Here’s something I’ve never understood about standard free trade theory – and something that should bug you, too.
Proponents of the theory – who include nearly all economists for centuries, living and dead, along with numerous fakeonomists from think tanks and elsewhere and most major newspaper editorialists and media pundits – insist that the freest possible global competition, fostered by the freest possible trade flows, will help produce the greatest possible global efficiencies and the best possible array of products and services. Here’s my starting question: Why does it have to be global competition? Why can’t it be purely domestic competition, especially in the case of the United States?
Here’s what I mean. As of 2013, the United States economy made up some 22.6 percent of the whole world economy – a little more than one-fifth. (This calculation comes from apples-to-apples data from the World Bank and the Central Intelligence Agency.) At $16.8 trillion in current dollars, it must be obvious that the U.S. economy could and does generate plenty of competition from Americans “trading” exclusively with themselves. Free trade theory logically is saying – at best – “Yes, but that’s not nearly enough.” But it’s never been clear why.
Looking at the issue purely mathematically, it seems as if the theory holds that opening up the U.S. economy could generate about 3.4 times the competition for American producers than they would face with no trade (the ratio of the $57.5 trillion of annual output outside the United States to that $16.8 trillion U.S. economy). Alternatively put, every new unit of foreign competition added to that already faced by American goods and services providers generates just as much competitive pressure as every new unit of purely domestic competition – which could be sparked by purely domestic growth. Have you, however, seen any economist make this argument, either empirically or theoretically? I sure haven’t.
And the more you think about the matter, the more far-fetched the efficiency case for free trade becomes. For example, of that $57.8 trillion of annual non-U.S. global output, $9.2 trillion – 16 percent – came from China in 2013. Whatever you think of China’s reforms over the last few decades, it’s at best an economy where the state continues to play a lead role, and at worst one that remains largely communist. How does trading with this kind of largely non-free market economy enhance efficiency in the United States or the world at large? And China’s output and share of world trade have both been skyrocketing in recent decades, generating the added puzzle that a low-efficiency largely non-market economy is beating the growth and trade pants off lots of higher-efficiency largely free market economies.
So let’s assume that trading with China really doesn’t enhance U.S. and global competition and efficiency. That leaves trade theory saying that totally free global trade generates just under 2.9 times the competition American producers would face with no global trade at all (the ratio of the $48.3 trillion of output outside the United States and China to the $16.8 trillion U.S. economy). Pardon me for being completely unimpressed, even leaving out the theorists’ failure to show that each extra unit of foreign competition produces the same increase efficiency-enhancing pressures as each extra unit of domestic growth.
And China, of course isn’t the only foreign economy that arguably should be left out of this mix. Russia’s $2.1 trillion economy as of 2013 adds up to 2.8 percent of world output. But it’s clear that Russia doesn’t have much of an economy outside energy. Neither do the OPEC oil producers, whose total annual output is $3.4 trillion, according to the latest World Bank data. Their export of relatively cheap oil has enhanced U.S. efficiency by holding down the world price of a key economic input. But with U.S. energy costs coming down rapidly thanks to booming domestic production, the imported oil bonanza should keep shrinking for the foreseeable future.
More important for the purposes of this post, that efficiency-producing effect is fundamentally different from that created by head-to-head competition. Taking away Russian and OPEC gross product means that free trade theory is down to insisting (again, with no empirical evidence) that a non-U.S. world economy about 2.5 times bigger than America’s could create enough competitive pressure to justify completely open trade flows. Color me even less impressed.
And here’s a final (for now) fly in the ointment of trade theory. The United States could generate more competition solely through its own devices not only by growing faster. It could also achieve at least the same goal by enforcing anti-trust laws more energetically. For evidence of just how extensively the U.S. economy is cartel-ized and monopolized, take a look at Barry C. Lynn’s eye-opening 2010 book Cornered.
There are of course many other theoretical problems with standard trade theory other than the competition conundrum I’ve laid out. For example, the theory has always assumed a world of full employment. And it’s never adequately accounted for significant international capital flows. Combined with the competition conundrum, maybe that’s why it’s failing the U.S. economy so spectacularly, with rebounding post-recession deficits slowing economic growth even further during an already historically weak recovery, by extension undercutting job-creation as well, and adding to the astronomical national debt. And that’s why anyone seeking a return to America’s historic economic vigor and genuine economic health should view the ongoing deadlock over new U.S. free trade deals as an indicator that’s strongly bullish.