin, and Sex,” http://www.census.gov/hhes/www/cpstables/

  032009/perinc/new03_021.htm.

  199 David R. Howell, “The Skills Myth,” The American Prospect, June 23, 1994.

  200 Interview, “Why should Democrats be for more trade deficits?” Manufacturing & Technology News, January 5, 2007, p. 9.

  201 “OECD Broadband Statistics,” Organization for Economic Cooperation and Development, December 2008, Table 1d.

  202 Michael Arndt, “The U.S. is Losing its Lead in Patents,” BusinessWeek, April 22, 2009.

  203 Richard McCormack, “A Big Lump of Coal: President & Congress Give A Christmas Present to the Federal Science Agencies,” Manufacturing & Technology News, December 21, 2007.

  204 “Budget of the United States Government: Fiscal Year 2009,” U.S. Government Printing Office, http://www.gpoaccess.gov/usbudget/fy09/browse.html

  205 2008 GDP comparison at market exchange rates based on CIA World Factbook, https://www.cia.gov/library/publications/the-world-factbook.

  206 Organization for Economic Cooperation and Development, “OECD Science, Technology and Industry Scoreboard 2007,” 2007, Graph A-2, http://oberon.sourceoecd.org/vl=9612937/cl=27/nw=1/rpsv/sti2007/ga2-4.htm.

  207 “Technology Indicators: Move Over U.S.–China to be New Driver of World's Economy and Innovation,” Georgia Tech Research News, January 24, 2008, http://www.gtresearchnews.gatech.edu/newsrelease/high-tech-indicators.htm. The study itself is at http://www.tpac.gatech.edu/hti.php.

  208 Thomas Friedman writes that China “will soon be reaching a point where its ambitions for economic growth will require more political reform. China will never root out corruption without a free press and active civil society institutions. It can never really become efficient without a more codified rule of law. It will never be able to deal with the inevitable downturns in its economy without a more open political system that allows people to vent their grievances.” The World is Flat (New York: Picador, 2005), p. 149.

  209 “Article IV Consultation with the People's Republic of China” International Monetary Fund, July 22, 2009, https://www.imf.org/external/np/sec/pn/2009/pn0987.htm.

  210 “Intel CEO Barrett: India and U.S. Are A Lot Alike,” Manufacturing & Technology News, September 17, 2007, p. 9.

  211 International Monetary Fund, “Report for Selected Countries and Subjects,” http://www.imf.org/external

  /pubs/ft/weo/2009/01/weodata/weorept.aspx?pr.x=25&pr.y=15&sy=1987&ey=2008&ssd=1&sort=country&ds=.&br=1&c=924%2C534&s=NGDPDPC&grp=0&a=.

  212 Tokyo-based financial journalist Eamonn Fingleton has documented this at length in In the Jaws of the Dragon: America’s Fate Under Chinese Hegemony (New York: St. Martin’s Press, 2008).

  213 “The History of the Sony Walkman,” http://inventors.about.com/od/wstartinventions/a/Walkman.htm.

  214 Ernst & Young, “Q1’09 Global IPO Update,” April 2009, p. 9.

  215 Japan has a lot more countercultural creativity than it is usually given credit for, anyway.

  216 Alvin Toffler, Future Shock (New York: Bantam, 1970); George Gilder, Telecosm: How Infinite Band-width Will Revolutionize Our World (New York: Free Press, 2000); Virginia Postrel, The Future and Its Enemies (New York: Pocket Books, 1999); John Naisbitt, Megatrends: Ten New Directions Transforming Our Lives (New York: Warner Books, 1982)

  217 Newt Gingrich, To Renew America (New York: Harper Paperbacks, 1995), pp. 56-68.

  218 “Value Added by Industry as a Percentage of Gross Domestic Product,” Bureau of Economic Analysis, http://www.bea.gov/industry/gpotables/gpo_action.cfm.

  219 Josh Bivens, “Shifting Blame for Manufacturing Job Loss: Effect of Rising Trade Deficit Shouldn’t Be Ignored,” Economic Policy Institute, April 8, 2004.

  220 Ibid.

  221 “Innovation Index: Where America Stands,” Council on Competitiveness, 2006.

  222 The imported content of China’s exports is estimated to be 50%. Robert Koopman, Zhi Wang, and Shang-Jin Wei, “How Much of Chinese Exports is Really Made In China? Assessing Domestic Value-Added When Processing Trade is Pervasive,” National Bureau of Economic Research, June 2008, p. 4.

  223 2005 data. Greg Linden, Kenneth L. Kraemer and Jason Dedrick, “Who Captures Value in a Global Innovation System? The Case of Apple’s iPod,” Personal Computing Industry Center, University of California at Irvine, June 2007, p. 6.

  224 2006 data. Greg Linden, Jason Dedrick and Kenneth L. Kraemer, “Innovation and Job Creation in a Global Economy: The Case of Apple’s iPod,” Personal Computing Industry Center, University of California at Irvine, January 2009, p. 7.

  225 Source: Peter Navarro, “Report of The China Price Project,” Merage School of Business, University of California at Irvine, July 2006, p.5.

  226 Ross Perot and Pat Choate, Save Your Job, Save Our Country (New York: Hyperion, 1993) p. 69. See also Susan Helper, “The High Road for U.S. Manufacturing,” Issues in Science and Technology, National Academy of Sciences, Winter 2009.

  227 Michigan Manufacturing Technology Center, “The National Context: Is Manufacturing in the U.S. Toast?” ManufactLINE, September 2007, p. 12.

  228 National Research Council, Dispelling the Manufacturing Myth: American Factories Can Compete in the Global Marketplace (Washington: National Academies Press, 1992), Chapter 2.

  229 Charles McMillion, “The Economic State of the Union, 2008,” Manufacturing & Technology News, January 24, 2008.

  230 Author calculation based on Greg Linden, Kenneth L. Kraemer, and Jason Dedrick, “Who Captures Value in a Global Innovation System? The case of Apple’s iPod,” Personal Computing Industry Center, University of California at Irvine, p. 6. Note that the $140 figure includes reexport from China of components imported into China from other countries, including the U.S.