Global Trade, Trade, International, Production, Trade, Free Trade, Free Trade Agreement, Free Trade Zone, pros and cons, NAFTA

Modern Free Trade is Out-Dated

The Brood: Free Trade. Proponents say its excellent for creating wealth, preventing war, and promoting cultural exchange. But blue collar backlash throughout the western world has provoked a major re-think. What is free trade, where did it come from, and do we need to change it?

First put together into an articulated theory by Adam Smith and David Ricardo in the late 18th and early 19th century, free trade can be summarized as the idea that countries ought to specialize in what they are good at producing, and then trade with one another without any taxes on imports or exports. (If economics isn’t your thing, check out this crash course in economics, or listen to this comically white man explain free trade to you.)

Adam Smith, David Ricardo, free trade, free trade agreement, free trade zone, pros and cons, history, 19th century, specialization, comparative advantage, theory
Adam Smith and David Ricardo, pioneers of the theory of free trade. Or, as the leftist kids these days might say, the OG neoliberal shills. (Image Source)

Since it sprang into the world as an idea, free trade has caused arguments. In fact, you could argue the American Revolution was fought in favor of free-er trade because American merchants were prevented from selling their goods abroad. Even after victory, it still caused arguments. Thomas Jefferson argued for free trade, with America specializing in agricultural products, and Alexander Hamilton argued against free trade for an economy based on manufacturing.

Thomas Jefferson, Alexander Hamilton, Free Trade, Yeoman Farmer, Industry, Trade Policy, Free Trade, Free Trade Agreement, Pros and Cons, Free Trade zone, 18th century, 19th century
Thomas “We Should Only Ever Make Cotton and Tobacco” Jefferson. (Image Source)

As the award winning musical reminded us, Hamilton won out. So whose policies brought back free trade? Complicated question. Ironic answer? The Soviet Union. Facing down the Soviets, we rewarded our Cold War allies with relatively unimpeded access to our domestic markets. As JFK told the AFL-CIO in 1963:

“…More absolute [trade] protection… [risks] driving potential trading partners into the arms of the Soviets, denying competitive prices to our consumers and industry, and shutting off… export markets…”

Short term, this was a great idea, creating enormous amounts of wealth in the decolonizing third world countries, especially in countries like Germany, Japan, and, later, China. These countries gained access to the excess cash of consumers in the United States, the world’s largest market. This pulled them into the US orbit during the Cold War.

Communism, Communist, Socialist, Communist Party, t-shirt, Marx, Lenin, Castro, Mao, Stalin, trade, free trade, global trade, protectionism, free trade, pros and cons
Communists: so scary, we had to open up our capitalist markets as wide as possible. Enjoy this ironically commercial t-shirt design designed for mass consumption! (Image Source)

In the long run, things got more complicated. Starting under Carter and Reagan, these policies started to have a harmful effect on American industry. Instead of adjusting, neoliberals doubled down, convinced the future was in cheaper consumer prices and new technologies. The result was greater economic growth, but since gains from free trade weren’t passed down to workers, it was growth decoupled from income.

When economic growth, job growth, and income growth don’t work hand-in-hand, inequality grows. That’s mainly because as companies export jobs and their supply chains to cheaper labor markets, more things get made, but less people have jobs. When less people have jobs, there’s less money to buy things, and more reasons to save for an uncertain future. When there’s less money for consumption, there’s more money in the bank. When there is more money in the bank, there’s more to invest. When there’s more to invest, but no one is buying, investments go bust.

House Bubble, 2008, 2007, Great Recession, Investment, trade policy, free trade, stagnant wages, blue collar, employment, unemployment, income
You can see how our trade policy contributed to the stagnant wages, declining blue collar employment, and rising saving rates. That, in turn, could contribute to something like the 2007-2008 Housing bubble that played such a large role in the Great Recession. (Image Source)

Countries around the world that either bought into, or played a supporting role in this form or economics, or the “Washington Consensus”, have since suffered increasing inequality. Some countries have fared better, though. In his book, Land of Promise, Michael Lind points out:

“American industry contributed to its own problems. […] The bitterly adversarial tradition of US labor-management relations made it hard for the United States to compete against Japanese companies with their paternalistic labor relations and against German companies in which codetermination by managers and workers was part of the law.” [p.371]

That is to say, Japan and Germany have labor systems in which there is a commitment to constructive negotiation between labor, management, and government, instead of the union-bashing of the last several decades seen in the US.

Unions, Union membership, middle class, income, trade, free trade, income inequality, aggregate income, chart, graph
When there isn’t a force to balance out a company’s profit-motive, incomes tend to stagnate or shrink. (Image Source)
So, what can we do?

As I see it, we have three (not necessarily mutually exclusive) options:

  1. To bring back American industry, we could re-invent, or adapt this labor-management-government relationship dynamic in the US, and impose higher standards on the rest of the world, which is what the TPP tried to do. That is to say, we get back in the export game by increasing wages for American workers while leveling the playing field globally in terms of the cost of doing business.
  2. We could ignore industrial jobs and transition into a post-industrial society, focusing not on high-value added goods like mass manufactured electronics (China has long assumed this role in the world) , but on high-value added services in education, medicine, arts, and technology. For the unemployed, a universal basic income, government education subsidies, and publicly mandated corporate apprenticeship programs would provide both security and job prospects. That is to say, we capture the economic gains from free trade and redistribute them through taxes and government programs.
  3. We can bring back protectionist policies aimed at encouraging domestic manufacturing again, of both low (coal) and high (electronics) value products. This is along the lines of what President Trump wants to do, but it is likely to provoke a trade war with global trade titans such as China. We abandon free trade entirely, and forge a brave, terrifying path through potential global conflict by protecting key industries here at home that can’t compete abroad to create jobs.

All of these models will have to account for structural unemployment which will rise over the next few decades due to automation. We’re in a unique position without historical precedent, so our generation has to tackle the question of whether free trade, or some other, new model is best for our times. The answer is anything but simple.

Should we continue to pursue a free trade model? If yes, why and how? If no, why and what model would you replace it with? Do you agree with my three options, or do you know of alternatives? Comment and share your thoughts!
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Written and edited by Dylan Welch, co-host and creator of the Municipals podcast.


One thought on “Modern Free Trade is Out-Dated

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