Oren Cass has fired a broadside against free trade. He accuses free traders of being not just severely mistaken, but also tendentious, in both their history and theory. This serious accusation deserves a serious response. Space, unfortunately, prevents me from addressing certain errors, especially his grievous misreading of nineteenth-century American economic history. Readers interested in sound accounts of that era can consult Douglas Irwin and Phil Magness. I show below that Cass (1) presents data carelessly; (2) fails to grasp simple economic theory and even the meaning of basic terms; and (3) misreads and misquotes economists.

Cass opens by documenting the fact that prominent modern economists, of all ideological stripes, strongly support free trade. Indeed, in Cass’s estimation, economists’ expressions of support for free trade—and of the high importance of the principle of comparative advantage—are so formulaic and frequent as to be nauseating. But as Cass then tells his readers, economists’ embrace of free trade is mindless, and their obsession with comparative advantage is of relatively recent vintage. Whether it be Milton Friedman in Chicago or Paul Samuelson in Cambridge, nearly all modern-day economists have refused to think as carefully about trade as Oren Cass. Further, these economists don’t adequately comprehend what economists of earlier generations wrote about trade. Were modern economists as attuned as Cass to the nuances of trade theory, as well as to the reservations about this theory expressed by earlier economists such as David Ricardo and Alfred Marshall, they wouldn’t be so quick to parrot rote, simpleminded assurances of the virtues of free trade.

Yet reasons to doubt the reliability of Cass’s case arise immediately. His first and chief piece of evidence that the case for free trade is unsound is America’s regular run of annual trade deficits (more on which anon). Noteworthy here is Cass’s confusing manner of introducing the topic. Writing that “US exports and imports were roughly balanced in 1992,” he reports that by 2022, US imports exceeded US exports by more than $900 billion. Cass conveys the impression that 1992 or thereabouts marked a significant turning point in the fortunes of US trade. But it did not. America’s current unbroken string of annual trade deficits—in which the value of imported goods and services exceeds the value of exported goods and services—began in 1976. This deficit swelled until around 1987, when it began to shrink. But contra Cass, it never came close to disappearing; in 1992 it was $39.2 billion, or 0.6 percent of that year’s GDP of $6.52 trillion. The trade deficit then began to swell again. Cass’s attempt to begin the assessment of trade deficits in 1992 lops off 16 years of these deficits, years that include the economically dynamic 1980s. With this maneuver, Cass better protects himself from having to answer a difficult question: If trade deficits truly harm the economy, why are Americans today so wealthy? People who reached the age of retirement in 2023 were just graduating from high school when this unbroken annual run of trade deficits began. Surely 47 consecutive years of being drained of wealth would be enough to immiserate Americans if trade deficits were truly so ruinous.

Trade Deficits ≡ Capital Surpluses

The truth is that US trade deficits are neither evidence of a faltering economy, nor a source of such faltering. Quite the opposite. US trade deficits exist because investors across the globe find America to be an attractive place to invest. Faltering economies don’t fit this bill. And foreign investors are subject to the same rules of reality as Americans. Just as Cass cannot spend all of his dollars on consumption if he wants to have dollars available to invest, foreigners cannot spend all of their dollars on exports from America if they want to have dollars available to invest in America. Foreigners wishing to invest in America, therefore, refrain from buying some American exports in order to have the dollars they need for such investment. The US trade deficit thus swells.

That global investors continued, for almost a half-century, to invest in a tanking American economy is a mystery. The mystery is solved by recognizing that, because no one intentionally invests in places that are tanking, the American economy is actually doing quite well, at least as judged by global investors.

Cass will demur. He’ll remind us, as he does in his essay, that the productivity of American manufacturing workers has declined since 2012. He wants us to think that this falling productivity results from America’s ongoing annual trade deficits. But when we look at a longer picture, his case collapses. While dipping during recessions, the productivity of American manufacturing workers steadily increased from the end of WWII until 2012; it neither stopped nor even slowed when America’s run of annual trade deficits started in 1976. In fact, in the 1980s, its rate of growth slightly rose. The non-recession-years decline in productivity began only in 2012, 36 years after America’s unbroken string of trade deficits started. Cass blames the recent stagnation of manufacturing-worker productivity on trade deficits, but his argument fails the smell test.

Cass reveals his misunderstanding of international financial accounts in two other places in his essay. One is where he writes—referring to the accumulated annual trade deficits since 1992—that “since 1992, the United States has accumulated $15 trillion in trade debt.” Untrue. A deficit in goods and services trade is not synonymous with an increase in debt. If a Dutch exporter uses dollars to buy land in Texas or corporate shares on the NASDAQ (or simply holds the dollars as cash), this transaction obliges no American to repay anything to anyone. America’s trade deficit rises but Americans’ indebtedness does not. 

Cass will respond that in this example Americans bought imports with assets—a transaction, Cass assumes, that makes Americans poorer. But, again, he errs. The amount of capital—of productive assets—isn’t fixed. It can shrink or grow. When foreigners invest in America, the general effect is to increase America’s stock of capital. The effect could be otherwise, and would be if Americans spent on consumption all dollars earned on sales of assets to foreigners. But these dollars can also be invested in ways that increase both the stock of capital in America and Americans’ net wealth. As it happens, many of these dollars—along with foreigners’ dollars—are indeed invested in this productive way, as attested to by the steady growth over the decades in the real stock of capital in America, and by the rising net worth of American households, which is today at an all-time high. (Using the Personal Consumption Expenditures Price Index to adjust for inflation the nominal-dollar measure of US household net worth, I find that in 2019 the total real net worth of American households was 87 percent higher than it was in 1999, the year when the so-called “China Shock” began. But because in 2019 there were 25 million more households than there were in 1999, a more revealing figure is the average household’s real net worth. In 2019, the average real net worth of an American household was 46 percent higher than it was 20 years earlier. I chose 2019 to avoid the inflation of asset values created by incontinent pandemic spending and monetary policy.)

