Free trade should not be demonized
Adam Smith’s “The Wealth of Nations” was written in the 1770s in an effort to overthrow the mercantilist policies of the British government, which Smith saw as stifling economic growth by limiting trade.
Smith’s ideas led to the growth of capitalist economies that have created unprecedented material wealth. The political economist and philosopher Henry George argued that if free trade were truly free, with neither party forcing the other to trade, of course it would be beneficial for both parties; if it were not, then one party would back out.
But lately, free trade has come under fire from the leading presidential candidates, because of its impact on American workers.
While George’s almost tautological justification for free trade is accurate, it is too broad to apply to the national level. For example, when the North American Free Trade Agreement reduced trade barriers between Mexico and the United States, each country as a whole did benefit, with increased trade and increased economic growth. But not everyone in the U.S. and Mexico benefited; efficient corn farmers in the American Midwest increased their exports to Mexico, which put a lot of less efficient Mexican farmers, who were farming on a much smaller scale on much less fertile land, out of business. But Mexican consumers got cheaper corn.
Likewise, American autoworkers lost their jobs as U.S. companies moved operations to Mexico to take advantage of lower labor costs. The economy became more efficient, consumers benefited from lower cost goods, and investors made higher profits. But some citizens in each country were adversely affected.
Theoretically, free trade should be a desired goal, so the economy is as efficient as possible. While society might choose to allow some inefficiencies, such as protecting family farms, having more material goods available at lower cost is generally a benefit. In a capitalist economy, investors seek to invest where they can make a profit, and in so doing, increase economic efficiency, as economic assets shift from less profitable to more profitable sectors. Unfortunately, sometimes the reason an investment might be profitable is that the investment exploits workers or the environment. For example, production costs may be lower in some countries because weak labor and environmental laws allow companies to undercut producers who cannot similarly exploit their workers or the environment. This facilitates a “race to the bottom,” which can be a high cost of unrestricted free trade.
The most recent controversial trade deal is the Trans-Pacific Partnership, which the Obama administration negotiated with 11 countries on the Pacific Rim, notably excluding China, whose influence in the region it is designed to contain. Supporters argue that the deal will secure intellectual property rights that will allow (mostly) American companies get paid for the things they’ve produced. Critics point to provisions that allow private companies to challenge the laws of signatory nations they claim infringe on their right to trade, limiting their sovereignty, with those disputes being adjudicated before tribunals staffed by arbitrators who are likely to be employed by these companies on other issues.
Ideally, countries would produce the goods they need very close to consumers who need them to avoid transportation costs. While some products are more efficiently produced in specific areas, like bananas in the tropics, so some trade will always be necessary. Currently, most trade occurs because of an unnatural productive advantage, like lower wages. In less developed countries, people are willing to work for lower wages because they have few options. As those countries become wealthier, the wage advantage disappears.
If trade barriers prevent investment in less developed countries, they will grow slowly, because they cannot access the advances created by the rest of the world. If powerful countries use their advantages to stifle progress in less developed nations, as was often the case under colonialism, the powerful country benefits while the weaker country stagnates. But with the proper restrictions, nations with advanced economies can profit by sharing their knowledge with nations with less-developed economies, profiting in the near-term while still allowing the nations to develop. In long run, helping developing nations increase the wages of their workers helps even developed economies as those workers evolve from a source of low-cost labor to consumers of higher-cost goods.
Does the TPP open up trade so that companies are forced into a race to the bottom, or does it provide a structure that allows companies to produce their wares efficiently while employing their workers at good wages and without destroying either their environment or the jobs of other countries? The flaws of the TPP are probably significant enough to warrant opposition, but that opposition should not be based on a demonization of all trade.
The next trade deal negotiated needs to better fill the needs of all stakeholders, instead of just those of the international corporations.
Kent James is an East Washington resident.