Beyond Free Trade

The American Conservative takes on vulgar economism.

Certainly the world looks very different from Tokyo, not least because East Asian leaders are convinced that, in its ever more heedless commitment to laissez faire, the United States is digging its own grave. But of course, East Asians are discreet people and, short of being waterboarded, they are unlikely to ever offer a frank opinion on an American mindset that happens to have done so much to transfer industrial leadership to East Asia.

It has long been obvious to Tokyo-based observers that, where trade is concerned, the world is divided into two economic camps—on the one hand, nations that generally run a trade surplus and on the other those that run chronic deficits. The United States, of course, now ranks as the all-time champion in the latter camp, but it shares its heedlessness with most of the English-speaking world, including the United Kingdom, Ireland, Australia, New Zealand, India, and Pakistan.

By contrast, nations that generally run surpluses include not only virtually all of the East Asians, but Germany, Sweden, Austria, Switzerland, the Netherlands, and other rich European nations.

April 2011 coverLargely overlooked in the Anglophone media, the two camps are polar opposites in several policy matters, most obviously their approach to exchange rates. Anglophone nations have generally taken pride in strong—i.e., overvalued—currencies and have rushed to the barricades when threatened with depreciation. (This mindset was epitomized most absurdly by the “defend the pound” antics of a sickly post-imperial Britain in the 1960s and 1970s.) In contrast, the surplus nations have rejoiced in low exchange rates.

To be sure, the United States recently has undergone a partial change of heart with respect to the Chinese yuan. But U.S. policymakers still show little interest in securing competitive exchange rates for their exporters against the Germans, the Japanese, and the Koreans.

The dichotomy in mindset between surplus and deficit nations raises many questions. Why, for instance, do Anglophone economists win so many Nobel Prizes and their peers in such robust surplus nations as Japan, China, Korea, and Germany so few? And, conversely, why are Japanese, Chinese, Korean, and German exporters so much more effective than their American and British counterparts in world markets? The answers will wait for another time, but it is a fair bet that there are more things in heaven and earth than are dreamt of in American economics textbooks.

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