Free Trade means big Trade Deficits for the U.S.

Free Trade leads to large trade deficits

Before the 1830s, the idea of Free Trade did not exist. Every nation used tariffs and other barriers to prevent nations with more efficient economies from overpowering their home grown industries. For example, in the 16th century, England used tariffs to prevent the booming Dutch wool industry from wiping out the inefficient (at that time) English producers of woolen goods.

This posed a problem for Great Britain in 1830 because, by then, it had the most efficient industries in the world. To open up markets for its products, English politicians used the new field of “economics” to develop an idea they called “Free Trade.” They claimed that, if a nation takes down its trade barriers, it forces local manufacturers to become more efficient and eventually they would become as wealthy and efficient as the English. In practice, Free Trade only occurred when a third world nation was intimidated by the British navy and English goods would flood into the hapless country. After the Civil War, the U.S. had very high tariffs and a large enough navy to resist Great Britain’s Free Trade ideas.

The U.S. Adopts Free Trade

The first and second World Wars were tough on British industries. By 1945, the U.S. emerged as the largest and most efficient industrial economy. However, with the capitalist nations of the world destroyed by fighting and the possibility of communist movements taking over France, Italy, and Greece, the U.S. adopted both the Marshall Plan and a very generous, new definition of Free Trade. This is how I explain it in my new book (which will be published May 15):

“We have seen how, in the process of assisting the struggling economies of allies in the capitalist world after WWII, the interests of U.S. domestic producers were subordinated to the needs of exporters from Germany, France, Taiwan, Japan and South Korea. While the U.S. practiced “free trade” – providing open markets for goods from their allies – the government also tolerated a variety of trade barriers that prevented U.S. companies from exporting to these same allies. U.S. policy was clearly stated by President Truman’s Bureau of the Budget in 1950:

“Foreign economic policies should not be formulated in terms primarily of economic objectives; they must be subordinated to our politico-security objectives and the priorities which the latter involve.”

Free Trade Becomes Dogma

This practical strategy, devised to revive European and Asian economies from the devastation of World War II, became ossified into the ideological dogma known as Free Trade. The pursuit of free international trade relationships became the underlying rationale for trade policies long after U.S. allies had re-industrialized and, in many ways, became more efficient producers than U.S. industries. [By the 1970s] The doctrine of Free Trade acted as intellectual blinders, shielding economists, policy makers, and politicians from the reality that U.S. domestic prosperity was threatened by a rising tide of imports. In addition, the promotion of Free Trade became synonymous with the U.S. maintaining its position as “Leader of the Free World,” yet another layer of mythology.”

Since the 1970s, the U.S. balance of trade has steadily gone deeper into the red. 2017 was a bit worse than 2016, with the deficit rising to $565 billion. Yet the Free Trade discussion remains stuck in 1950s patterns. In a recent example of Free Trade’s intellectual blinders, James North Patterson, normally a progressive voice on the Boston Globe Editorial page, pronounced this whopper: “Trade is not a zero sum game. We import more than we export because we are the world’s wealthiest nation…” Somehow he forgets that the U.S. owes foreign nations and banks over $6 trillion as of December 2016, primarily because of our trade deficits.

On the next blog post, we will examine how other countries use “managed trade” policies to ensure they will have a big trade surplus with the U.S.

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