The Free Trade Heretic

Ha-Joon Chang is an award-winning Cambridge economist whose new book, Bad Samaritans, explodes what its subtitle calls ​“the myth of free trade.” At a time when Democrats are bashing NAFTA and Republicans are championing a NAFTA-style free trade deal with Colombia, 

Chang shows how the entire debate over trade has divorced itself from history and economic reality. Phrases like ​“free trade,” in fact, are misnomers unto themselves, leading the world into a globalization debate whose basic premises are inaccurate.

But that’s not all that is inaccurate. Chang says that while the media and political elite lead us to believe industrialized countries achieved their wealth by eliminating tariffs, history suggests it’s exactly the opposite: The strategic use of tariffs is precisely what built the industrialized world into an economic powerhouse. Bad Samaritans shows that wealthy countries’ demands on poor countries to reduce tariffs is a way to keep the developing world in a subservient role – or a means to ​“kick away the ladder,” as he puts it.

But the brilliance of Bad Samaritans doesn’t derive solely from its forceful arguments or irrefutable history, but also from its conversational style – a rare quality in the esoteric world of economics. Not geared toward the academics, pundits and elites whose propaganda has polluted the globalization debate, Chang’s book is for the rest of us who are getting screwed by unfair trade policies.

Bad Samaritans claims that most trade ​“experts” ignore the history of trade policy in building up industrialized countries. Specifically, you assert that protection and tariffs – not free trade – have always been a cornerstone of any successful industrial policy. Why do you think these experts ignore this history?

First of all, there is the power of ideology. There is no reason why even the mainstream neoclassical economists should support free trade. However, allegiance to free trade has become the union card for ​“kosher” economists. 

Even economist and New York Times columnist Paul Krugman, who made his name by building mathematical models showing the limits of free trade, had to cover himself by emphasising that, despite his models’ conclusions against free trade, he does not actually recommend government intervention because we ​“cannot trust the government.” This prompted the Chicago economist Robert Lucas to ask ironically why, then, Krugman bothered to build those models in the first place. 

Secondly, there is the influence of special interests. Having built their whole careers advocating a certain worldview, free-trade economists have a lot to lose if they admit they have been wrong – even if faced with contrary evidence. Also, when you advocate ideas that serve powerful interests, you get more research grants, invitations to more prominent public forums, higher lecturing fees and more air time and column inches.

Then there is the sheer power of numbers. When 99 percent of economists believe in free trade, it is easy to pretend that the 1 percent does not exist or that they are incompetent. With their numerical advantage, free-trade economists can always assert that professional consensus is on their side. Of course, if the numerical majority was always right, the sun would still be going around the earth and the earth would still be flat.

As world populations become angrier and angrier with current trade policies, could the field of economics change from its current free-trade orthodoxy?

Let’s not forget that in much of the world for much of the time, free-trade theory was not an orthodoxy, even in economics. It was the orthodoxy in the late 19^th and the early 20^th century in Britain and its sphere of influence – but elsewhere, it was not the orthodoxy. Even during that time, protectionist theory was the orthodoxy in the United States, Germany and many other countries. In the 1960s and ​’70s, in much of the developing world, free-trade theory was discredited because people there had seen how free trade imposed on them by imperialism prevented their economic development.

The current dominance of free trade is overwhelming, but it won’t last forever. Free-trade policy of the last quarter of a century has failed to deliver the prosperity that it had promised, and too many of its ​“losers” have not been compensated for their sacrifices. An increasing, although still small, number of mainstream economists are coming out against free trade (Nobel Prize winner Joseph Stiglitz being the most prominent example).

Economics is not a science like physics or chemistry, where if a theory becomes an orthodoxy, nothing short of a scientific revolution will dislodge it. If public opinion changes and the world changes, the economics profession can, and will, change – although with a time lag, given the tenure system. 

Do you think the terms of the trade debate – free trade vs. protectionism – accurately portray the debate?

I agree with the spirit behind that question. In the present atmosphere, once you say anything positive about protectionism, people dismiss you as a supporter of North Korea or Cuba.

The reality is that few countries practice pure free trade or pure protectionism. Most countries practice free trade in some areas and protectionism in others, with varying mixes across countries. This is basically because policy-makers instinctively understand that different sectors have different needs – sectors that are just emerging or in decline need more protection and subsidies in the same way that children and the elderly need more support than able-bodied adults do.

If no one listens to the lessons of your book and the industrialized countries continue to push their current trade policies, what will be the results?

The result will be the persistence of slow growth and income inequality in developing countries. We have seen this in the last 25 years of free-trade orthodoxy. Don’t forget that the developing countries used to grow at almost double the rate in the ​“bad old days” of protectionism in the 1960s and ​’70s, compared to the next two decades of trade liberalization. Inequality has also grown significantly in many countries in the last 20-to-25 years.

While growth has picked up in some developing countries in the last few years, this was largely because some resource-rich developing countries have benefited from the enormous demands generated by China and, to a lesser extent, India – two countries that, while gradually liberalizing, definitely have not used the free-trade policy recommended by the orthodoxy. 

If current free-trade deals are so bad for developing countries, how come so many of them – or at least their governments – agree to them?

There are a lot of people in developing countries that would benefit from free trade. Brazilian cattle ranchers, like the American cotton plantation owners of the South in the 19^th century, would be delighted if they could export their beef freely to the United States and import consumer goods freely from the United States, Japan or Europe. When these people control the government, developing countries will support free trade.

And some countries are simply desperate. Many small Central American countries feel that they do not have the luxury of promoting their own industries. If they can increase their exports to, say, the United States, even by a little bit, by signing a bilateral free-trade agreement, it does not matter in the short run if their industries die. 

Of course, in the long run, these countries may have benefited from infant industry protection, but their poverty compels them to look for short-term solutions.

And then there are people who advocate free trade for ideological reasons. True, these people may personally benefit by being able to buy cheaper, higher-quality imported consumer goods, but it is not as if they own some business that will benefit from free-trade policy. However, these people still support the policy because they are ideologically convinced that free trade is good for their country.

Democrats have been criticized for advocating only a halt of our current trade policy, but not having any ideas moving forward. What does an alternative trade policy look like?

I think the trade policy advocated by the Democratic candidates is very regressive. It’s about preserving the status quo and trying to reduce imports by raising non-tariff barriers – such as labor standards – rather than raising American productivity. It is trying to increase exports by forcing other countries – especially developing countries that have weak bargaining power – to open their markets more. 

A more progressive strategy would accept that the United States should keep its markets reasonably open but that it should be done through upgrading its industries, instead of trying to defend the industries that it has today. Some industries may need to be protected for a period in order to help them restructure, but in the long run, any threat to American jobs and living standards should be dealt with by industrial upgrading. 

This is good for the United States – which becomes more productive – and for developing countries, which can increase their exports in more productive industries and thus upgrade their economies.