Free Trade May Be On Its Way Out

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Free Trade May Be On Its Way Out by George Friedman, Mauldin Economics

The controversy over the Trans-Pacific Partnership has grown in the US. Right now, both presidential candidates oppose it.

Donald Trump opposes most multinational agreements, including noneconomic ones. He believes they do more harm than good.

Some think these treaties put poor countries at a disadvantage. Others say they transfer jobs to low-wage countries. This enriches multinational corporations but hurts local workers.

The question of free trade has become a pivotal issue… one that transcends ideology.

The argument for free trade

The idea that free trade (trade without tariffs or regulation) is better than protectionism has dominated since WWII. Bilateral and multilateral free trade agreements have risen since then.

The issue is whether it is still reasonable.

The best argument for free trade was made by David Ricardo in the early 19th century. It was based on the theory of comparative advantages. It assumed that every nation had at least one product in which it had some edge over other countries. Focusing on this industry would maximize the nation’s income.

Plus, free market gives you access to a wider range of goods at lower prices. So, opening your own market has perks—even when you don’t sell anything.

This is a solid argument in theory. The problem is reality.

Most nations, including the US, took protectionist steps prior to WWII.

The surge in the American economy after the Civil War moved it into the top tier of global economies.

Some have said that the US would have surged further without tariffs. That is doubtful. At most, they made no difference. But I’m certain they were vital to growth.

The problem with free trade

The argument for free trade has several problems.

First, in order to trade, you must make products that others need. If your markets aren’t protected, more advanced countries will offer better quality products at lower prices.

As a result, you’ll be unable to develop industry or purchase even low-cost goods. This, in turn, prolongs underdevelopment and poverty.

A protectionist policy is a must as a nation begins its industrial revolution… or else that revolution fails. The US did this in the 19th century.

But today’s free trade agreements lock out poor economies, and lock in advantages to advanced economies. This is the left-wing argument.

The (surprisingly) right-wing argument is that free trade doesn’t work when booming emerging economies like China take advantage of temporary low wages and their own protectionism. These developing countries use free trade to destroy some sectors in advanced countries.

So it is possible for both sides to be right.

In the short run, free trade could wreck a certain economic segment. In the long run, this might be resolved. The wealth of nations might grow… but it might not grow equally. And time and the distribution of benefits pose a political problem.

The politics of free trade

“Political economy” was a term used by classical economists like Ricardo and Adam Smith. This was not loose terminology.

Both understood that political agreements—such as creating corporations—are a catalyst for growth. They also knew that a nation is not a homogenized whole. Growth without distribution will fail.

Assume that free trade would create a 20% annual growth rate in a country but would ruin main sectors of the economy. The nation’s net worth would increase, but who benefits from the growth?

Aggregate numbers show that free trade is wonderful. Breaking down those numbers, you’d find that from a political standpoint you have created two classes: beneficiaries and victims of free trade.

The free trader might say that’s life: losers are losers. The losers would say that the winners live in a fantasy world if they think that they’ll be allowed to maintain that situation.

People who think that it is possible to pursue self-interest only in economic life are mistaken. Having established self-interest as a moral absolute, it is likely to spread to other parts of society.

The long-run argument for free trade

Here’s the long-run argument for free trade. Over time, the pain caused by free trade will lead to huge benefits that will be equitably distributed. This is a strong case. The issue is this: how long is the long run?

Assume that an industry moved to another country. This eliminated jobs in one place and created them in another lower-wage place. The wealth of the nation might increase. However, the former employees might be devastated.

Assume that it would take a generation for the benefits of increased national wealth to create new industries based on new inventions. While that’s not a long time for a country, it is for an individual. And a personal disaster affecting large numbers of people is a political problem.

The US practiced protectionism throughout the 19th century. It decided tariffs on two bases.

One was economic: what industries should be protected to increase the nation’s wealth? The second was political: what are the political consequences of these decisions and the ensuing probability that the politicians making the decisions would get re-elected?

There is no answer to this in principle. Those who support free trade demand that the government intervene when another country “cheats.” They also define free trade for their benefit.

But protectionists shift their stance on what should be protected at any given time and to what degree.

The balance is shifting to protectionism

Each side views free trade based on its interests. Each uses the state to shape the economic landscape so that it benefits.

Since 2008, the political balance between the free traders and the protectionists has shifted. A significant sector of the population believes that free trade has hurt it.

This sector wants an end to expanding free trade or a redefinition of its terms.

The argument that it is beneficial overall has little impact. A CEO would oppose a shift in trade policy if it hurt his business, no matter the national good.

Individuals take the same stand.

The balance between free trade and protectionism has been a major political issue in the US since its founding. But now, free trade must demonstrate its worth, not just assert it.

The system is moving toward protectionism.

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