FREE TRADE AND THE AMERICAN DREAM

PCDForum Article #4,  Release Date October , 1993

by David C. Korten

Since World War II, the promise of a share in the American dream of middle class prosperity has been embraced by people the world over. Recently politicians, economists, media, the World Bank and big business have come forward with the message that the universal elimination of trade barriers through regional and global trade agreements such as General Agreement on Trade and Tarrifs (GATT), North American Free Trade Agreement (NAFTA), and the European Economic Community (EEC) is the key to realizing this dream for one and all. Given the commitment with which successive U.S. administrations of both the Republican and Democratic political parties have taken up this cause and pressed it on the world through such international institutions as the World Bank, the IMF, and the GATT one might conclude that whatever its potential implications for the rest of the world, the movement toward more open international markets, which has had devasting consequences for many Southern countries, must surely be working to the benefit of most Americans.

Quite the contrary says economist Ravi Batra in his recent book The Myth of Free Trade. Batra argues that free trade is destroying America's industrial base and moving the American dream further and further beyond the reach even of most Americans.

Throughout much of its history the United States justly deserved its reputation as the land of opportunity the ultimate economic miracle. According to Batra the secret of this success was a strong industrial base nurtured through vigorous competition among domestic producers protected from predatory foreign competition. In other words, the U.S. industrial strategy was in fundamental respects the same as that employed by Japan, Korea, and Taiwan the leading economic success stories of the last half of the 20th Century.

The United States was practically a closed economy throughout most of its history. From 1890 to 1973 total trade (imports plus exports) rarely exceeded 14 percent of total economic activity. Throughout the period of U.S. industrialization, starting in the early 1800s, average U.S. tariff rates ranged as high as 62 percent, averaged about 40 percent, and fell below 20 percent only once for a brief time prior to the end of World War II. Batra's charts reveal that the years when tariffs were highest were generally the years of most vigorous economic expansion. During these years the industrial base expanded, productivity and real wages grew steadily in all sectors, poverty rates declined, the middle class grew, the United States became the world's number one creditor nation, and the American dream became a reality for more and more Americans.

So what, in Batra's view, has been the source of the current U.S. espousal of free trade? With the industrial sectors of Japan and most of Europe in ruins at the end of World War II, the United States emerged from the war as the world's only industrial super power. Confident that its dominant position would make it the major beneficiary of more open world markets and eager to strengthen the economies of its allies and the Third World to create a strong bulwark of non-communist states the United States became a strong advocate of trade liberalization, regularly granting one sided concessions to its trading partners in the interests of advancing the elimination of trade barriers. U.S. tariff rates were dropped rapidly to an average of just over ten percent. Following the Kennedy Round of GATT negotiations completed in 1967, they were progressively lowered to an average of 5 percent. Total trade as a percent of U.S. GNP rose steadily from only 9.4 percent in 1950 to 13.7 percent in 1973. Up until this point, according to Batra, either U.S. tariffs had been exorbitant or trade as a share of the economy was so small as to make it virtually irrelevant.

By 1973, Japan and Europe had rebuilt their industrial base and were looking more aggressively to export markets, as were newly industrializing countries such as Korea and Taiwan. The U.S. market, the largest, and now one of the most open in the world, was an obvious focus. Total trade as a percent of U.S. GNP rose rapidly to 25.3 percent in 1990.

Not coincidentally in Batra's view, 1973 was also the year the historical long-term upward trend in real weekly U.S. wage earnings peaked. It has fallen steadily since, even though the output per U.S. worker in manufacturing productivity has nearly doubled since 1970. In 1973 the poverty rate reversed its steady fall and began to rise. Conversely the portion of national income going to the bottom 20 percent of the U.S. population stopped increasing and has fallen since. Since 1973, only individuals in the top 20 percent income brackets have experienced real income gains, with the greatest gains going to the top one percent which by recent government reports now controls more wealth than the bottom 90 percent of all Americans combined.

Americans responded to falling real wages with a variety of strategies to maintain accustomed life styles including increased personal borrowing, sending additional family members into the labor force, and working longer hours sometimes in two or more jobs. In spite of these efforts, 80 percent of American families have suffered an income decline since the early 1970s, with the greatest percentile declines being experienced by the bottom ten percent.

