Free Trade Bromides Wrecking America
The tired justifications for disastrous deals mask major wreckage wrought on the middle class
Free trade not only cures cancer but also prevents aging! That should have been the lede of Douglas E. Schoen’s Fox News op-ed this week explaining his boundless, fact-challenged enthusiasm for free trade. If one believes Schoen, free trade and the global institutions supporting it are the wellspring of American exceptionalism and economic growth. Unfortunately, the opposite is generally the case. Free trade has hollowed out our economy and middle class, rather than supporting them.
Schoen’s cheerleading claims don’t mention some important negative trends: Over the last 20 years, free trade policies have led to the closure of over 60,000 American factories and destruction of 5 million production jobs and many more jobs up- and downstream, given manufacturing’s strong job-multiplier effect.
Additionally, free trade has destroyed all too many working and middle-class lives, and devastated major cities, towns, villages, and hamlets from Maine to Minnesota, down through the Midwest into Virginia, the Carolinas, and the rest of the South.
Is it any wonder that there is a trade rebellion this year in both parties as good jobs become more scarce, our national debt mounts, and we defer our policymaking to unaccountable, investor-state dispute settlement panels? It is a rebellion that Schoen seeks to suppress. But perhaps the average American has a more valid perspective than Schoen.
Schoen’s article begins with the headline, “The Truth about Free Trade.” That may be an editor’s work, but the self-importance telegraphs to the reader that he’s not going to be getting much truth about anything. Sure enough, Schoen immediately launches into one of the many non sequiturs that plague his free trade thinking — namely that Donald Trump offers a more concrete plan to dismantle global trade than Islamic terrorism. Hmmm?
Of course, it's a Schoen setup. Trump's plan on trade has nothing to do with his plan for defeating radical Islam. Trump's trade plan is somewhat concrete but not nearly detailed enough. Yet his intention is clear: to restore fairness and balance to America's trading relationships — not to dismantle global trade. Hysterics like Schoen must attribute all sorts of excessive motives to those calling for change in an attempt to smear them. The simple fact is that global trade will continue — whether or not the Trans-Pacific Partnership passes Congress (unlikely) or whether existing trade agreements are renegotiated (more likely).
World trade will not be "dismantled" under Trump, but foreign countries may have to dismantle excess capacity aimed at dumping goods in the U.S. market and increase their domestic consumption instead. Is this the end of the world as we know it? Hardly.
As with the globalists who tried to spook the British people prior to the Brexit vote, Schoen claims the sky will fall if the United States makes any adjustments to a global trade system increasingly out of balance due to the massive scale of trade cheating, the ineffectiveness of the International Monetary Fund and the World Trade Organization to deal with the cheating, the position of the dollar as the world's reserve currency, and the unsustainable U.S. borrowing that supports the current system.
Schoen charges that Trump's policies will lead to "the destruction of the global economic structures that have underpinned the U.S. economy" for the last three decades, If he had written "undermined," he would have stumbled on the truth his headline promises.
Schoen invokes President Reagan's name to sanctify the global economic structures he claims Reagan instituted. But he doesn't know his trade history. The global free trade network was not, as per Schoen, pioneered by Reagan three decades ago. It was in fact created by various Cabinet Secretaries of the Roosevelt and then Truman administrations, beginning with the establishment of the International Monetary Fund and International Bank for Reconstruction and Development at the conference in Bretton Woods, New Hampshire, in 1944. At a follow-on conference in Havana in 1948, the charter of the complementary International Trade Organization was approved. However, it was never ratified by the U.S. Senate, and the General Agreement on Trade and Tariffs operated in its place until the creation of the World Trade Organization in 1994.
These post-WWII arrangements are the basis of the current global trading system — and they are not responsible for America's economic prowess. It is almost a tautology that American manufacturing, science, technology, individual freedoms, and creativity, along with our free enterprise system, have powered the American economy to its position of prominence — not global institutions. Schoen is revealing his biases and his ignorance.
Another bias follows quickly: Trump would "sever alliances with developing nations" with whom we have "partnered" to lift millions out of poverty. This is big news — that we have alliances around the developing world and our trade policy is designed to help their citizens economically by transferring jobs and wealth from our working and middle classes to them.
