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Why free trade doesn't work for America

Every now and then I come across a book I like enough to review since I think it should be in the hands of every American and every member of Congress. “Free Trade Doesn’t Work: What Should Replace it and Why” by Ian Fletcher definitely fits that criterion.

One reason why is because Fletcher, who formerly was an economist and currently is an adjunct fellow at the U.S. Business and Industry Council (a Washington think tank founded in 1933), not only realizes that free trade doesn’t work for America. He also realizes that the United States needs some form of protectionism if we are to ultimately get our economy back on track.

I especially was interested in reviewing “Free Trade Doesn’t Work” because the author agrees with many of the views I wrote about extensively in my book, “How Americans Can Buy American.”

Fletcher believes it’s not only that there is a benefit to buying American-made products, but that there also is a benefit to supporting American-owned companies. In the book, Mr. Fletcher says, “Despite the myth of the stateless corporation, only a few dozen firms worldwide maintain over half of their production facilities abroad,” citing one study that shows multinational companies “typically have about two-thirds of their assets in their home region/country, and sell about the same proportion in their home region/country.” Therein lies the argument that it is indeed beneficial to support home-based companies.

Even though the iPod is assembled in China, for instance, the United States captured two-thirds of the 9,366 professional jobs generated by that product. The downside, as Fletcher puts it, is that every $300 iPod sold in America adds about $140 to America’s trade deficit with China.

Some pro-free market, pro-free trade supporters falsely think that under free trade, the United States government will become smaller. But as “Free Trade Doesn’t Work” points out, the more open economies of advanced industrial nations where trade is a higher percentage of Gross Domestic Product (GDP) actually spend more on welfare rather than less. As free trade countries seek to compensate the “losers” of a national free trade policy, they enlarge rather than reduce the scope of government in the economy and the lives of American citizens.

Quoting a friend of Winston Churchill – F.E. Smith – in 1906 who also was a Member of Parliament, “We call ourselves free traders, but we have never secured free trade for ourselves; we have merely succeeded in enlarging the area within which our protectionist competitors enjoy free trade.” How true that statement is for the United States today.

And what nation ever has actually succeeded with free trade? Can you name one? If you think you can, you are likely also to name a nation that has protectionism and deliberate, nationally guided industrial policy under the surface. The success of Brazil’s aircraft and steel industries was due to past policies of import substitution. In Mexico, it was motor cars. In Chile, where in 1993 at least 13 out of 20 exporting corporations were created by a single government agency, it was salmon, forest products, and grapes.

While Fletcher opines that we can’t always expect our country to consist only of the best industries (successful nations diversify), we should not merely just accept the given factors of production for our economy per David Ricardo’s theory of comparative advantage; we should create the best factors of production that will put us at a better competitive advantage that make our economy richer.

In denouncing free trade, Flecher reveals the myths that many successful American industries succeeded without government help on their own in the free market. Silicon Valley’s success was directly due to state industrial policy. The transistor was invented in 1947 by Bell Laboratories, which was the research wing of the government-sanctioned monopoly that was AT&T (the old American Telephone and Telegraph).

Boeing lost money on its commercial aircraft business for the first 20 years, and its 7×7 series of planes was derived from the civilian twin of the Air Force’s aerial refueling plane. The Internet was derived by the military’s ARPANET to facilitate defense research. Google can lend a large chunk of its success to digital library research done by the founders while supported by the National Science Foundation.

Fletcher gives those of us who already know free trade deosn’t work almost unlimited ammunition to support that belief. He makes the case free trade makes American companies less competitive, destroys the fruits of production, leads to manipulation by foreign trade and regulatory industrial policies, bids down wages in non-manufacturing sectors, leads to more inequality and lower American wages, and prevents us from ever achieving balanced trade. Even more importantly, he highlights which arguments work best debunking the myth that free trade is the best trade policy for America.

The author also points out imports now are 17 percent of GDP, while our entire manufacturing sector is 11.5 percent. That means the United States couldn’t achieve balanced trade even if we exported our entire national manufacturing output.

So what does Fletcher prescribe for America? Something he calls a natural strategic tariff. According to Fletcher, there are serious flaws in the pro-free trade outlook that says David Ricardo’s theory of comparative advantage should be strictly followed. One glaring flaw is that the United States routinely imports products that we actually produce more efficiently, which makes no sense under free trade.

A natural strategic tariff such as a flat tariff across the board of, say, 30 percent, could survive the inevitable political meddling that would be more prominent in a mixed bag of different tariff levels for different industries located in different political districts. A 30 percent tariff may not bring back the jobs of all the semi-skilled industries, but it would bring back more jobs in industries like high-tech manufacturing, such as semiconductors, which is accompanied by higher wages and higher returns.

The importance of a flat tariff in order to prevent political meddling by anti-Buy American legislators cannot be underestimated. Sen. John McCain showed his hostility towards buying American when he called Buy American laws “the worst, most disgraceful aspect of the legislative process in Washington. I cannot be more strong in my views without using four letter words.” In “Free Trade Doesn’t Work,” Fletcher reveals how former vice-president Dick Cheney voiced his own hostility as well. When Cheney was Secretary of Defense, he said that policies favoring American defense producers “raise questions about my spending money on things I could get cheaper elsewhere.” This type of bargain-shopper mentality is not likely to be helpful in developing strategic answers to large, ongoing problems in our economy, such as our burgeoning trade deficit with China and other national adversaries.

With Fletcher’s book, America has strategic and well-reasoned answers to our economic problems. I would encourage any American concerned about stopping America’s downward economic spiral to read “Free Trade Doesn’t Work: What Should Replace it and Why.”