What’s the problem with free trade?
by Dave Johnson
Our country’s “free trade” agreements have followed a framework of trading away our democracy and middle-class prosperity in exchange for letting the biggest corporations dominate.
There are those who say any increase in trade is good. But if you close a factory here and lay off the workers, open the factory “there” to make the same things the factory here used to make, bring those things into the country to sell in the same outlets, you have just “increased trade” because now those goods cross a border. Supporters of free trade are having a harder and harder time convincing American workers this is good for them.
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.
Does Trade Really “Open New Markets?”
“When more than 95 percent of our potential customers live outside our borders, we can’t let countries like China write the rules of the global economy.” – President Barack Obama
“[W]hen 95 percent of the people we want to sell something to live outside of the United States, we must open foreign markets to American goods and services so we can create jobs at home.” – U.S. Chamber of Commerce
“Ninety-five percent of America’s potential customers live overseas, so closing ourselves off to trade is not a solution.” – Hillary Clinton
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.
After NAFTA, for example, smaller, more local Mexican farms were wiped out by large, efficient American agricultural corporations that were able to sell corn and other crops into Mexico for low prices. The result was a mass migration northward as desperate people could no longer find work in Mexico.
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.
As for opening new markets for American exporters, note that the record since the ascendance of free-trade ideology in the 1970s we have seen continuing and increasing U.S. trade deficits, with imports exceeding exports, resulting in flat wage growth.
Freeing up trade does not “open new markets” as much as it enables giant, multinational corporations to become even more giant and more multinational – at the expense of smaller companies and the rest of us.
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.
When “thugocracies” that exploit workers and do not protect the environment are able to offer a comparative advantage over our democracy, then free trade makes democracy with its good wages and environmental protections into a comparative disadvantage.
Free Trade Undermines Democracy And Wages
“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 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.
The fact is, a democracy cannot “play by the same rules” as a country that can make people live in barracks at the factory and call them out to work at midnight if an order comes it, make them stand all day, pay them very little, pollute the environment, etc. The rules should instead be that we impose a tariff on goods from such countries unless they “level the playing field” and “play by the same rules” as democracies by giving people a say, paying more and protecting the environment.
Free trade became a scam intended to get around those costs of democracy – good wages, environmental protection and other common goods – but also to use cheap foreign labor and low regulation as a wedge to drive down those costs here as well, and ultimately weakening democracy itself. Every time you hear that regulations make “us” “less competitive” etc. you are hearing an appeal for our country to become more of a low-wage, low-cost “thugocracy.”
Does Protecting Democracy Cause Trade Wars And Depressions?
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.
If you google “the trade war of,” you won’t find any historical examples. There was no Austro-Korean Trade War of 1638, Panamanian-Brazilian Trade War of 1953 or any others. History is devoid of them.[. . .] Trade wars are an invented concept, a bogeyman invented to push free trade.
The giveaway, of course, is that free traders claim both that a) trade wars are a terrible threat we must constantly worry about, and b) it’s obvious no nation can ever gain anything from having one. Think about that for minute.
Voters Finally Pushing Back
These are the reasons that voters across the country are finally pushing back against politicians selling “free trade.” Friday’s post, “’Free Trade’: The Elites Are Selling It But The Public Is No Longer Buying” explained how Donald Trump and Bernie Sanders are gaining from their opposition to free trade deals like NAFTA and the upcoming Trans-Pacific Partnership. From the post: “Voters have figured out that our country’s current ’free trade’ policies are killing their jobs, wages, cities, regions and the country’s middle class. Giant multinational corporations and billionaires do great under free trade, the rest of us not so much.”
Free trade encourages further exploitation of workers and the environment in other countries and here. It helps fuel calls inside of our own country for “less regulation” (fewer environmental protections), “right-to-work” laws (that break unions and lower wages) and “more competitive” tax policies (that defund democracy and our ability to provide public services) to “attract” companies back to the U.S.
It is time for Washington elites to scrap our current “free trade” negotiating model that allowed giant, multinational corporations to dictate our trade policies, and open up the process to all of the stakeholders, including labor, environmental, consumer, human rights and other groups. Then we can begin to negotiate trade policies that lift American workers along with workers across the world, while protecting the environment.