Facing the truth about trade

In October 2010, the EU and South Korea celebrated conclusion of a bilateral Free Trade Agreement between themselves. This was widely hailed as another major step along the way to complete globalization, and American policy makers hurried to avoid losing out on trade goodies by quickly negotiating a similar deal that was just concluded in March, 2012.

But wait. Now it seems that the E.U.-Korean deal didn’t flatten the world after all. Reuters reported this week that France has asked EU officials to request that Korea give advanced warning of planned car exports to the European markets. This is the first step toward possible reintroduction of tariffs on car imports. It comes in the face of a contracting European auto market, rapidly rising European unemployment, an announcement by Peugot of major factory closing plans that will result in extensive layoffs of workers, and a 34 percent surge in imports from Korea in the wake of the Free Trade Agreement.

This is not really surprising. Anyone who thought the FTA would produce free trade in autos had to be daft. Look, the governments of both the EU and Korea have been heavily involved in the development and preservation of their auto industries from the beginning. At various times they have been investors in their auto industries. These industries are in the too big to fail category and are thus politically sensitive. For these and other reasons they will not have free trade no matter how much negotiators might wish that they will.

Yesterday, the Financial Times ran a full page article on the global aircraft industry, emphasizing that China’s fledgling aircraft industry might be the one that will eventually break the duopoly of Boeing and Airbus. The article cited two reasons for thinking that China’s Comac might succeed where so many others have failed. One was the willingness of the Chinese authorities to spend whatever is necessary to become a world class aircraft producer. The other was the fact that China itself will be the biggest single market for aircraft over the next decade or so and is likely to buy Chinese wherever possible.

Of course, China is a member of the World Trade Organization (WTO) and as such nominally committed to free trade – except where it’s not. Nor should we single out China. Boeing and Airbus did not result from some immaculate conception. Both have been and are the object of substantial government protection and assistance in a variety of ways.

The truth is that free trade is impossible in a wide variety of industries characterized by capital and technology intensity, economies of scale, oligopolistic structures, cross border investment, high costs of entry and exit, sensitivity to exchange rate fluctuations, and close connection to national security objectives and/or to national pride. It is impossible under these conditions because they violate all the key assumptions of neo-classical free trade doctrine.

We really need to stop peddling free trade fiction and start facing the truth about globalization.