Book Review: Free Trade Under Fire

Book review of Free Trade Under Fire, by Douglas Irwin (2002)

In The Wealth of Nations, Adam Smith expressed doubt that his devastating critique of mercantilist protectionism would ever be heeded. “To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain,” he wrote, “is as absurd as to expect that Oceana or Utopia should ever be established in it. Not only the prejudices of the public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it.”

Smith sold himself short. In 1846, seven decades after he wrote, the abolition of the Corn Laws brought free trade to Great Britain, and under British influence trade barriers around the world began to fall. Although free trade suffered terrible reversals during the first half of the 20th century, it has steadily regained and extended its domain over the course of recent decades. In the agency of the World Trade Organization, its ideals-if not its full-fledged practice-are now recognized around the globe.

But Smith was certainly right to give the protectionist devil his due. Two and a quarter centuries later, popular prejudice and private interests remain formidable adversaries to the cause of open markets. Protectionism lives on in an undrainable swamp of invincible ignorance: The same tired old half-truths and fallacies are dredged up anew with each generation to serve the special pleadings of free trade’s opponents. Supporters of international competition can never claim final victory; on the contrary, they must resign themselves to unrelenting combat against bad ideas and bad policies that have, in other guises, been dispatched many times before.

Which is why the publication of Douglas Irwin’s Free Trade Under Fire is such a welcome event. Irwin, a professor at Dartmouth, is that happy exception among economists: one who writes clear, jargon-free English. In this slender volume, he reviews the gamut of current misconceptions about trade and patiently, politely dismantles the lot of them. For all those who’ve been bamboozled by one or another of the accusations now hurled against open markets, or who doubt those accusations but don’t have the facts and figures to respond to them effectively, Free Trade Under Fire has come to the rescue.

Irwin is particularly effective at addressing the meat-and-potatoes protectionism now advanced most vigorously by organized labor and the steel and textile lobbies. According to that mindset, imports are the enemy of ordinary, hard-working Americans: They threaten existing jobs and drive down wages by forcing us to compete with Third World nations where workers make only a few dollars a day. As Irwin shows, all the claims that imports reduce the total number of jobs by this much or that much are pure eyewash. Trade flows don’t affect aggregate employment one way or the other: The total number of jobs depends first and foremost on population. On that score, Irwin provides a wonderful graph showing employment climbing in tandem with the civilian labor force for the past 50 years.

Of course, there is always a gap between the number of job seekers and the number of job holders-it’s called the unemployment rate. However, as documented in another handy graph, unemployment actually tends to fall when imports and the trade deficit (the excess of imports over exports) are rising. A trade deficit, far from being a cause of economic problems, is actually a consequence of good news. As the economy surges (and unemployment falls), people have more money to spend on imported merchandise.

While trade doesn’t affect how many jobs there are, it does have an impact on the kinds of jobs people have. And that impact is decidedly positive. To understand why, it is necessary to grasp the basic relationship between productivity, on the one hand, and wages and living standards, on the other. In the protectionist view, Americans are rich because they have high-paying jobs; anything that threatens any of those good jobs — like foreign competition-is therefore a threat to our standard of living.

But this is precisely backwards. We aren’t a rich country because we have jobs that pay well; rather, jobs pay well here because we are a rich-or, more precisely, a productive-country. Because of the treasure troves of capital, tangible and intangible, that have accumulated and been invested here over time, the productivity of American labor is very high. Wages and living standards are a function of productivity. Once again, Irwin provides a chart that tells the story-one that shows labor productivity and real compensation rising in lockstep since 1960.

The effect of trade, meanwhile, is to shift resources-capital and labor-into those sectors in which Americans are relatively most productive. Less productive industries shrink in the face of foreign competition, or else improve their performance to fend off the foreign challenge. And more productive industries expand, to serve export markets as well as domestic customers. The net result: higher productivity, and wages and living standards, for the country as a whole.

It’s true that workers sometimes lose their jobs to foreign competition. And some of those displaced workers never find jobs as good as the ones they lost. That’s the hard truth: International trade creates losers as well as winners. But let’s put the downside in perspective.

Consider the American textile and apparel industry, which has been in the crosshairs of foreign competitors for many years. Irwin recounts a study of displaced textile and apparel workers in North Carolina. Of those workers who lost their jobs between 1986 and 1992, 91 percent of textile workers and 86 percent of apparel workers eventually found other jobs-somewhat below the reemployment rate of 94 percent for manufacturing industries as a whole. But while displaced manufacturing workers generally (including all those who lost their jobs for reasons other than foreign competition) experienced a 10 percent pay cut in their new jobs, former textile workers earned 99 percent of their old wages, and former apparel workers actually averaged a 22 percent pay raise.

The problem of displaced workers is real, but it is in no way unique to trade. At the heart of the market economy’s dynamism is Schumpeterian “creative destruction”-and it can get a little messy. However, most Americans understand-in the purely domestic context, at least-that the opportunities created by competition more than make up for the turmoil. Nobody sheds many tears for bank tellers put out of work by ATM machines, or receptionists laid off because of voice mail; job churn generated by technological progress is an accepted fact of life. In the end, protectionist arguments rely on a baseless double standard-that, somehow, it’s worse to lose your job to a foreigner than to a machine.

Irwin also takes on the more voguish grounds for closing markets-in particular, that international competition promotes environmental degradation and abusive labor practices. Irwin turns the tables and shows how the waste of resources caused by trade barriers includes natural resources as well. For example, agricultural protectionism works to shift farm production to countries with less favorable growing conditions, thereby encouraging the overuse of pesticides and fertilizers.

As to labor abuses, none is more heartrending than the economic exploitation of children-a grim fact of life in many poor countries. But will trade restrictions against those countries help, or simply make matters worse? According to Irwin, only about 5 percent of child labor worldwide is in exportoriented industries; poverty, not trade, is at the root of this problem. Consequently, banning imports made with child labor might make us feel good, but it’s unlikely to help the children thrown out of work. In Bangladesh, according to an Oxfam researcher, roughly 30,000 of the 50,000 children working in textile factories were fired between 1993 and 1994 because their employers feared reprisals from customers concerned about human rights. Most of those children wound up far worse off as a result-in prostitution, or dangerous jobs like welding.

There’s a great deal more packed into the pages of Free Trade Under Fire — including a thoughtful analysis of the extent of globalization, a scathing review of America’s protectionist trade laws (including the Section 201 law used recently to slam steel imports), and a sturdy defense of the beleaguered World Trade Organization. Irwin hasn’t drained the protectionist swamp-that’s a task that would have bested Hercules. But he has lent great assistance to the more realistic project of containing and ameliorating its pestilence.

Brink Lindsey is director of the Cato Institute’s Center for Trade Policy Studies. He is the author of the book Against the Dead Hand: The Uncertain Struggle for Global Capitalism (John Wiley & Sons, January 2002).