In Defense of Free Trade (A Response to “The Free Trade Blues” in Economix)

A Response to “The Free Trade Blues” in Economix

In a recent Economix article—a New York Times’ blog detailing the economics of everyday life—Nancy Folbre argues that the U.S. free trade agenda is responsible for increasing the distance between winners and losers in the U.S. economy. Her main evidentiary argument is a forthcoming econometric analysis from economists David H. Autor, David Dorn and Gordon H. Hanson which contends that rising Chinese import competition between 1990 and 2007 is responsible for one-quarter of the aggregate decline in U.S. manufacturing employment over the same period. However, what Folbre fails to understand are the mercantilist strategies employed by China to reach this level of influence in the global economy.

Free trade is about more than the reciprocal opening of markets (something China does not abide by anyway); it’s about a fair and level playing field for all countries operating in world markets. This means reducing non-tariff barriers to market access, enforcing robust intellectual property protections and reducing the influence of state owned enterprises (SOEs). China does absolutely none of these things. To imply that the United States is losing out because of our willingness to engage fairly on a global scale is tantamount to saying that the Tour de France runners-up lost to Lance Armstrong because they didn’t cheat. Frankly, it’s a ludicrous assessment, primarily because the United States is not losing out—Chinese trade has slowed throughout this year— but more than that, it implies that the only way to get ahead for developing countries is by purposefully subverting the system.

This means China employs policies of “forced localization,” measures such as mandatory intellectual property (IP) or technology transfer, entrance into joint ventures, or domestic production as a condition of market access. As ITIF argues in Enough is Enough: Confronting Chinese Economic Mercantilism, the Chinese economy made a dramatic shift to “indigenous innovation” policies in 2006, i.e., focusing on moving Chinese firms up the value-chain to higher-value-added production activities. As a result, the consequences for the United States are pretty self-evident: the IP Commission states China is the world’s largest source of global IP theft, accounting for 50% to 80% of it, and costing the U.S. economy at least $300 billion in losses annually; the U.S. International Trade Commission estimated that American business lost $48 billion to copyright infringements in China in 2011 alone; and the Washington Post approximates that the pay-tv industry has losses of $1 billion in Asia.

In contrast to what Folbre says, the U.S. free trade agenda is an opportunity to rectify this in balance, not exacerbate it. With the Doha Development Agenda stalled for going on twelve years now, agreements like the TransPacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (T-TIP) give the United States and its partners countries the power to set the rules in the 21^st century global trade arena. In other words, mercantilist countries like China need to either get on board, or get left behind. And as recently as May 2013, China, fearful of exactly this, demonstrated interest in joining the TPP, stating, "We will analyze the pros and cons as well as the possibility of joining the TPP, based on careful research and according to principles of equality and mutual benefit."

And despite Folbre’s assessment that manufacturing workers and their communities are the losers of free trade, the National Association of Manufacturers (NAM) seems to disagree with her, sending a letter in support of the negotiations for the T-TIP. They argue (emphasis added), “It would put emerging markets on notice that the United States and European Union are serious about market liberalization, and serious about maintaining and strengthening our broader alliance. Ultimately, the EU and U.S. could trail blaze a true 21^st century trade, investment, and regulatory cooperation initiative – upgrading our ability to respond to today’s commercial realities. This alone buttresses our ability to build the international legal regime the United States and Europe together created after the Second World War, and will further strengthen our cooperation in such international economic fora as the G-20.”

21^st century free trade theory is about free and fair trade. It’s about setting standards for the global economy going forward. It’s about ensuring fair levels of market access and competition in the international marketplace. And while the new U.S. free trade agenda holds the promise to achieve deeper trade integration than any other period in history, it will only do so if these new agreements hold themselves to the highest standards. It is absolutely imperative that the TPP and the T-TIP be agreements dedicated to 1) constituting an alliance of committed free traders in response to the growing number of countries embracing “innovation mercantilist” tactics distorting global trade; and 2) promoting global standards for adoption in third party countries. There’s no question China used distortive trade policies to run up the world’s largest current account surplus, but last time I checked, running away from a fight and choosing isolation was definitely not the American style.