Keep Free Trade Free

Michael Kinsley

[Reprinted from The New Republic, vol. 188, no. 14 (11 April 1983)]

Free trade is not a religion - it has no spiritual value - and Bob Kuttner is right to insist, as he did in TNR [see: The Free Trade Fallacy] two weeks ago, that if it is no longer good for America in practical terms, it is not a sensible policy for liberals anymore. He and I would also agree that a liberal trade policy ought to be good for working people in particular (including people who would like to be working but aren't). The question is whether free trade is just a relic from two happier eras - the period of liberal clarity two centuries ago when Adam Smith and David Ricardo devised the theories of free enterprise and free trade, and the period of American hegemony after World War II when we could dominate world markets - or whether it is still a key to prosperity.

Kuttner argues that Ricardo's theory of "comparative advantage" - that all nations are better off if each produces and exports what it can make most efficiently - no longer applies. Local factors such as climate and natural resources don't matter much anymore. As a result, "most basic products ... can be manufactured almost anywhere" with equal efficiency. This means, Kuttner says, that the only ways one nation (e.g., Japan) gains comparative advantage over another (e.g., us) these days are through low wages or "government action." Either of these, he says, makes nonsense of Ricardo's theory. In addition, Kuttner says, Ricardo didn't account for the problem of "idle capacity" - expensive factories sitting unused.

"Idle capacity" is an argument against any competition at all, not just from abroad, and has a long history of being carted out whenever established companies (the airlines, for example) want the government to prevent newcomers from horning in on their turf. If you believe in capitalism at all, you have to believe that the temporary waste of capital that can result from the turmoil of competition is more than outweighed by the efficiency of competition in keeping all the competitors on their toes. A capitalist who builds a plant knowing (or even not knowing) that it is less efficient than a rival abroad deserves whatever he gets. As for older plants that are already built - that capital is sunk. If the cost of running those plants is higher than the cost of buying the same output from abroad, keeping them running is more wasteful than letting them sit idle.

This brings us to the real problem; not sunk capital but sunk lives. The middle-class living standard achieved by much of the United States working class is one of the glories of American civilization. Yet Kuttner says, "semi-skilled labor overseas is producing advanced products for the U.S. market at less than a dollar an hour. Who really thinks that we should lower American wages to that level in order to compete?"

We shouldn't, of course. But importing the products of cheap foreign labor cannot lower American living standards as a whole, and trade barriers cannot raise living standards. This is not a matter of morality: it is a matter of mathematics. If widgets can be imported from Asia for a price reflecting labor costs of $1 an hour, then an hour spent making widgets adds a dollar of value to the economy. This is true no matter what American widget makers are being paid. If foreign widgets are excluded in order to protect the jobs of American widget makers getting $10 an hour, $1 of that $10 reflects their contribution to the economy and $9 is coming out of the pockets of other workers who have to pay more for widgets. Nice for widget makers, but perfectly futile from the perspective of net social welfare.

After all, if this economic alchemy really worked, we could shut our borders to all imports, pay one another $1,000 an hour, and we'd all be rich. It doesn't work that way. In fact, as a society, we're clearly better off taking advantage of the $1 widgets. The "comparative advantage" of cheap Asian labor is an advantage to us too. That's why trade is good.

But what about the poor widget makers? And what about the social cost of unemployment? If former widget makers aren't working at all, they aren't even adding a dollar's worth to the economy. Protectionism is, in effect, a "make work" jobs program - but a ridiculously expensive one, both directly and indirectly. The direct cost, in this example, is $9 an hour. The indirect cost is in reducing the efficiency of the economy by preventing international specialization.

If the disparity between American and foreign wages is really that great, Americans just shouldn't be making widgets. We could pay widget workers at $8 an hour to do nothing, and still be better off. We could put them to work at their current wage doing anything worth more than a dollar an hour. We could spend the equivalent of $9 an hour on retraining. And we owe it to widget workers to try all these things if necessary, because they are the victims of a change that has benefited all the rest of us by bringing us cheaper widgets (and because, as Lester Thurow points out, doing these things will discourage them from blocking the needed change). To protect them while they keep on making widgets, though, is insane.

These suggestions are, of course, overt tax-and-spend government programs, compared to the covert tax-and-spend program of protectionism. In a period of political reaction, the covert approach is tempting. But hypocrisy is not a sensible long-term strategy for liberals, nor is willfully ignoring the importance of economic productivity.

