The Free Trade Myth

The Betrayal of American Prosperity by Clyde Prestowitz - Reviewed. As a product of Temple Univ. Business School I was indoctrinated into the holy gospel of free market economics. Then I was sent out into the world to spread the message. We studied various economic models, like The Theory of Comparative Advantage. The Theory of Comparative Advantage developed by the 19th century English economist David Ricardo, works likes this: In the 19th century, there is England and Portugal. Portugal makes good wine, having an ideal climate for growing grapes. England produces good textiles. England produces excellent wool, and has advanced manufacturing. If you have free trade between England and Portugal, getting rid of all tariffs, Portugal will sell England excellent wine at a good price, and England will sell Portugal textiles. Portugal has a comparative advantage in wine, and England in textiles. So it makes little sense for England to produce wine or Portugal textiles. Both countries will prosper from the free trade. Every country has a comparative advantage in something. If you add more products and more countries to the mix, the world will benefit from the free trade. That's what the theory predicts. The model of comparative advantage is simplistic. For the model to work a whole set of variables are assumed: 1) No monopolies, a proliferation of many small producers 2) No government intervention of any kind. 3) A plentiful supply of labor, that is mobile. The model doesn’t account for currency exchange rates. In addition there are a host of other assumptions required. In the real world, Comparative Advantage and other simplistic free market models don’t work very well. Countries like China and Japan keep U.S products out by using government intervention, bureaucratic road blocks, manipulating their currencies to make their products cheaper, and various other means. The problem is, there are many ideologues who think that the USA should practice unilateral free trade. The theory of Comparative Advantage is their bible. Like religious fanatics they have an endless, naïve faith in the free market. The fact that the free market failed catastrophically during the recent financial meltdown doesn’t deter them. In Clyde Prestowitz’s new book entitled The Betrayal of American Prosperity, Presowitz shows how the U.S is getting the stuffing kicked out of it by countries like Japan and China who are rigging the game in their favor. Far from being a left wing radical or a Smoot- Hawley protectionist, Prestowitz was a trade negotiator during the Reagan administration. So he is traversing territory he knows well. The problem according to Prestowitz, is that our Asian trading partners Korea, Taiwan, Singapore, Japan and China, and most European nations never entirely bought into the comparative advantage, free trade doctrine. They practice an industrial policy. Because the aforementioned Asian nations, (the Asian tigers) are newly industrialized, they determined that they needed to protect certain chosen industries like electronics, and other high tech industries, through government subsidies, and other subtle forms of government intervention, to assure their survival. When their governments go to the bargaining table with the U.S government, and U.S. multinational companies, they demand technology transfers, for their protected industries. Already China has gotten deals with Boeing and other U.S. aircraft and defense contractors to transfer technologies to China for development of their up and coming aircraft and defense industries. Clyde Prestowitz provides many specific examples. Alternatively, the U.S. which practices unilateral free trade throws the doors open to most foreign imports and goes to the trade bargaining table with no coherent industrial policy. Which is why we hardly manufacture anything here, anymore. Like Prestowitz, I’m not against free trade. I’m for free and fair trade reciprocity. But wait, say the free traders. It’s ok for our Asian trading partners to protect their infant industries. We did the same thing during the 19th and early 20th centuries, when America struggled to become an economic power. We don’t need to manufacture anymore, they say. We will become dominant in services, like finance and design, they say. As the U.S loses its edge in industry after industry, they keep moving the goal posts further away. Now, we are losing even service industry jobs to places like India. Accounting, software, and even medical jobs, like interpreting x-rays by radiologists are being off-shored to India. Not only do the lost manufacturing jobs pay better than most service sector jobs but every manufacturing job creates an additional 5 jobs needed to support and supply them. Having invented the internet the US has fallen behind Korea where the average broadband speed of 49.5 mbps compares embarrassingly to the U.S of 3.9 mbps. Then there are the high speed trains in China and Korea that go 200 miles an hour compared to our Amtrak Acela Express that is only available in the northeast corridor and goes 125 miles an hour. The lack of an industrial policy by the govn’t is making the U.S. uncompetitive in key areas. The type of unilateral free trade the U.S has practiced since the 1980’s was 1st practiced by Great Britain, thus it is called the Anglo Saxon model. Prestowitz journeys through the history of trade in the U.S and Britain. Unfortunately, Britain has little to show for its high minded free trade principles. They were once the most powerful nation on earth but have declined to a 3rd rate power. Prestowitz supplies numerous examples of how the U.S became an economic super power by following an industrial policy that supported industries with government help. RCA was formed by the govn’t to help provide a U.S lead in the electronics business. The internet, computers, and the U.S aviation industry all received govn’t startup financing. Prestowitz shows how the trading policies first adopted by President George Washington and his Secretary of the Treasury, Alexander Hamilton protected and advanced the industrialization of America. And how the tremendous feat of building a transcontinental railroad, which extended the entire length of our country, from east to west, was supported by financing proposed by President Abraham Lincoln. Finally, Clyde Prestowitz offers some practical solutions. We need to develop public private partnerships that will foster our leadership in key manufacturing industries like clean energy. The Semantech public private partnership for the semi-conductor industry that took place during the Reagan administration is a successful example. Unfortunately, some of the Obama stimulus money geared to clean energy has already gone towards purchasing windmills and solar panels manufactured in China and Europe. We need to determine what industries the U.S needs to maintain leadership in, and develop a coherent trading strategy when negotiating trade deals with our allies. I don’t like books that are simply political diatribes. The Betrayal of American Prosperity is a well researched, fact based, thoughtful analysis of American trade policy. I highly recommend it. Unfortunately, once we lose key manufacturing industries they probably won’t return. That’s because selling products in today's global economy usually requires huge investments and economies of scale. Making it difficult to compete against foreign competitors once they have established a firm foothold in an industry. Something the 19th century economist, David Ricardo couldn’t have foreseen. The governments of our Asian trading partners have been willing to sacrifice the time and money required to jump start key industries. Only when we throw off the shackles created by the foolish, unilateral free trade ideologues, can we create a renewed tide of prosperity.