No American politician or government official has ever stated that lifting the rest of the world out of poverty is the primary objective of our trade policy. On the contrary, they have oft-stated that the goal is to improve the lives of American workers by having the rest of the world, i.e., the 95 percent of the globe's population that lives outside the United States, buy American-made goods. Of course, more exports would be welcome, but this catchphrase is a fantasy, since about 70 percent or more of the world's population lives on $10 a day or less (and that's in purchasing power parity terms, not in terms of the hard currency needed to buy US.. goods) and cannot possibly afford American goods.
The market that matters most in terms of our trade policy is the American market, where real purchasing power exists — at least for the time being. It is paramount that we take it back from imports and revive good job creation at home while we still can. But for Schoen, the idea that Americans should be producing the goods that Americans need and want doesn't fit into his worldview.
Schoen demonstrates convincingly that he knows very little about trade in general or its effect on the American economy over the last five decades. He mistakenly portrays these decades as a time of unified, bipartisan, trouble-free leadership in favor of free-trade policies — neglecting the August 1971 abandonment of the Bretton Woods fixed exchange-rate system by Richard Nixon and the September 1985 Plaza Accord initiated by Ronald Reagan. Both Republican presidents took strong action to curb currency undervaluation by Germany and Japan that was costing American factories and jobs. This critical issue has not been directly addressed by the last four presidents, and the negative effect on American manufacturing has been unparalleled.
Schoen, a pollster, has apparently not spent much time conducting polls in former factory towns and cities, or walked many machine-shop or factory floors. If he had, he would understand that millions of Americans without college degrees have led dignified, productive lives and earned decent incomes because they could build, calibrate, or repair a specialty tool, or machine a piece of metal to incredible tolerances — allowing it to be used, for example, in the super expensive cars that the bicoastal elite drive.
He would also understand that his (and others') naiveté and ideological fixation on free trade has brought that way of life to an abrupt and unnecessary end for far too many of our fellow citizens. He would also better grasp, since he is a big fan of citing studies, the new, shocking studies showing white lives in "flyover country" are ending much earlier than previously due to drugs, alcoholism, depression, and shame of government dependency. Previously, pride in self and family — and belief in the American Dream — was rooted in the dignity that a manufacturing job brings, and the wealth it spreads to create stable, prosperous communities.
If Schoen had any idea of the economic and personal hardships in these communities, he would not fret over (but instead understand) why a recent poll he cites finds 65 percent of Americans favor restrictions on imports to protect American jobs. One wonders if he covered his ears when Bernie Sanders and other commentators discussed today's striking income inequality over the course of the presidential primaries.
And if Schoen traveled across the developed world, he would comprehend why voters and politicians outside the United States have begun to embrace what he derides as a similar "protectionism." He castigates U.K. Labour Party leader Corbyn for harping on workers' rights to the detriment of free trade — but wait, isn't the raison d'être of Labour Party the plight of British workers? Isn't the dignity of a job important in the developed world as well?
Schoen praises Obama for defending free trade at a recent "Three Amigos" meeting of North American Free Trade Agreement heads of state. Obama, he says, made the case for trade as the best way to promote economic growth. But the last four U.S. presidents have made this case time and again for successive trade agreements, each one supposedly providing more growth than the previous. Each claim was proved a lie, as U.S. trade deficits grew.
Apparently, something awful happened on the way to our new, trade-fueled future. Not only has the U.S. run significant trade deficits for 40 years, but U.S. GDP growth has remained stuck at 2 percent for all of the Obama administration, the first time this has occurred. Why? National Income Accounting, a standard economic concept, accepted by the 95 percent of economists Schoen cites, explains why.
A country's GDP is the sum of consumption, investment, government spending, and net exports (i.e. exports minus imports). GDP = C + I + G + N/E. When imports exceed exports, as they have for 40-plus years, the N/E number in the equation is negative, and thus international trade subtracts from U.S. economic growth. If the U.S. trade position were simply in balance, we would have had greater than 3 percent growth for the entire Obama administration. But it's not (largely because of our trade partners' cheating) so we don't have "normal" growth. One wonders what Schoen is talking about when he touts the "well-documented benefits of free trade throughout modern economic history."