In many basic industries, American wages are not all that far out of line, as Bob Kuttner seems to acknowledge in the case of autos. Modest wage adjustments can save these jobs and these industries for America. It is uncomfortable for a well-paid journalist to be urging pay cuts for blue-collar workers. On the other hand, steelworkers (when they are working) make more than the median American income. Protectionism to preserve wage levels is just a redistribution of national wealth; it creates no new wealth. Nothing is wrong with redistribution, but in any radical socialist redistribution of wealth, the pay of steelworkers would go down, not up. So it's hard to see why the government should intervene to protect steelworkers' wages at the expense of general national prosperity. This is especially true when millions are unemployed who would happily work for much less, and there is no jobs program for them.

But Bob Kuttner believes that protection can be good for general national prosperity even apart from the wage question, in an age when other nations' "comparative advantage" comes from government policies that include protectionism. It is important to separate different strands in the common protectionist argument that we have to do it because Japan does it. Many politicians of various stripes, and William Safire in a recent column, argue (on an implicit analogy between trade war and real war) that only by threatening or building trade barriers of our own can we persuade the Japanese to dismantle theirs and restore free trade. Kuttner, by contrast, thinks that the idea of free trade is outmoded; that the Japanese are smart to restrict imports and we would be smart to do the same as part of an "industrial policy."

Both Safire and Kuttner assume incorrectly that free trade needs to be mutual. In fact, the theory of free trade is that nations benefit from their own open borders as well as the other guy's. This may be right or wrong, but the mere fact that Japan is protectionist does not settle the question of what our policy should be.

Certainly, it's worth looking at Japan for dues about how to succeed in the world economy, and certainly one key to Japan's success seems to be a government-coordinated industrial policy. (The current vogue for "industrial policy" is assessed by my colleague Robert Kaus in the February Harper's - forgive the plug.) But why must such a policy include trade barriers? One reason Japan thwarts imports is a conscious decision to reduce workers' living standards in order to concentrate national resources on industrial investment. I presume this isn't what Kuttner and other liberal trade revisionists have in mind. Kuttner and others include protectionism in their "industrial policy" for two other reasons. First, as a sort of bribe to get unions to go along with sterner measures - possibly necessary, but not a case for protection on its own merits. Second, to give promising industries a captive market in which to incubate and gather strength before taking on the world.

The trouble with this "nurture" argument is that there's no end to it. Kuttner himself says that it's "not unreasonable" to "treat every emerging technology" this way, and also says that "most of America's major industries can be winners" with the right treatment. After you add the few hopeless loser industries where we must allegedly create barriers to save American wages, you've got the whole economy locked up, and whether this will actually encourage efficiency or the opposite is, at the very least, an open question. And if every major country protects every major industry, there will be no world market for any of them to conquer.

Kuttner's model for "managed trade" is the Multi-Fiber Arrangement, an international agreement that restricts imports of textiles. This, according to Kuttner, permitted the American textile industry to modernize and become productive, to the point where exports exceeded imports - a less impressive accomplishment if you recall that the M.F.A. restricts imports.

Kuttner concedes that, despite the productivity gains, textile prices are higher than they would be without protection from cheap foreign labor. (Indeed, the current situation in the textile industry, as Bob Kuttner describes it, seems to vindicate Luddites, who got their start in textiles; human beings could do the work more efficiently, but machines are doing it anyway.) So what's the point? According to Kuttner, "The benefits include not only jobs, but contributions to G.N.P., to the balance of payments, and the fact that investing in this generation's technology is the ticket of admission to the next." Yet Kuttner does not challenge the "algebraic manipulations" he cites that show how each job saved costs the nation "several hundred thousand dollars" in higher textile prices. The only "contribution to G.N.P." from willful inefficiency like this can be the false contribution of inflation. The balance of payments is a measure of economic health, not a cause of it; restricting imports to reduce that deficit is like sticking the thermometer in ice water to bring down a feverish temperature. As for the suggestion that the next generation of technology will bring the real payoff - well, they were probably promising the same thing two decades ago when the Multi-Fiber Arrangement began.

Kuttner also worries that "without some limitation on imports," Keynesian fiscal policies don't work. This is like the monetarists who worry that financial advances such as money market funds will weaken the connection between inflation and the money supply. Unable to make their theory accord with life, they want the government to make life accord with their theory. There is a world economy - which Bob Kuttner seems to recognize as a good thing - and this means Keynesian techniques will increasingly have to be applied internationally....

There can be no pretense that domestic content legislation has anything to do with "industrial policy" - improving the competitive ability of American industry. It is protectionism, pure and unadorned, and each job "saved" will cost other American workers far more than it will bring the lucky beneficiary. Like most protectionist measures, far from aiding America's adjustment to world competition, it just helps put off the day of reckoning.