Would you like to know why we’ve lost millions of middle class jobs over the last 30 years and endured annual trade deficits of more than $500 billion for 15 years? Would you like to learn what we can do to right the ship? Then, buy, read, study and refer to “Free Trade Doesn’t Work: what should replace it and why” by Ian Fletcher. It ranks in my top five books on economics. It’s that good! The title makes bold claims; the content delivers.

In his effective 267 pages of text, Ian Fletcher dissects and often demolishes fundamental teachings about the benefits and risks of trade and replaces them with evidence based updates.  He then recommends a practical alternative based on clear objectives. He wastes no time on polemics or blame as he provides easily understood and well documented evidence sprinkled with stimulating analogies to support his thesis. He displays a refreshing and sensible appreciation of how we got ourselves into this unsustainable mess and why so few economists speak out against conventional wisdom, even though most of them probably know better.  His clear and simple explanations of complicated issues remind me of an old axiom: “The better you understand something, the more simply you can explain it.”

Free Trade Doesn’t Work has three sections: The Problem in which we are mired, The Real Economics of Trade in which evidence and history contradict the prevalent mythology and The Solution a relatively simple but politically controversial alternative to Free-Trade that has been successfully practiced in disguised forms by the Japanese and Chinese, among others.

The Problem section describes our stumbling embrace of free trade without a strategic objective. Its causes are multi-dimensional but include short-term gratifications and fallacious beliefs about the automatic benefits of trade and its natural corrective mechanisms. One of the most telling symptoms of the problem is a chronic US trade deficit, clearly illustrated by a chart on page 40 (Annual U.S. Trade Balance in Billions from 1960-2008) which shows that USA had tiny trade surpluses until 1978 and substantial annual deficits thereafter. From 1998 until 2008 those deficits ballooned from $100 billion to over $700 billion each year, paid for by money borrowed from abroad and by selling over $3.5 trillion of US properties to foreign interests! Fletcher clearly explains how those deficits matter today and in the not-so-distant future.

The Real Economics of Trade section is a valuable contribution to any discussion of economic theory and history.  It starts by uprooting and severely pruning a basic myth of free trade advocates: the theory of Comparative Advantage first developed by David Ricardo in 1817. Ricardo described comparative advantage with this example:  since Portugal is better at producing wines and Britain is better at producing textiles, then Portugal should export wines to Briton and import textiles. It sounds reasonable, is still taught in various guises as economic gospel and is as fallacious as Aristotle’s teaching that the heavier something is, the faster it falls. In demolishing this quaint theory by exposing and then refuting with evidence eight unstated assumptions behind it, Fletcher deftly plays Galileo to Ricardo’s Aristotle. One of the most obvious pieces of evidence is the relative economic development of Portugal and Britain in the 100 years after Ricardo; Britain flourished and Portugal didn’t. Fletcher explains what caused this divergence in trade’s benefits and how that divergence relates to our own economic malaise.

In Britain, the textile industry produced and funded a community of skills, including machine building, construction, scientific experimentation, and education which created vital infrastructure and new industries like railroads and modern shipbuilding. Portugal’s wine industry neither induced nor funded new technologies, and so Portugal was strategically impoverished by trade.  In our country the ante-bellum South, which was richer than the North in 1800, exported cotton, sugar and tobacco produced on plantations staffed by cheap slave-labor, which brought increased wealth to a few but didn’t produce new technologies. By the 1850’s it had fallen way behind the North’s industrial development, diversified technologies, sustained growth and greater wealth.

The following excerpt illustrates Fletcher’s tone and reasoning about comparative advantage:

“Absolute advantage is really the natural order of things in capitalism and comparative advantage a special case caused by the existence of national borders that factors of production can’t cross. Indeed, that is basically what a nation is, from the point of view of pure economics: a part of the world with political barriers to the entry and exit of factors of production. This forces national economies to interact only indirectly, by exchanging goods and services made from those factors, which places comparative advantage in control. Without these barriers, nations would simply be regions of a single economy, which is why absolute advantage governs economic relations within nations. In 1950, Michigan had absolute advantage in automobiles and Alabama in cotton. But, by 2000, automobile plants were closing in Michigan and opening in Alabama. This benefited Alabama, but it did not necessarily benefit Michigan. (It only would have if Michigan had been transitioning to a higher-value industry than automobiles. Helicopters?) The same scenario is possible for entire nations if capital is internationally mobile.