Schoen neglects to mention the doubling of the national debt on Obama's watch, a significant portion of which is incurred by our borrowing from foreigners to buy their goods — goods that the United States does not manufacture anymore. In fact, the trade deficit in manufactured goods was $631 billion in 2015. If it takes roughly 5,000 jobs to produce $1 billion of exports, and one applies that figure to the jobs necessary to produce U.S.-made substitutes for our imports (admittedly not a precise economic calculation), then with balanced trade we would have had about 3 million additional manufacturing jobs in 2015. And heaven forbid, if we were to put in place trade policies that permitted us to run an actual trade surplus at current levels of trade flows, the economy would soar. But Schoen isn't really thinking about real Americans and their lives. He is enamored of global institutions and transferring American wealth to poor nations.
It should be noted that Obama did make several misguided runs at our trade problems. He promised to double exports in five years (2010-2014), blaming U.S. producers for not trying hard enough to boost our lagging overseas sales. The president claimed that foreigners were eager for our goods. However, it turned out that they weren't — or at least their governments weren't eager to have them spend hard currency on U.S.-made goods. Actual exports increased only about 52 percent over the five years, and not because of anything the Obama administration did but mainly due to the global recovery from the Great Recession. During the 2012 campaign, Obama likewise promised to create 1 million new manufacturing jobs by the end of 2016. He will fail to deliver — a little more than a third of a million have been created so far, and the rest of the year looks to provide little additional manufacturing job growth.
More important, Obama's trade failures demonstrate his lack of understanding of the adversarial trade policies of our trading partners. Thus he has been unable to effectively address currency manipulation and a host of other mercantilist trade cheating. Obama's incompetence was not created by Donald Trump, Bernie Sanders, or their supporters. Our massive goods trade deficit is not the work of the Middle Americans who have dropped out of the labor force. However, Hillary Clinton helped to create the current situations in the multiple free trade deals she supported.
Schoen saves his most outrageous claim for last: Free trade, "as prominent research continues to indicate, prevents global war." The assertion that free trade prevents war is both ludicrous and insidious. Ludicrous because it is historically false, and insidious because it offers hope where there is none.
Further, it assumes that there is neoclassical free trade occurring now between the generally free-market, free-enterprise United States and the mercantilist economies of East Asia, for example. There is trade, of course, but it is manipulated and managed by our trading partners while we ineffectively protest their predatory practices — but nonetheless keep trading on their warped terms, in part no doubt because of myths perpetrated by Schoen and his fellow free traders that trade will prevent war.
To dispel that notion, one need only study the 50 years of increasingly liberalized trade that came crashing down with World War I. It wasn't just North America that was opened up by railroads and the movement of people and goods from the 1860s onward — it was the European market as well.
During this period, trade rose massively in Europe as a percent of what is now called GDP — so much so that it is fair to call this half century, 1864-1914, the first age of modern globalization. But there were many dark currents: A naval arms race between Germany and Britain was a prominent feature of this period, as Germany's industrial might surpassed Britain's. And overall, this period of globalization masked significant elements of nationalism. So much so that a couple of shots from a terrorist's pistol touched off a continent-wide conflagration. Further, in the aftermath of the war, intra-European trade did not reach the pre-1914 level for roughly 50 more years.
Today, China's successful mercantilist trade policies have caused a massive transfer of wealth from other countries — principally the United States — to China, which has used these riches to embark on a massive military buildup, including killer satellites, stealth jet fighters, carrier-killing missiles, and the construction and fortification of islands in the South China Sea. The other nations that lay claim to these islands trade extensively with China, as does Japan, which is involved in a separate dispute with China over East China Sea islands. Will a few shots or the downing of an American reconnaissance aircraft, such as happened in 2001, set off another conflagration — this time in Asia?
It is just not credible to make the case that free trade prevents wars. The first World War completely decimates the argument. And one would have to know the future to assert that China will abandon its aggressive, militaristic behavior, made possible by what Schoen considers free trade.
Schoen is entitled to his preferences and prejudices, but not to claim that his ignorance, straw men, misleading arguments, and unfamiliarity with economics is the truth about free trade that his headline promises.
Kevin L. Kearns is president of the U.S. Business & Industry Council (USBIC), a national business organization advocating for domestic U.S. manufacturers since 1933.