Editor’s note: Economists are often belittled for their inability to forecast the future. But back in the 1970s, a noted mathematician who worked for IBM, Ralph Gomory, started thinking hard about the potential downsides of trade, a result of his exposure to Japanese computer manufacturers when Japan was first getting into high tech. When Gomory retired from IBM in 1989, he began to write about his worries, often with Princeton economist William Baumol. Their collaboration culminated in a 2001 book, “Global Trade and Conflicting National Interests,” more warning than prediction. As opposed to the economic orthodoxy of free trade, they wrote that countries like Japan and by then China could, in the manufacturing of goods, exploit “cheap labor or other special advantages, and then … exploit the cheapness of modern transportation to deliver these goods to global markets” at a serious cost to workers in America.
To some, the book was a persuasively technical, if quirky, tour de force. Paul Samuelson, one of the most esteemed economists of the 20th century and a liberal, referenced it in a 2003 paper in the Journal of Economic Perspectives. But to skeptics, it was more nearly a laughable tour de farce, in that it argued so forcibly against free trade, the ultimate dogma of modern economics. (So much was this the dogma that at an economics conference in the late 1990s, another of the 20th century’s most famous economists, conservative Milton Friedman, angrily jabbed his finger at me and demanded to know why our program, then “The NewsHour with Jim Lehrer,” would stage debates with one economist in favor of trade and one against, when if the profession as a whole were polled, the results would be at least 90 percent for free trade, 10 percent at most opposed or ambivalent.)
But no one is laughing anymore. As Ralph Gomory puts it in the following post: “The events of the past year have clearly shown that many Americans, whether Democrats or Republicans, have finally rebelled against ‘free trade.’”
But we’ll let him take it from here.
— Paul Solman, NewsHour economics correspondent
The events of the past year have clearly shown that many Americans, whether Democrats or Republicans, have finally rebelled against “free trade.”
It is high time.
There is an enormous gap between free trade as it is taught in textbooks and advocated by those who benefit from it, and free trade as it is actually practiced in today’s world. Textbooks still unabashedly teach the virtues of free trade, but their arguments assume a world of pure market forces. But the American people don’t live in a world that is anything like that. The American people live in a world where increasingly capable foreign industries, subsidized by their home governments, are destroying significant parts of our economy. They live in a world where obvious currency manipulation goes unpunished and foreign state-controlled enterprises, not needing to operate at a profit, can underprice any company that does.
In this real world, Americans get cheap Asian goods at low prices, but pay a high price in lost jobs, low wages and in transferring leading technologies to our competitors. Both careful analysis and actual experience show this to be a downward path for America.
But the American people are catching on. They are increasingly aware that their world is very different from the benign free trade world portrayed to them. And in the world they actually live in, it takes more than Economics 101 to deal with what is going on.
China did not get to where it is today by allowing natural economic forces to decide industry outcomes. Reality is much closer to the exact opposite. The Chinese government chooses an industry and then puts in place the subsidies, special tax rates and technology transfer agreements needed to obtain dominance in that industry.
Textbooks maintain that something called “comparative advantage” shows that it doesn’t matter if we lose one industry after another to our trading partners. We will, they assert, be better off just concentrating on the industries that are left. But that is not so. Even in the dream world of pure market forces, comparative advantage is not enough to assure prosperity. And in the mercantilist world that we actually live in, it is even less relevant.
“Mercantilism” is an old term, and it describes an old practice. It means that your trading partner uses the full powers of its government to advance its industries. Mercantilism, in its modern form, often exploits the fact that the sole goal of our great American corporations today is to be as profitable as possible. A modern mercantilist country can provide subsidies and/or cheap labor that make it more profitable for American corporations to manufacture in Asia than in the U.S. and often to do their research and development there as well. These corporations then import these outsourced goods back into America.
Mercantilism has its impacts. The improved profits of outsourcing go to shareholders, who are predominantly the wealthy, and to top management. But American workers don’t benefit. Instead, they lose their jobs. This increases inequality.
By importing what we used to make here, America now imports far more than it exports. We pay for the difference in dollars. Our annual trade deficit with China alone is hundreds of billions of dollars each year. The accumulation of these trade deficits have provided the Chinese government with more than $3 trillion in U.S. dollars. With $3 trillion available to spend in the U.S., China is now buying up U.S. firms at an unprecedented rate. They are buying small innovative companies as well as large, established corporations. We should think about what it will mean for the firms that are still U.S. owned to have to compete around the world with former U.S. firms that now have Chinese government support and may or may not need to make a profit.
We should also think about what it will mean here at home about the independence of our country if firms controlled by a foreign government use their almost endless government funds to participate on a really large scale in corporate lobbying. These firms will have the freedom to make these efforts not only to advance their profitability, but also to advance the goals of a foreign government.
All this does not have to happen. There is much that we can actually do. Some is reasonably well understood; some is not. Balancing trade to stop the continuing outflow of productive employment in sectors like manufacturing can be done if the will to do it is there.
It is much more difficult to counter the danger posed by the immense sum, roughly $3 trillion, already in the hands of the Chinese government. The actions needed here are only now being seriously explored. In its 2016 annual report to Congress, the China Commission of the U.S. Congress (U.S. China Economic and Security Review Commission) called for a halt to the purchase of U.S. companies by Chinese state-owned enterprises and for a major expansion in the role of CFIUS, the federal government’s Committee on Foreign Investment in the U.S.
These efforts will not go forward unless there is widespread sentiment for change based on understanding what the impact of free trade on our country really is.
The American people are telling us what that impact is. We should listen. They have it right.
An earlier version of this essay appeared in the Huffington Post.