Trade Skepticism Gets an Airing

It’s all too rare to see skepticism of free trade in the business press, much less a full-throated attack on it. So, applause to The Big Money, Slate’s business site, which today goes big with a book excerpt about the downside of free trade.

The author, Matt Miller, tries to puncture some of the conventional wisdom about trade:

Ralph Gomory and Willian Baumol make the argument that globalization is not free tradeā€”it is free trade plus productivity changes, which they term “a whole new ball game.” When the United States trades semiconductors for Asian T-shirts, that is trade in the old-fashioned sense, in which both countries plainly benefit. “But when U.S. companies build semiconductor plants and R&D facilities in Asia rather than in the U.S.,” Gomory and Baumol write, “then that is a change in productive capacities … and there is nothing in either common sense or economic theory which says that improvement in the productive capabilities of other countries is necessarily good for your country.”

And here’s the basic problem with free trade/globalization:

Another point Gomory makes seems obvious but is widely ignored: Under globalization, the interests of companies and of countries can now dramatically diverge. Offshoring jobs and know-how to developing countries is generally smart and profitable for American-based firms even if such moves ultimately hurt the United States. This tension between their fiduciary duty to shareholders and their broader loyalty as citizens makes American executives profoundly uncomfortable.

China, India, and just about every other ambitious developing country has a national economic strategy, and one of the chief aims of that strategy is to get major corporations to transfer new technologies to and locate high-value jobs in their country. It’s basically a deal: Companies want profits, countries want GDP, and countries figure out how to strike a bargain that gives both sides what they seek. In the old days, profits and GDP mostly went together in America for U.S.-based firms; nowadays, profits are increasingly found elsewhere, and that is costing America some GDP.

This is a good explanation for why economists are so one-sided about trade, and helps explain why the press is, as well:

Which brings us to the heart of darkness, so to speak. Most economics professors will tell you that trade’s inevitable creation of winners and losers is the second thing they teach, after first lecturing on comparative advantage and the gains from trade. So why don’t economists acknowledge trade’s downside more readily outside the seminar room? The answer has more to do with paternalism than with social science. Economists would really prefer that “the kids” (that is, we the people) didn’t know about all this, because if we did, irresponsible barbarians might seize on these facts to push protectionist agendas that cascade into trade wars that harm the entire world, as happened in the 1930s. It’s a slippery slope out there, and economists are keeping us in the dark for our own good.

“Of all the policy-relevant aspects of economics,” says Princeton economics professor Alan Blinder, “the one on which there is the closest to total unanimity among economists is that free trade is good. The result is that anyone in the fraternity who says anything that could even obliquely give aid and comfort to the enemies of free trade is considered traitorous.”

Good for The Big Money for running this.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.