Capital immobility doesn’t have to be absolute to put comparative advantage in control, but it has to be significant, and as it melts away, trade shifts from a guarantee of win-win relations to a possibility of win-lose relations. David Ricardo, who was wiser than many of his modern-day followers, knew this perfectly well. “ (p 110)

Fletcher traces the history of trade from 19^th century to the present and accurately points out that Britain didn’t practice free trade during its heyday. I would add that China does not practice free trade today and is flourishing while the US practices it and is languishing. Nations which benefit strategically from trade protect domestic industries. When they abandon trade barriers, as Britain did in the 19^th century, they lose vital infrastructure and their economies weaken. Economic vigor, like genetic vigor, requires diversity; a diversity of skills, capital and technologies managed within the borders of a country. Free-trade tends to simplify economic and technical diversity within a nation in exchange for short term profits. It creates over-specialized economies which are intrinsically weak and unsustainable.

Fletcher points out that the international laws and agreements as well as global corporations promoting free-trade also undermine any nation’s ability to manage or even influence its own economy, and ultimately its ability to govern itself. These agreements are made in secret by un-democratic institutions (like the WTO) and in the long run are contrary to democratic governance.  The following description of International Law illustrates Fletcher’s use of familiar analogies to explain abstract and poorly understood economic and legal concepts. It also begins to explain why free-trade within a nation benefits the nation, but free trade between nations impoverishes some or all of them.

“American efforts to negotiate reasonable trade agreements are handicapped by the fact that some American politicians have an unrealistic idea of international law. International law is not like ordinary civil law because there exists no sovereign to compel the obedience of nations. Instead, it is analogous to the rules of a game of stickball being played by children on a vacant lot: its rules only mean anything insofar as they are enforced by the players on themselves. Obviously, as in the case of stickball, the players will enforce certain rules because that is the only way they can have a game. So international law is not a completely vacuous concept, as some cynics suggest. But the players also won’t enforce any rule grossly to the disadvantage of any particularly powerful player. This means that the Anglo-American legal framework Americans tend to take for granted simply does not exist, and therefore that a trading model based upon neutral and consistent enforcement of legal obligations is not feasible. There is no way to take power politics out of trade, which means that there is no way to leave everything in the hands of a neutral and rational free market once we construct the right international legal machinery. “  (p 179)

The Solution section first answers a critical question: what is necessary in the way of industry and infrastructure for a nation to produce and sustain economic growth? Classical economists and free-traders don’t answer this question and have left us blindly stumbling into an uncertain future. An operational answer to this question provides a concrete objective for economic policies and something with which to measure their success or failure. The gist of Fletcher’s answer is this: growth is produced by an adequately diverse, interactive, symbiotic, robust, cohesive, adaptive community of resources and systems within a nation which drives increasing complexity and the creative destruction of less valuable alternatives. [i]

The next question Fletcher answers is: what practical and sustainable trade policies would foster the desired outcome? His answer is deceptively simple: a flat tax on all imported goods and services. He calls it a Natural Strategic Tariff. I cannot do justice to the systematic way in which he supports this solution or to the powerful and subtle ways it would maintain our economic vigor or to his cogent arguments against more selective forms of protectionism. They are all worth careful study.

When I first read his solution, I was skeptical. However, I’ve come to agree with him after analyzing alternatives, run through what-if scenarios and reviewing how other nations, like China and Japan, have successfully used it in thinly disguised ways. The only nit I can pick with his solution is its name, because transportation costs, relative health and safety requirements, and currency manipulations are also parts of every nation’s Natural Strategic Tariff; some being negative tariffs which a flat tax must more than compensate for on average.