The odd thing about free trade is that it is both meaningless and vastly important. Comparative advantage, which is supposed to be a straight win for both trading partners, is a rounding error even when it works–if you don’t have full employment; it’s essentially meaningless. However, the ways in which free trade (and the free capital flows that are part of what we call “free” trade) is used to systematically undercut wages and working conditions and destroy environmental safeguards, make trade, as we practice it, vastly important.
(In light of the Trans-Pacific Partnership Trade Deal, I have put this back to the top–originally published Nov. 23, 2013.)
The classic case for trade is comparative advantage: You do what you’re best at, I do what I’m best at, we trade, and we both wind up with more stuff. The math on this is impeccable, but it works in the real world only under very specific conditions. The most important part is this: If I have the extra resources (both material and labor), I’m better off producing the goods myself, rather than trading with you–even if my production methods are less efficient than yours. I’ll still wind up with more stuff. In short, if I don’t have full employment, then free trade is a rounding error.
This is related to Ricardo’s Caveat, where the economist noted that, in his time, capital was not mobile. If it was not being used to do one thing in Britain or France, it would be redeployed to do something else in its own country. It would not be used to create jobs in another country. In our system, with mobile capital, there is no reason to employ either capital or people in the country of origin if higher profits can be made elsewhere. In this case, free trade can lead to an actual loss of jobs.
One standard argument made for free trade is that it produces cheaper consumer goods, and that makes people in a country better off, even if jobs are being off-shored. This is only marginally true. Most of the reduced cost of foreign goods is taken as profits, not passed on to consumers. The loss of jobs means that some people lose outright and completely: those who can’t find jobs or can only find low-paying, service jobs. But even those who keep their jobs are disadvantaged if trade means the labor market is not tight, because if the labor market is not tight, labor has no pricing power and gets almost no raises (this is why there have been no significant median wage raises since the mid-70s or so.)
The renunciation of tariffs and trade controls is a form of betrayal by in-country elites who have capital to deploy outside the country against everyone else in the country. If a foreign country has lower wages, worse environmental standards, horribly unsafe or coerced labor conditions, this is a comparative advantage. It is a comparative advantage even within countries, mind you.
If I pay less, or I work my workers like dogs, or I dump effluent into rivers, or I don’t bother to pay for fire escapes and sprinklers, I have an advantage over anyone who does these things. The standard solution to this is to legally mandate that I must pay a decent wage, not dump effluent, and pay for a safe work space. If everyone is forced to do so, no one is at a disadvantage.
This can only be done if there is a legal mandate over a territory and an enforcement mechanism. That means, usually, it can only be done within a single country.
Anyone outside the country can betray and can do any of these noxious things which increase their productivity at the cost of the environment or the people.
The standard response to this is to say: “Sure, you can do that, but if you do, we’ll just add it to the price of any goods you sell to us.”
Free trade agreements take the ability to do that off the table and force roundabout methods (like currency manipulation) which don’t work as well and instead of earning a government income, cost the government money. Alternatively, though it costs money, one can subsidize one’s own industry, but most free trade agreements make that illegal as well.
Free trade is harmful to the economy of nations. It is also not necessary for industrialization–rather, the reverse is true. Every nation larger than a city-state, other than Russia, has industrialized behind trade barriers of some kind and that includes the United States, Japan, Britain, and China. (There is an argument that mercantilism requires one party to have trade barriers and another party to have no barriers. However, a country with full employment can allow free trade for things it doesn’t produce itself, thus allowing foreign mercantilism.)
As long as the capital of a country is deployed within that country and the country has some access to markets, protected trade works. Sub-Saharan African countries had higher GDP growth in the 50s and 60s, under managed trade, than they did when their markets were forced open.
