Free Trade Illusions

Free trade is supported by enlightened thinkers and academic economists.  Those who are opposed to free trade are seen as special interests trying to shelter uneconomic industries that can’t stand up to foreign competition.  It is a truism that no trade transactions would take place if they weren’t to the advantage of both parties.  What could possibly be wrong with trade that is advantageous to both parties?

If free trade is so wonderful, one has to wonder why many of our trading partners are resistant to it.  Perhaps these countries are just behind the times.  They may not have caught up with the latest economic theories from the University of Chicago.  For example, China has been the object of many trade complaints from the U.S. government.  The Chinese subsidize exports.  The Chinese engage in the wholesale theft of intellectual property – theft allegedly worth a hundred billion dollars per year.  It is not plausible that the Chinese are behaving this way because they have failed to read the Economics 101 textbook at almost any college.

The theft of formal intellectual property – patents, copyrights, and trade secrets – is only one part of the transfer of intellectual property.  A tremendous value of intellectual property takes the form of human capital – the accumulated knowledge of the workforce.  If you have dealt with an airline reservation agent in India, you have an inkling as to the difference between American workers and those in more backward areas.  If an American company opens a factory or a corporate research center in China, it is transferring human capital from the U.S. to China.  Much learning takes place not in formal institutions of education, but in the workplace.  This is especially true of the knowledge needed to make cutting-edge products.  The people who are the recipient of this knowledge at a branch of a U.S. company will likely emerge at some point in the future as competitors, probably taking not just the knowledge in their heads, but also computer codes, drawings, and all matter of practical knowledge.

Considering that China is hostile and is aggressively building up its military, maybe it’s not so smart for us to be so free with the transmission of human capital and intellectual property.  Yes, you can’t stop the spread of knowledge, and it is in our interest that the Third World modernize.  But do we have to give away the store?  Like it or not, Donald Trump has a point when he says that the Chinese are taking us for a ride.

Take the example of Apple Computer.  Apple sends around $100 billion a year to China, where almost all of Apple’s manufacturing is performed.  This is not coolie labor assembling equipment by hand.  That’s not how high-tech manufacturing works.  The manufacturing process is highly automated, and the workers have to be highly qualified.  There is not much question that much of this manufacturing could be done economically in the U.S.  Further, if he manufacturing were to be transitioned to the U.S., one would expect that Apple would develop new and better manufacturing techniques that would provide a lasting competitive advantage and become a part of American human capital.  Right now Apple is financing the development of high-tech manufacturing in China.  Things have progressed so far that we may be well-advised to demand the transfer of human capital and intellectual property from China and other Asian countries in return for access to our markets.  In other words, we should take a page from the Asian playbook.

Idiotic policies on the part of the U.S. government have aggravated the situation.  We have an immigration policy that encourages the mass immigration of poorly educated Mexicans while engineers and scientists educated at U.S. universities are sent packing when their student visas run out.  The corporate tax structure is designed to encourage companies to move their manufacturing out of the country.  Overkill and useless regulation of pollution and employment are other blocks to doing business in the U.S.  Then there are endless lawsuits over trumped up causes of action.  A lot of regulation that supposedly helps workers is actually counterproductive and ensures only that foreigners will have jobs while Americans get welfare.

Pandering to crackpot special interest groups is another distraction that wastes tremendous resources.  Take, for example, the Keystone XL pipeline, designed to bring oil from Canada to the U.S.  This is opposed by global warming believers for some symbolic reason.  If the oil can’t go by pipeline, it will be transported by rail, or else the Canadians will build a pipeline to their coast and sell the oil to China.  Hillary Clinton announced that she is opposing the pipeline, a clear pandering to a crackpot constituency of the Democratic Party.  Of course, as a scientific theory, global warming/climate change is fading away, because the evidence is becoming overwhelming that the theory is wrong.  There has been no warming of the Earth for 18 years in the face of rapidly increasing CO2.

Surely there is room for a more nuanced view of free trade.  We should try hard to understand the motives of our trading partners who give lip service to free trade but pursue goals and policies that laugh in the face of free trade.

Conservatives have elevated free trade to a sacred doctrine that brooks no opposition.  The fact that Asian countries that adopt exactly the opposite doctrine have been highly successful does not seem to have made much of an impression.  Sacred doctrines are like that.  No matter that the facts contradict global warming or free trade, the sacred doctrines are not to be questioned.

Norman Rogers writes on global warming, electromagnetic pulse, and a variety of other topics.

If you experience technical problems, please write to