The first response of US legislators to the economic crisis was a whole raft of “America First” measures. “Buy American” provisions were embedded in the various stimulus packages being proposed, all designed to ensure that only American corporations and American workers benefited from the measures. Commitments entered into with other countries, particularly the North American Free Trade Agreement, were suddenly under review. According to a New York Times article earlier this month, a Harvard university economics professor, Kenneth S Rogoff, warned ‘that the United States is in “great danger of backing away from free trade”. That, says the professor, could be a “disaster”.’
All sorts of responses are possible to a comment like that. Advocates and opponents of globalization could tear each other apart over the idea that protectionism is synonymous with disaster and free trade with wealth-creation. But the part of the professor’s assertion that bugged me was that phrase “backing away”. How do you back away from somewhere you’ve never been? To suggest that the United States is backing away from free trade is like suggesting that Barack Obama is backing away from the Klu Klux Klan.
In Empires Apart I describe in some detail how the American and Russian economies developed in very different ways over the last two or three centuries, but one thing they had in common – neither had any time for free trade.
Britain’s American colonies grew rich behind tariff barriers and that continued after independence. America’s manufacturing might was built behind punitive tariffs – by 1913 average tariff rates on imported manufactures were zero in Britain, 13 per cent in Germany, over 20 per cent in France and a massive 44 per cent in the US. In 1932, while the world was wallowing in depression, American import duties incredibly reached almost 60 per cent of the value of imports.
More recently a reader who booked a cruise from New York to Canada and then back to Florida complained to the travel pages of the Observer that he been made to leave the ship in Quebec City and travel overland to Montreal. The reason, it transpired, was that the US Jones Act (technically the Passenger Services Act) makes it illegal for passengers to travel from one US port to another on a non-US vessel. To avoid this protectionist legislation, foreign cruise operators have to break their voyage into separate unconnected legs, each starting or terminating outside the US.
True there have been some tariff reductions but these have in practice been easily balanced by the massive subsidies given to exporters, especially farm exporters in electorally critical states. The obscene subsidies paid to cotton farmers in the Bush home state of Texas and to rice growers in Clinton’s Arkansas have devastated third world competitors.
There are fundamental differences in what for want of a better word might be described as the political “ideologies” of Americans and Europeans. America is essentially parochial. Anyone watching US TV in the last few years must have been struck by the campaigns trying to persuade American drivers to convert to bio-fuels. But whereas in Europe the adverts would have concentrated on the benefits to the environment or on price the message on American TV was quite different: help reduce American dependence on foreign oil.
No wonder that in the latest economic crisis legislators made sure that foreigners would not benefit from their largesse – even to the point of insisting that banks receiving federal aid be banned from applying for work permits for foreign workers. US electors expect their representatives to put US interests first. In 2007 a Pew Global Attitudes Survey ranked 47 countries as varied as Bangladesh, China, Germany and Nigeria in terms of support for free trade: the US came last.
The stimulus bill passed by Congress last February contained numerous Buy American measures, with broad restrictions on buying foreign-made iron, steel and manufactured goods alongside a pious insistence that international trade agreements need to be respected. Robert Gibbs, a White House spokesman showed what the debate was really about when he claimed that: “Where we ended up . . . is the right compromise that respects the [Buy American] laws that we’ve had on our books for many, many years while also ensuring that the language doesn’t create unnecessary trade disagreements.” The substance can be protectionist as long as the language is not.
To an economist, the US may seem to be backing away from free trade but to a historian the US is simply standing still.
Our enormous trade deficit is rightly of growing concern to Americans. Since leading the global drive toward trade liberalization by signing the Global Agreement on Tariffs and Trade in 1947, America has been transformed from the wealthiest nation on earth – its preeminent industrial power – into a skid row bum, literally begging the rest of the world for cash to keep us afloat. It’s a disgusting spectacle. Our cumulative trade deficit since 1976, financed by a sell-off of American assets, exceeds $9.2 trillion. What will happen when those assets are depleted? Today’s recession is the answer.
Why? The American work force is the most productive on earth. Our product quality, though it may have fallen short at one time, is now on a par with the Japanese. Our workers have labored tirelessly to improve our competitiveness. Yet our deficit continues to grow. Our median wages and net worth have declined for decades. Our debt has soared.
Clearly, there is something amiss with “free trade.” The concept of free trade is rooted in Ricardo’s principle of comparative advantage. In 1817 Ricardo hypothesized that every nation benefits when it trades what it makes best for products made best by other nations. On the surface, it seems to make sense. But is it possible that this theory is flawed in some way? Is there something that Ricardo didn’t consider?
At this point, I should introduce myself. I am author of a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” My theory is that, as population density rises beyond some optimum level, per capita consumption begins to decline. This occurs because, as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (per capita output, which always rises), inevitably yields rising unemployment and poverty.
This theory has huge ramifications for U.S. policy toward population management (especially immigration policy) and trade. The implications for population policy may be obvious, but why trade? It’s because these effects of an excessive population density – rising unemployment and poverty – are actually imported when we attempt to engage in free trade in manufactured goods with a nation that is much more densely populated. Our economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to a healthy market, all we get in return is access to a market emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs, tantamount to economic suicide.
One need look no further than the U.S.’s trade data for proof of this effect. Using 2006 data, an in-depth analysis reveals that, of our top twenty per capita trade deficits in manufactured goods (the trade deficit divided by the population of the country in question), eighteen are with nations much more densely populated than our own. Even more revealing, if the nations of the world are divided equally around the median population density, the U.S. had a trade surplus in manufactured goods of $17 billion with the half of nations below the median population density. With the half above the median, we had a $480 billion deficit!
Our trade deficit with China is getting all of the attention these days. But, when expressed in per capita terms, our deficit with China in manufactured goods is rather unremarkable – nineteenth on the list. Our per capita deficit with other nations such as Japan, Germany, Mexico, Korea and others (all much more densely populated than the U.S.) is worse. My point is not that our deficit with China isn’t a problem, but rather that it’s exactly what we should have expected when we suddenly applied a trade policy that was a proven failure around the world to a country with one fifth of the world’s population.
Ricardo’s principle of comparative advantage is overly simplistic and flawed because it does not take into consideration this population density effect and what happens when two nations grossly disparate in population density attempt to trade freely in manufactured goods. While free trade in natural resources and free trade in manufactured goods between nations of roughly equal population density is indeed beneficial, just as Ricardo predicts, it’s a sure-fire loser when attempting to trade freely in manufactured goods with a nation with an excessive population density.
If you‘re interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It’s also available at Amazon.com.)
Please forgive me for the somewhat spammish nature of the previous paragraph, but I don’t know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.
Pete Murphy
Author, “Five Short Blasts”