By Robert A. Vella
A major topic of discussion on this blog is the issue of free trade. I’ve been focused on cutting through its technicalities, as well as through the highly charged political rhetoric that surrounds it, in order to convey the meaningful essence of what free trade is all about and how it affects the lives of ordinary people everywhere. Judging by the responses, my posts on the subject have been reasonably successful towards that goal.
But, the following explanation by Dave Johnson of the Campaign for America’s Future is much better. He encapsulates the complex issue of free trade in simple, easy to understand language. For those who need help putting it in perspective, or for those who still have questions about the pros and cons of free trade, this is must reading. Here are a few excerpts, from What’s The Problem With “Free Trade”:
Free trade is when goods and services are bought and sold between countries without tariffs, duties and quotas. The idea is that some countries “do things better” than other countries, which these days basically means they offer lower labor and environmental-protection costs. Allowing other countries to do things in ways that cost less “frees up resources” which can theoretically be used for investment at home.
Opponents of free trade ask for tariffs to “protect” local businesses, jobs, wages and the environment from being undermined by low-cost goods from countries where people and/or the environment are exploited.
Free trade is generally sold as offering lower prices to consumers. It is also sold with claims that it “opens up foreign markets” to U.S. exporters. But it also opens up U.S. markets to imports.
It is a fact that only 5 percent of the world’s population lives in the United States. The problem is that the line of argument that opening up trade “opens markets” brings with it certain misleading assumptions. It assumes first that non-U.S. markets are not already being served by local companies. Second, it ignores that free trade also opens our own markets to others. Third, it ignores that U.S. companies already can and do sell to most of the world’s markets and vice versa. (For example, U.S. companies were already moving production to Mexico before NAFTA, the North American Free-Trade Agreement.) Suggesting that alternative approaches to trade would “close us off from trading” or “wall our economy off from the world” are ridiculous, misleading arguments.
If local companies are already meeting the needs in U.S. and non-U.S. markets, what does a trade deal really enable? Trade deals indeed “open up new markets” – for giant, predatory multinational corporations. They enable large, predatory companies that have enormous economies of scale to come in and dominate those markets, putting smaller, local companies out of business. So trade deals mean the biggest multinational companies get bigger and more multinational – at the expense of all the other companies. This includes enabling non-U.S. corporations to come to the U.S. and take over markets already served by smaller companies here.
The net result of allowing goods to cross borders without protecting local businesses is a “more efficient” manufacturing/distribution system powered by the biggest and best capitalized operations. The rest go away. Economists will tell you that these increased efficiencies allow an economy to best utilize its resources. But obviously one effect of this “increased efficiency” is fewer jobs, resulting in lowered wages on all sides of trade borders.
Economists say even this is good because when costs are lower the economy can apply its resources more efficiently and increased investment can put the displaced people to work in better jobs. But we can all see that in our modern economy that’s not what is going on. Investment in our economy is not increasing, partly because the resulting downward wage pressure has resulted in an economy with decreased demand. Fewer customers with money to spend is not a good environment for investment. Instead of these “freed up” resources (money) being used to provide better jobs with higher wages for everyone, they are instead being concentrated into fewer and fewer hands.
Economists say that free trade allows us to take advantage of the “comparative advantages” offered by other countries. A comparative advantage exists when one country can do something better than another country. For example, Central and South America can grow bananas better than the U.S., and we can grow wheat better than they can. So trading wheat for bananas makes sense.
Unfortunately, economists also say that low labor and environmental-protection costs are a comparative advantage. They say it is good for U.S. companies to take advantage of countries with governments that exploit labor and the environment, because they offer lower costs for manufacturing. (Of course, the ultimate form of such a comparative advantage would be slavery.)
Here’s the thing. Buying goods from low-wage and low-environmental protection countries means not making them here anymore. “Trade” increases, but so does our country’s trade deficit as imports rise and exports fall. Factories here close, people here get laid off, wage pressures here increase and overall demand in our economy decreases.
“Give us a protective tariff, and we will have the greatest nation on earth.” – Abraham Lincoln.
Democracy has a short-term “cost” with a longer-term gain. In countries where people have a say, the people say they want higher wages and benefits, good infrastructure, good education, a clean environment, safety on the job, and other services. These things all lead to a prosperous economy later, as long as benefits from this system are fed back into maintaining that infrastructure, education and services. This prosperous economy made America a desirable market to sell things to.
When the country and the idea of democracy were young we “protected” this concept with tariffs, so that goods from places where labor was cheap (or free) did not undermine our democracy. Those tariffs in turn funded investment in infrastructure and other common needs that enabled productivity gains that made our goods competitive elsewhere. But generally companies here served the population here and grew and prospered along with the rest of us.
At some point elites and free-market “economists” began an effort to convince us that “free trade” is a good thing and “protectionism” is not. We used to “protect” our country’s manufacturing base from being undermined by goods from low-wage countries that don’t protect workers or the environment. Then we didn’t.
“Free trade” broke down those borders of democracy. It enabled goods from low-wage countries into the U.S. with no protective tariffs. This made the low wages and lack of environmental and worker protections in some countries into a “comparative advantage” – which meant democracy
because[became] a comparative disadvantage. We stopped “protecting” American jobs, and allowed companies to freely lay off workers and close factories here and we have seen what has happened since. [grammar correction by The Secular Jurist]
Free-trade advocates claim that restoring tariffs to protect wages and democracy would start trade wars and even cause recessions and depressions. One claim they make is that tariffs helped cause the Great Depression of the 1930s. Economist Paul Krugman took on that argument in 2009’s “Protectionism and the Great Depression,” writing,
I’ve always seen this as an attempt at a Noble Lie; there’s no good reason to believe that it’s true, but it has been used to scare governments into maintaining relatively free trade.
But the truth is quite different, as a new paper by Barry Eichengreen and Doug Irwin shows. Protectionism was a result of the Depression, not a cause. Rising tariffs didn’t even play a large role in the initial trade contraction; like the spectacular trade contraction in the current crisis, the decline in trade in the early 30s was overwhelmingly the result of the overall economic implosion. Where protectionism really mattered was in preventing a recovery in trade when production recovered.
As for trade wars, economist Ian Fletcher points out in “Free Traders Can’t Name a Single Trade War“:
Trade wars are mythical. They simply do not happen.
Regarding the notion that protectionism doesn’t cause trade wars, I would say that Mr. Johnson has overstated his point. While a credible argument could assert that trade alone is not the primary cause of war, it certainly has been a contributing factor throughout history. For example, the U.S. oil embargo and other economic sanctions imposed against Japan beginning in the 1930s did hasten the December 7th attack on Pearl Harbor even though war between the two nations was probably inevitable (see: Events leading to the attack on Pearl Harbor). Johnson also failed to address the quite obvious geopolitical rivalry currently in play between the U.S. and China as a motivation to pass the contentious Trans-Pacific Partnership (TPP) trade agreement. But aside from these critiques, I think his examination of free trade is spot-on accurate and most relevant to the debate now heating up in America.