Ralph Gomory: America Rethinks Free Trade

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This extraordinary primary season has clearly shown that Americans, whether Democrats or Republicans, have finally rebelled against “free trade.”

[Ralph Gomory| May 11, 2016 |The Huffington Post]

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. The 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. These trade deficits have provided the Chinese government with more than $3 trillion, and 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 to our country if firms controlled by a foreign government use funds from their government to participate in the corporate political and lobbying efforts that are now legal for U.S. corporations. 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 to avoid these unwelcome outcomes, but the first step is to understand what the impact of free trade in the real world really is.

We should listen to what the American people are telling us. They have it right.

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