Often, the practical effect of free trade and free capital flows is to allow foreigners to buy out large parts of a nation’s economy, as when NAFTA was used to buy out Mexico’s major food producers. Foreign goods from other countries flood into whatever country is forced to, or agrees to, open its borders, destroying the local economy. This is most dangerous when food is involved. In Mexico, millions of farmers were forced off the land because of US subsidized agricultural products, post-NAFTA. African and Latin American countries forced their own farmers off the land so they could agglomerate agricultural land for cash crops, leading to food insufficiency, and because everyone was selling the same cash crops, they didn’t even get very much hard currency for it.
Once your country can’t feed itself, you are at the complete mercy of other countries and you have lost significant sovereignty–especially if you don’t generate sufficient hard currency to pay those who are selling you food (see Greece or Egypt).
Internal elites are often happy to sign destructive trade agreements because they win, even if their country loses. They get to skim off money from the loans, they are the ones who run the cash-crop farms, they are the ones who are able to sell whatever it is that foreigners want to buy, in exchange for hard currency.
If you want a country that’s self-sufficient and which is also heading towards economic prosperity, you must have elites and a population which do not want foreign luxuries, or who are at least willing to forgo them. When Korea was modernizing, foreign cigarettes, for example, were demonized. Every bit of foreign exchange was used not for luxuries, but to buy capital goods which could be bought only with hard currency. If your elites want a Mercedes-Benz, a vacation on the Riviera, a flat in London, to see shows on Broadway–if they want things which can only be bought in hard currency, they will sell you out and you will not industrialize or modernize. The tastes of the elites and the population must be for whatever your country produces or whatever can be bought in your currency from partners with whom you do not have a significant trade deficit.
None of this is to say that trade is always bad, it is important and necessary. But trade must always be managed. Just as you don’t want resource prices to increase your currency to the point where your manufactured products are uncompetitive (thus destroying your manufacturing base), you don’t want trade to destroy your sufficiency in food or to lock you into a low tier of production forever. Comparative advantage screams, “Do what you’re good at,” but if what you’re good at is growing soybeans, you may not want to do that for eternity. You may want to do what you’re not good at and get better at it. If Korea or Japan had taken Western economists’ advice, as Ha-Joon Chang has pointed out, they’d still be growing silk and rice, which is where they had an advantage, instead of making some of the best cars in the world, which is where the US had a comparative advantage.
No country can do everything and every country will need to trade for the resources it cannot obtain otherwise, but trade should be rationally managed so that a country has a manufacturing sector and enough self-sufficiency that it doesn’t absolutely require another country’s goods, if that can at all be avoided. (It can’t always, we don’t all have oil.) At the very least, a country should be as close to able to feed itself as possible, something which was long understood by statesmen as an absolute priority.
Internally, free trade is used to create betrayals. Trade deals do not allow environmental protections, do not allow high wages, and do not allow fair treatment of workers. Otherwise, you aren’t competitive and the usual remedies, like tariffs and subsidies, are not allowed by those same trade deals. This allows oligarchs in every country involved in the deal to put downward pressure on wages, regulations, benefits, and even standards of humane treatment, in the name of “competitiveness.”
A wise society, including a global society, takes certain types of behavior “off the table,” by just forbidding them. Absent that, they make it so that those who do such things are not rewarded. Fail to do either of these things and you find yourself in a race to the bottom.
Note, again, that this is in oligarchs’ best interest EVEN if their country loses. Greek oligarchs, post-crash, are doing just fine. African potentates walk away with multi-million dollar bank accounts even as their own citizens starve to death. Business owners want to push down wages and costs, no matter where they are. This devastates countries and even the citizenry of many of the winning countries (like the US), but it benefits the few a great deal in relative terms. They’d be better off, as a class, in absolute terms if they took this behaviour off the table, but they wouldn’t be as rich relative to everyone else, or as powerful, and they value that relative wealth and power more than absolute wealth and power. It isn’t enough that they win, their own populations must be poor and weak, too.
Free trade is a bad idea. Free capital flows are a worse idea. Managed trade is a good idea and slow capital flows are a better idea (there is no evidence that foreign capital develops countries, as an aside, see Ha-Joon Chang on that).
Free trade, as we practice it, is about our country’s elites betraying their own populations.
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