What happened? Batra explains that by the time the United States became an open economy, it was no longer dominant in manufacturing. Many of its own industries had become monopolistic, their workers and managers lethargic, and extravagant. Meanwhile the countries the United States had helped to rebuild had developed disciplined, internally competitive domestic economies. With its borders opened, U.S. industry was no match, and the deindustrialization of the United States began. Factories closed. Millions of manufacturing jobs evaporated, and workers moved into the service economy where except for a relatively small number of highly skilled jobs workers such as doctors, lawyers, and computer programmers wages are well below those in manufacturing jobs.

In the misguided belief that larger firms would be more competitive internationally and produce more U.S. jobs, the U.S. government relaxed its anti-trust enforcement. Instead of breaking up monopolistic corporations to re-establish domestic competition, it encouraged a wave of mergers and acquisitions that further reduced domestic competition, which Batra maintains is the real key to economic success. Thus Batra suggests the key to the American dream is not free trade. It is enforcement of anti-trust laws to assure vigorous domestic competition and productive efficiency.

Batra points out that the U.S. industries with the highest domestic concentration, such as autos, have proven the most vulnerable to foreign competition as trade barriers have fallen. Bloated and inefficient, foreign rivals whose competitive edge has been honed in intensely competitive domestic markets easily run circles around them. In the 1950s and 60s, Japan had more than seven major auto producers competing in a market one tenth the size of the U.S. automobile market which was served by only four major producers.

Batra points out that trade itself is a major source of inefficiency and environmental stress because of the energy consumption, emissions, and toxic waste and oil spill accidents involved in the related transport. It is difficult to see that any over riding human priority is served by the enormous waste involved in the more than 50 percent of all world trade that is intra-industry, as when the U.S. and France trade wines or the U.S. and Japan trade automobiles. While some trade in physical goods is clearly essential to human well-being, in part to equalize natural resource endowments, Batra believes that in a resource scarce and environmentally stressed world we should be working to eliminate that substantial portion of trade that is wasteful and unnecessary.

Building on historical experience, Batra proposes a framework for a new world economic order based on what he calls the principles of competitive protectionism:

• Create domestically competitive markets by breaking up monopolistic corporations. Batra recommends that for an economy the size of the U.S., no one firm should be allowed to control more than ten percent of the domestic market.
• Require that to the extent possible goods be sold in the same country in which they are produced.
• Augment the international transfer of technology, including through investments by multinational firms in production facilities that serve local markets.
• Locate plants so that shipping needs are minimized.
• Provide public funding for research and development to develop technologies that reduce both pollution and the optimum economic size of plants.

Batra is writing for a U.S. audience from a predominantly U.S. perspective. However, these prescriptions are consistent with the experience of a considerable number of late developing economies including those of Japan, Taiwan and Korea widely heralded as success stories, even by free trade ideologues. He does not address the case of smaller countries with tiny domestic markets. Such countries would need to form regional economic blocks of sufficient size to support domestic competition with countries at similar levels of economic development. Southern countries with highly dependent economies would need time and financial assistance to facilitate the necessary adjustment of their economies in directions nearly the opposite of those imposed by the damaging World Bank and IMF structural adjustment programs.

Batra's recommendations align closely with the thinking of citizen organizations that are calling for an international system that focuses on human needs, distributes and decentralizes economic power, and is ecologically balanced. It is interesting that economic history provides substantial support for measures that would move the global system in exactly these directions.

Ideological free traders have framed the trade debate as a choice between virtually eliminating borders and erecting barriers that shut out the world. Anyone who calls for local preference is dismissed as a protectionist. Obviously there is little merit in protecting privileged and inefficient national monopolies.

However, if it is protectionist to give preference to local producers who provide employment to local people, pay local taxes to maintain local infrastructure and social services, meet local social and environmental standards, and participate as neighbors in community life over footloose and predatory firms that roam the world seeking cheap labor, lax regulation, and tax holidays until a better offer is made elsewhere to give them a further competitive edge then responsible global citizens should take pride in being protectionists. Trade has brought human society enormous benefits and surely will continue to do so. Free trade is quite a different matter.

David C. Korten is a fellow and president of the People-Centered Development Forum. References are to Dr. Ravi Batra, The Myth of Free Trade: A Plan for America's Economic Revival (New York: Charles Scribner's Sons, 1993).

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