These data are impossible to square with Cass’s assertion that US trade deficits either load us Americans with greater debt or divest us of assets. In fact, US trade deficits—because they are the necessary consequence of net inflows of capital to America in a world in which the capital stock can and does grow—sustainably raise ordinary Americans’ standard of living. Not only do American imports increase our access both to consumer goods and to inputs for production here at home, the investments made in the US by foreigners help to keep the productivity of American workers and businesses higher than it would be if these investments were fewer.

Cass’s confusion over the balance of trade is further displayed in his complaint about America’s trade deficit with China.

In a world of more than two countries, there’s no reason whatsoever to suppose that any pair of countries will have “balanced” trade with each other. Every country could have neither a trade deficit nor surplus with the rest of the world yet still have so-called trade deficits and surpluses with several individual countries. America’s “trade deficit with China,” therefore, tells us literally nothing about the condition of either country’s economy, the nature of either country’s trade policy, or, indeed, about either country’s overall balance of trade.

I advise students, when they encounter anyone talking seriously about one country’s trade balance with another country, immediately to conclude that that person does not understand trade. That Cass sees meaning in the fact that Americans import more from China than they export to China is alone sufficient to disqualify him from pronouncing on trade-related matters.

Cass on Past Economists on Trade

Cass is equally confused about the history of economic thought on trade. He’s correct that David Ricardo, when long ago explaining how comparative advantage creates gains from trade, assumed that capital is internationally immobile. But Cass incorrectly infers from this fact that today’s greater international mobility of capital reduces or even eliminates these gains. This misunderstanding of the case for free trade isn’t unique to Cass; protectionists regularly fall for it given the prominence of Ricardo’s work in justifying free trade. Years ago, I addressed this misunderstanding. 

Another of Cass’s confusions arises with his reference to F. A. Hayek’s alleged “promise” that free trade would achieve (quoting Cass quoting Hayek) the “necessary balance … between exports and imports.” Because a country that runs trade deficits imports more than it exports, Cass scores Hayek’s case for free trade as faulty—as a “broken promise.”

But “balance” doesn’t mean “equality.” Hayek of course knew that international investment flows are real and that they break what would otherwise be a necessary equality between imports and exports. It’s wrong, therefore, to interpret him as “promising” that free trade guarantees that the value of a country’s exports will always equal the value of that country’s imports. The balance to which Hayek referred isn’t an equality between the value of exports and imports. Hayek meant, instead, that the market process connects exports to imports in a predictable manner: if imports fall, so too will exports. (And so you protectionists, beware of your misguided schemes to reduce the trade deficit by restricting imports.)

Cass stumbles also in attempting to portray the great Cambridge economist Alfred Marshall as uncommitted to a policy of free trade. Cass’s first misstep here is inferring significance in Marshall’s failure to mention comparative advantage in his hugely influential Principles of Economics, first published in 1890. Cass aims to convince readers that it wasn’t until the twentieth century that economists, overwhelmed by an itch to concoct a case for free trade, began paying serious attention to comparative advantage. (Cass clearly hasn’t read his J. S. Mill.) But Marshall’s Principles says very little about international trade generally. Being the first of two intended volumes, it was thought that Marshall would turn in the second volume to more policy-oriented subjects, including international-trade policy. Unfortunately, no second volume appeared.

Cass further stumbles by quoting Marshall’s objections both to economists who hewed too strictly to Ricardo’s very abstract manner of doing economics, and also to non-economists who used classical economics to advance policy agendas. Marshall did indeed reject the airy abstractions of Ricardian theorizing, but this fact hardly means that he rejected everything about Ricardo’s economics, including comparative advantage. (Because comparative advantage is ultimately just arithmetic, Marshall can hardly have done so.) As for Cass quoting Marshall’s line in a footnote about “many hangers on of the science,” that footnote is not in any way about international trade. In it—note the irony—Marshall bemoans tendentious attempts by non-economists to use economics to further their policy goals.

If Cass were really interested in what Marshall thought about free trade, a tad bit of research would have led him to H. W. McCready’s 1955 Journal of Political Economy paper that contains revealing correspondence from Marshall. In this 1903 correspondence, Marshall makes clear that, while he accepted the validity of some theoretical exceptions to the case for a policy of free trade, he didn’t believe that these abstruse points created a practical case for protectionism. Marshall comes out firmly in favor of free trade and opposes even retaliatory tariffs as being too likely to lead to unwarranted levels of protection. Further research by Cass might have also alerted him to Doug Irwin’s 1991 Journal of Economic Perspectives article in which Irwin writes that “despite the outpouring of theoretical work on tariffs using the analytical tools he had developed, Marshall was convinced that the reintroduction of tariffs in England would ‘be an unmixed and grievous evil.’”

As with all of Cass’s attempts to discredit the case for free trade, his suggestion that Alfred Marshall was not a strong supporter of a policy of unilateral free trade falls beneath the facts.

Cass’s fulminations against free trade, being delightfully written, likely persuade many people unfamiliar with economics that the case for free trade is bogus. If, however, Cass wishes to productively engage knowledgeable scholars about trade, he’ll need to learn more economics.