Its costs are easy to see, and its benefits aren’t. Policymakers should explain the benefits, and craft policies to mitigate the costs.
I was reading about the repeal of the corn laws and the effect the repeal had, and it brought me back to the current election. (Also of interest, this 2013 Economist article, explaining their pedigree of free-trade support, stemming from the movement to repeal the corn laws.) While protectionism has always been somewhat popular, it’s seen a resurgence lately. With Trump advocating punitive tariffs, and Sanders stating he is not comfortable with “a single trade agreement this country’s negotiated,” popularist protectionism is back in vogue.
The instinct of several students in the first lecture I had on the economy of Mexico was to blame NAFTA for the difficulty Mexico has had allocating resources into research and providing adequate liquidity. The professor (who has done significant research in the field), noted that NAFTA saw a marked increase in both on a percentage basis, but relatively little on an absolute basis. NAFTA has certainly tied Mexico and the United States closer together. This hurts Mexico when the US is doing poorly, vise verse. But it’s certainly not an altogether bad thing, as the intuition of some (economics students!) would suggest.
It seems that even among some economics majors there is pretty widespread and wholesale skepticism of free trade. I know that the vast majority of economists support free trade, so I looked to see what others attributed the gap between the public and economists to. William Poole, the former head of the St. Louis fed, posited that it’s largely due to a lack of understanding by the public of what free trade actually does. Furthermore, he claims, those who oppose free trade are in a general sense doing it altruistically. This makes sense. Free trade does hurt those whose jobs are outsourced, but though over 50% of Americans are skeptical of fair trade, nowhere near that many have lost jobs to trade. The typical example for an outsourced job hurt by free trade is manufacturing. But a pretty substantial body of evidence would suggest that those jobs are pretty much gone, even if manufacturing output has increased. The US has comparative advantage in high-tech, low labor manufacturing, and jobs are increasingly moving into the service industry. This post-industrial economy where almost everyone is employed in service poses a whole new set of questions which I hope to write on, but these are questions like “what can we do to improve low-moderate skilled service industry jobs?” or “how can we improve the quality of our labor force?” not “how can we take jobs back from China?” NAFTA has cost us manufacturing jobs, but has made goods cheaper. It has benefited those with higher levels of skill and education. Now it’s a question of how to reallocate said lower skill lost jobs, and retrain those adversely affected. Policies such as improved education and healthcare, or even more radical proposals such as taking corporate gains from outsourcing and funneling those into programs to help those affected by free trade have something to be said for them. This is the 3 million dollar question, one which economists have struggled to agree on. How can we get the efficient allocation of free trade whilst supporting those adversely affected? However, clinging to quotas and tariffs is not risk-free for US workers, though it is effective rhetorically.
The costs of free trade are pretty obvious. Joe builds toy cars. Joe’s job goes to China, and Joe’s job in the toy-car industry is lost. He no longer has a relevant skill (toy car building) and he’s in a bad place. The benefits, as are pointed out in the above William Poole article, are much more nuanced. Toy car prices are lower, which helps everyone on aggregate. Other gains, such as increased foreign demand for US goods or services are much more hidden and small, and must be taken in aggregate. Essentially, Joe bears an individually high cost for small gains applied over a large number of people. And the government, perhaps, should be in the business of looking how to rectify that. Sanders (who has unfortunately pushed Clinton on this issue) is very anti-trade, largely viewing it as only a mechanism through which jobs are lost, and ignoring entirely gains from trade. This is pretty darn effective rhetorically, as has been seen both in his Michigan win among those who dislike free trade, and in those students in my econ courses who support Sanders and jump to free trade as an evil at the earliest possible opportunity. Ted Cruz opposes TPP, but says he’s generally free trade. The Republican argument on this just doesn’t sell. On one hand, they’ll say, free trade is good, for nebulous reasons. But it’s not very rhetorically effective to preach about the gains from trade and the cost of tariffs. They are preaching smaller government which includes not helping those impacted, and I agree with David Frum that the Republicans are short of good ideas these days. They won’t support those adversely affected by free-trade policies, helping them form part of a new, stronger american workforce. Saying “well it’s good for the country but you’ll get hurt by it, but we won’t do anything about that because small government.” doesn’t sell, and shouldn’t sell. This does let Trump blame bad trade outcomes on incompetence though. “If only the government was good at trade, it’d be better. I would negotiate better.” This is entirely hot air, but it does promise to solve issues free trade has caused for those whose jobs have been lost. I’d prefer a candidate who was willing to acknowledge the costs of free trade, and help workers adversely affected retrain, increase their human capital, and work in more competitive and efficient fields. As such, I in some ways agree with the Progressive Policy Institute’s newest policy advisory for trade.
I cede that wellbeing GDP does not make, but there is a very strong correlation between the two, and taking a short-term hit to a small segment of the workforcemay be worthwhile. Admittedly, some economic studies have indicated tariffs in the short run may have positive effect under certain circumstances. But this is far from the Sanders claim that he supports no US free trade deals.
In terms of trade advantages, just look here.
But ultimately, none of us are shaping trade policy. What does this mean for us? Those who are feeling the Bern should see there is actually relatively little difference. Sanders views trade in terms of winners (multinationals) and losers (employees.) Trump sees it in terms of winners (foreign nations) and losers (the USA). Sanders has pushed Clinton to the left, but the one thing which bothers me the most about these policy shifts is the shift away from free trade, to protectionism. While it’s unlikely Sanders would go as far as Trump, he’s opposed the same trade deals (NAFTA, South Korean Trade Agreement, upcoming TPP) that Trump has. While Trump’s ridiculous tariffs would be more harmful than simply repealing these agreement, at this point the repeal of any of these makes us less competitive on a global market, increases the cost of our goods, and causes inefficient allocation into things like high labor manufacturing which we already have high-tech growth in! Trade agreements sure aren’t panacea, but they do lead to lower prices and more efficient allocation. They hurt individuals, but taking gains from trade and parlaying them into helping those affected via training, etc is the way to go. The “we lose in free trade” argument is demonstrably false. Even moreso, it’s somewhat pessimistic. “We can’t compete with foreign markets” is essentially those calling for the end of these trade agreements are saying.