When free trade isn't fair

Washington Post columnist Steven Pearlstein wrote an interesting piece last week that makes you think about U.S. trade with China, and whether free trade always makes sense.

The focus is on Intel Corp.'s plans to build a $2.5 billion chip fabrication plant in Dalian, China. Nothing surprising about that, right? After all, a lot of manufacturing is moving to China, the result of cheaper labor costs and the opportunity to serve a growing market in Asia. But it's not that simple.

It would be one thing if the Chinese had developed the capacity to make advanced microchips on the basis of their own investment and ingenuity. But it is quite another when the technology for the chips and chip production has been created by American researchers and American companies, and transferred wholesale to a developing country that makes no secret of its intention to use that knowledge and experience to improve its own industry.

By what reasoning is this a net plus for an American economy that is supposed to prosper in this globalized world on the basis of its high-tech know-how? Can you really say that, in such a high-value-added industry, the lower cost of imported computer chips will offset the foregone economic output -- jobs and profits -- that Intel's move entails?

As it turns out, the reason it will be cheaper for Intel to make those chips in China has little to do with lower-cost labor. That's because chip factories aren't particularly labor intensive. In fact, a study by the Semiconductor Industry Association found that 90 percent of Asia's cost advantage over U.S. production is attributable to government subsidies and tax breaks. In the case of Intel's new plant, I'm reliably told that those subsidies amount to about $500 million. That's a sum well beyond anything available to Intel in the United States. And it hardly fits into any common-sense notion of free trade or fair and open competition.

Pearlstein chalks it up to strategic trade, a move by one country to subsidize a portion of its economy because the short-term cost will be worthwhile over the long term. Other examples of strategic trade include keeping the value of currency artificially low in order to stimulate exports.

The U.S. uses strategic trade too -- we've got agricultural subsidies, for example, and large chunks of our economy are reserved for U.S.-based defense contractors. But Pearlstein argues that U.S. citizens are catching on to the fact that what passes for free trade these days isn't necessarily free, and some sectors of the U.S. economy are suffering.

Contrary to what you hear from editorial writers and other free-trade ideologues, it is not "protectionist" for the United States to impose countervailing duties on imports from a country that subsidizes exports and keeps its currency pegged to the dollar.

It's not "anti-business" to toss out a tax code that encourages multinational corporations to invest overseas and replace it with one that gives tax preferences to companies that create high-value-added jobs in the United States.

And it is not "class warfare" to raise taxes on those who have benefited from globalization to pay for health care, wage insurance and retraining of workers who have lost their jobs as a result of globalization.

There is a reason that, when it comes to trade and globalization, more Americans believe Lou Dobbs than Hank Paulson and Ben Bernanke -- and it's not because they've been bamboozled. The reason is that Americans perceive, correctly, that in recent years liberalized trade has not delivered as promised, that education alone is not the answer, and that neither party has come up with economic policies as tough and effective as China's.

Trade issues are being debated in Washington right now. This column covers an interesting slice of the debate. I'm curious about how plastics industry readers see the debate, and whether their point of view differs depending on whether they view their company as a U.S. or a global firm.