Thursday, August 11, 2011

Free Trade Doesn't Work

What Should Replace It and Why, a book by Ian Fletcher. Excerpts from Chapter 6, Chapter 8, and Chapter 9. From Chapter 6:
The protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone...that I vote in favor of free trade. -- Karl Marx, "Speech to the Democratic Association of Brussels at its Public Meeting of January 9, 1848"
From Chapter 8:
The interests of individual powerful corporations do not even align well with the interests of the U.S. business community as a whole, a fact exacerbated by the “every man for himself” mentality of American businesses abroad. (Contrast this with the notorious solidarity of, say, Japan, Inc., which plays as a team due to government pressure and financial ties between corporations.) American companies frequently bid against each other overseas, even over sensitive long-term issues such as technology transfer. Among other things, this makes them exceptionally easy for foreigners to manipulate. When, for example, Japanese companies form alliances with them, this tends to neutralize them as opponents of Japanese trade practices. In the words of former trade diplomat Clyde Prestowitz, “Once a company has got a deal with Hitachi, they become silent on those issues. Why attack your partner?”3 Similarly, American aircraft producers have been silenced about Airbus by complaints from their European customers.

Many of the largest American companies are now so dependent on their overseas operations, and thus so vulnerable to pressures by foreign governments, that they have become outright Trojan horses with respect to American trade policy. As former congressman Duncan Hunter (R-CA), for years one of the outstanding critics of trade giveaways in Congress, has put it, “For practical purposes, many of the multinational corporations have become Chinese corporations.”

When our trade negotiators work to open foreign markets, they usually do so willy-nilly, with no sense that some industries are more strategic than others.
Our nakedness has, ironically, made us even more desperate in pushing for free trade: having disarmed ourselves by throwing open our markets, we desperately need to disarm everyone else by forcing their markets open, too. But we try to do this after having thrown away our principal leverage: access to our own market. We rationalize this implausible approach with the fantasy that the rest of the world “must” inevitably embrace our own laissez faire economic ideals, including free trade, due to their innate superiority, one day soon.

Our main method of getting the rest of the world to fold its cards has, of course, been bribing foreign nations to join our vision of a rules-based global trading system under the WTO (which enjoys fanatical American support despite its anti-American actions). Unfortunately, this bribe has mainly consisted in letting foreign nations run surpluses against us. We have thus become the global buyer of last resort and the subsidizer of a system that in theory needs no subsidy because it supposedly benefits everyone.

One irony of this is that the U.S. has been diligently working to pry open foreign markets for Japan, China, and the other neomercantilist states. (As noted in Chapter 6, Britain had precisely this problem 100 years ago.)
From Chapter 9:
Deindustrialization is a more complex process than is usually realized. It is not just layoffs and crumbling buildings. It is, in fact, industrial policy in reverse. As a result, understanding industrial policy helps illuminate how industries die.

When American producers are shut out of foreign markets, it is not just immediate profits that are lost. Declining sales undermine their scale economies, driving up their costs and making them even less competitive. Less profit means less money to plow into future technology development. Less access to sophisticated foreign markets means less exposure to sophisticated foreign technology and diverse foreign buyer needs. When an industry shrinks, it ceases to support the complex web of skills, many of them outside the industry itself, upon which it depends. These skills often take years to master, so they only survive if the industry (and its supporting industries, several tiers deep into the supply chain) remain in continuous operation. The same goes for specialized suppliers. Thus, for example, in the words of the Financial Times’s James Kynge:
The more Boeing outsourced, the quicker the machine-tool companies that supplied it went bust, providing opportunities for Chinese competitors to buy the technology they needed, better to supply companies like Boeing.
It is no accident that, as noted in the Foreword of this book, some of America‟s corporate elite are now starting to question postindustrialism, about which they were utterly gung-ho only a few years ago. In the February 2009 words of General Electric‟s chairman, Jeffrey Immelt:
I believe that a popular, 30-year notion that the U.S. can evolve from being a technology and manufacturing leader to a service leader is just wrong. In the end, this philosophy transformed the financial services industry from one that supported commerce to a complex trading market that operated outside the economy. Real engineering was traded for financial [International Jewish Bankster - r.m.] engineering.


Paul Craig Roberts gives us his view of the financial crisis.

Stanislav Mishin at Mat-Rodina responds to claims that all of this is somehow Russia's fault.

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