September 17, 2009 Vol. 16, No. 15
Commentary: Unilateral Free Trade Is A Simplistic, Flawed Doctrine, By Clyde Prestowitz
David Halberstam in his great book "The Best and the Brightest" about Vietnam underscored the point that the elite of the media, business, government and academia in our country brought into the doctrine of the domino theory. It was a doctrine that perceived communism as monolithic, and the Russians and Chinese as being part of one great movement to achieve global dominance. The theory stated that if just one Southeast Asian country went communist all of Asia would go communist and the world would go communist. It turned out to be a really simplistic, flawed doctrine. It cost us 58,000 kids, and it was embraced by the total leadership elite -- the most brilliant minds, the graduates of Harvard Business School, Harvard Law School and Stanford: the Best and the Brightest.
Well, a similar thing has been occurring in the area of globalization and international trade. Our elite has brought into a doctrine that is called free trade. I think it would be better labeled unilateral free trade, or hybrid free trade, or merco free trade, but we call it free trade.
We have built our international economic policies around this notion that trade is always win-win. Indeed we have bought into the notion of unilateral free trade, so that if our trading partner is so benighted as to put rocks in his harbor to prevent us from exporting to him, nevertheless we should keep our markets open.
The doctrine that trade is always win-win underlies everything we have done in globalization.
Now the doctrine is not completely wrong. Trade sometimes is win-win. The great insight that David Ricardo had of comparative advantage is you trade what it is that you do best. That insight is important and it is applicable in many instances of trade. It's applicable when the trade is in products that do not have economies of scale. The assumption of that insight is that there are no economies of scale. It is applicable if there is no mobility of technology or capital across borders. The assumption of Ricardo was that British capital would not go to Portugal to create textile mills in Portugal. There would be no foreign direct investment. The assumption was that technology would not leave borders.
If that is the context in which you are doing trade, then it works.
But the world in which we live is one in which that kind of trade is restricted to a narrow section of total trade. Most of our trade takes place in markets that are not perfectly competitive; that are oligopolistic with imperfect competition. All of our trade takes place in markets in which exchange rates are managed. All of our trade takes place in markets in which technology and capital moves across borders. In these circumstances trade is not always win-win. Trade can be adversarial. It can be zero sum. We have not recognized that. Particularly, we have not recognized that in terms of the role of the U.S. dollar.
The role of the U.S. dollar as the world's currency of account and the currency of reserve is one that puts the United States in a privileged position, but also in a dangerous position. It is a privileged position because we alone among the world countries can borrow in our own currency. We alone among the world's countries can buy oil and other international commodities simply by printing dollars. Other countries have to produce something and earn dollars to buy oil. We just have to print them.
And so this gives us a great deal more flexibility and leverage than any other country, but it also means that as long as the rest of the world will accept dollars we can be irresponsible. Deficits don't matter to us. Trade deficits, current account deficits and budget deficits don't matter. The war in Iraq -- we're not paying for it. The cleanup of New Orleans -- we're not paying for it. The Chinese are paying for that. We're borrowing from them. As long as they keep taking the dollars, it's not that costly for us. It allows us to be irresponsible and it allows us to consume above our means, which we have been doing for quite some time and which underlies the crisis that we're in.
It also allows the rest of the world to be irresponsible. It allows other countries -- many of them in Asia -- to manage their currencies; to intervene in the currency markets to allow their currencies to be undervalued in order to promote their exports and foster their export-led growth strategies. So for the past 30 to 50 years, the dollar has been systematically overvalued.
If you are on Wall Street, you like that. If you are the Secretary of Treasury and you need to finance the U.S. deficit, you like that. It's easier to do that with a strong dollar. But if you're on Main Street producing real products with real people, this is anathema to you. This is a disaster to you. This is where Main Street has been living for quite some time.
We have reached the point where the dynamic has taken on a life of its own. If you look at the statements of the protagonists in the U.S.-China Strategic Dialogues [held for the past three years], not only have they been not terribly different between presidential administrations, but you notice that in the dialogue that we're having with the Chinese [in July in Washington, D.C.], nobody talked about currency management. It's off the table because the United States is now in such a position that our leaders fear to discuss it in public for fear of spooking markets or for fear of antagonizing the Chinese who we need to buy our bonds.
The only way to reverse this is to do something about our manufacturing base.
If you look at our trade numbers, the deficit is so overwhelming there is no realistic possibility that we will ever have sufficient exports in services to overcome our deficit in goods. If we are ever to become competitive and to be able to grow our economy without borrowing we are going to have to do it in manufacturing, and we can't do it in manufacturing unless we address the fact that the world is not a world of free trade. All of these countries that belong to the World Trade Organization are not free traders. Many of them are mercantilists.
And so to paraphrase Lincoln: We live in a world that is half free -- half free trade and half mercantilist, and that world is not sustainable for the United States.
-- Clyde Prestowitz is president of the Economic Strategy Institute in Washington, D.C. He made these comments before the New American Foundation in July.