Jeffrey Garten's paen to free trade can be found the Journal website a the address below:
Garten extols the benefits of free trade without regard to what it really means. It's cook book economics from another time. Free trade economics as classically taught does not go down well in a world where one man's employment is another's unemployment. It works where there are jobs for all. That hardly applies to the global economy now with a savage downturn in progress, nor has it applied in recent years as China's and India's development have meant wage erosion and unemployment (disguised unemployment?) in the US. So too, until the recent plummet in house values, much of the destruction of US wealth was 'unappreciated'.
Asleep or comatose?
India and China are late-comers to the trade game and they are using their 'characteristics' and the new complacent referees (IMF and WTO) to turn the game to their advantage. I think of this in terms of a basketball game if the game is called tight the team with speed, skill and quickness will have an advantage. If hands-on and muscling is allowed then teams with size and lumbering strength will have an advantage relative to skill team. In short the referee's bias is an issue and an important determinant to who wins. The same is true in international trade and, on the currency front, the IMF has definitely been asleep to the advantage of India and China and others.
The missing link: Real and financial sectors interact
Garten's light treatment of currency values misses the central point of the problem. Looked at from a US perspective - instead of some international accusatory position- much of what has happened in the world trade in the last 20 years has involved the pillaging of the American global capital position: the US has run ever larger deficits in its balance of payments (current account) so that its demand could fuel job growth abroad and 'feed the world.' Oh, the US 'fed' itself, too, with huge volumes of imports of consumer goods at bargain basement prices. But in a rational economic system, that appetite would have been choked off by a falling dollar currency value and rising values of competitor currencies, forcing trade to re-balance. Why didn't that happen? Why did the real sector run amok with no adjustment in the financial sector?
IMF: toothless and blind or impotent?
The IMF, the exchange rate cop on the beat, has neither whistle nor gun. So the fx inmates have run the asylum, subject to an occasional outbreak of order. The IMF has been unwilling to call out any of the currency peggers/controllers and that is partly because it possessed no tools for enforcement.
The facilitators were...
We are far enough into our financial crisis that one need not counter-argue that if it was so bad for America why did so many multinational US-based corporations participate in the 'rape' of US capital? They did it for profit- their own.
The More/Better solution
While Free trade is noble it is also something that must be looked at outside of the normal economic comparative static framework. An economist will look at stage one, before free trade and stage two, after free trade, and conclude that stage two is better since more output is being created. QED. In economics the amount of output is king: More-Better.
Compensation principle: without principal?
Economists long ago discovered the 'compensation principle' to evaluate trade regimes and break what had been a an intellectual log-jam in assessing those regimes. Consider this: Bill has 2 and Gene has 4. Then, presto change-o, after free trade Bill has 6 and Gene has 2! Who can say that one state is superior to the other? Gene has just seen his position deteriorate from 4 to 2. But Bill, at 6, is an unequivocal winner! Who makes the decision on the redistribution? Well, economists use the COMPENSATION PRINCIPLE. They say that bill with 8 could - COULD - compensate Gene giving him 2 to return him to his original 4 and still leave Bill better off that before. So the free-trade state is superior. But what if Gene is not compensated? Well. my friends that is a distributional issue economists say and they do not address it. Recognize that from the VERY START that FREE TRADE is only BETTER in this HYPOTHETICAL WORLD... and it goes downhill from there.
Free Trade: The blood-letting of America
One point is that free trade does not compensate those who are harmed by it. Right now trade has driven down wages in the US and more nefariously stripped the US of wealth by building up net debt (the current account deficit represents a rise in the nation's debt or a diminution of its assets- either way it's a drop in wealth).
Why have we sold our inheritance down the river?
So why has US wealth been exploited to make growth strong in the surplus countries: Japan and China and others? Here free traders jump in to say that the US saving rate was too low and the US got these cheap goods etc. But that begs the real question. The real question is, 'why didn't the international system adjust to choke off the cheap (too-cheap?) imports?' Part of the answer is that US consumers were happy and the erosion in wages affected workers in a general sense and not specifically enough to create a counterforce to the free-trade trend. Companies like Wal-Mart had developed ties in the cheap export markets like China (Nike and others did this too) to keep the flow of cheap goods coming.
Who were the chief advocates? (ps don't even bother blaming Republicans)
And we all know the political strength of the corporate lobby and the powerful intellectual support 'Free Trade' has from the likes of Mr. Garten (... and Mr Clinton and his Treasury Secretary, Mr Rubin). All US banks and investment banks (Mr Rubin was one of these both BC and AD Clinton) want freer trade. They want freer - not just free - trade in fact since financial services are one of the last industries to open up. They must press for free trade in order to get their reward. Now that seems much less likely given what the financial sector has wrought.
Can't argue with RELIGION
People would have you believe that free trade is not only 'free' but 'good' and its one thing all economists agree on. It's like a religion. So after all it must be true. But for the trade side to work properly it must interact with a functional currency side...and that has not been the case
IS 'MORE' STILL 'BETTER'?
Garten waxes eloquently about all the poor people creating a new New York 'every two months.' Is that a good thing - Jeffrey? Environmentalists have looked at the way we live in the US, India and China and concluded that India and China cannot raise their 'standard of living' (or we can use the word 'consumptiveness') to levels enjoyed in the US without creating world-destroying ecological damage. Our new president is finally going to recognize the impact that carbon emissions have on global warming. So, hey, maybe MORE IS NOT BETTER ANYMORE?
Survival of the 'whatest'?
When the global economy heads into recession there is suffering and Mr Garten would have you believe that we should sit by and let free trade determine who survives. Why? Why should the cheapest car producer get to fill all the demand over the next 12months when demand is so low leaving nothing for higher cost producers? Why should the higher cost producers be run out of business when demand shuts down for A SHORT PERIOD OF TIME? Why should we not as a nation have right to protect our market our companies and our jobs from a temporary drop in OUR demand? Why should we ignore the welfare impact, considering the years to come and base our consideration on a too simple 'point in time' comparative static assessment?
It's really stupid. This sort of "free trade talk." It is really very naive and, in the end, STUPID.
Burden-sharing is NOT protectionism
Sharing the burden when economic slack appears makes sense. The truly badly run companies should go out of business but the salvageable companies are a different case. I'll not waste breath here defending the US auto industry but clearly it has made some real mistakes and at the same time it has some cost issues that foreign companies do not have because of the special case of the health care system in the US. Should GM fail because of the burden of legacy and current health care costs? Does that make sense? And what of the competitive advantage the foreign transplants get in the South because of deals they cut for tax abatement and other cost reductions in 'right-to-work states?
The Black and White of it
So as we peel the various skins off the Free Trade onions we find that many truths lurk below that seemingly pristine white surface where trade is white and protectionism is black.
See trade in Technicolor
But it is not that way. Moreover, if other parts of the world want to create the equivalent of a New York every two months, they should have a plan to support that 'city' without expecting to run down of wealth in the US.
Don't you think so?
Game, set, match
Look at who wants free trade! The fast-developing export-scamming low income countries and the export oriented economies of highly developed Germany and Japan. They are screaming the loudest because for their cozy little game, the jig is up.