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IntelDigest
LAW – POLICY – FINANCE – MARKETS
INFORMATION FOR THE ENTERPRISE AND INVESTOR
NOVEMBER 16, 2016
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This week in IntelDigest, we address a major policy issue which had a significant impact on the election of the next President of the United States. That issue is Trade Policy, but voters often focus only on certain economic provisions, referred to as Free Trade.
Arguably, the election turned on this very issue, as formerly “Blue” states in the Rust Belt were won … by narrow margins … by Donald Trump. These states had been solidly-Democratic, but Trump’s argument … that Free Trade had taken away millions of American jobs … resonated with enough voters to turn the tide.
Enmity focused on: (1) a dated trade agreement, the North American Free Trade Agreement (NAFTA), which was negotiated in 1993; and (2) a proposed agreement, the Trans Pacific Partnership (TPP), which would go into effect by 2018 if ratified by all the parties.
While job losses over the last twenty years have resulted as much from technology, automation, and productivity gains as from Trade Policy, the detrimental effects of foreign competition have been unmistakable.
Trade Agreements
Trade Agreements are vital factors in relations among nations. Although many people see them as strictly economic agreements, the fact is that they form the basis of economic, political, and strategic relationships. Trade Agreements are often primarily diplomatic accords, with economic details secondary.
The central economic feature in such agreements is usually referred to as Free Trade, meaning that goods and services may be sold between countries without any sort of tariffs, quotas, or other prohibitions. However, these agreements can cover a wide variety of issues, including labor and workers’ rights, currency manipulation, regulatory compatibility, movement of capital, data transfer, protection of intellectual property, bribery and corruption, environmental concerns, et al.
The importance of such agreements is greater than ever before, because … whether we like it or not … the world has been growing increasingly interdependent. We are living in the age of Globalization, where advances in communications and transportation have facilitated the world-wide exchange of products, ideas, capital, and cultures.
Development of Free Trade
Protectionism had been the way of the world, from the Industrial Revolution and throughout the 19th Century and into the 20th. In the U.S., tariffs were regularly imposed in order to protect this industry or that from foreign competition, and to help their proponents win re-election. However, the theory of Free Trade took hold in the 20th Century, especially after World War II.
Open markets between countries would give people wider access to goods at lower prices, and spur economic growth. In the second half of the 20th Century, hundreds of bilateral and multilateral trade deals were negotiated and ratified, affecting every country on the planet.
However, there are practical difficulties which can offset the theoretical advantages of Free Trade in many economies. In order to trade, a country must make products which others need. If its markets are not protected, more advanced countries will offer products at lower prices and better quality. As a result, the country will be unable to fully develop its industry, and will be unable to purchase even low-cost goods, thus perpetuating underdevelopment and poverty.
The theory of Free Trade has been attacked from both ends of the political spectrum. One argument, from the Left, is that protectionist measures early in the industrial development of a country are necessary to allow that country to enter into competition with other nations. Free Trade agreements can lock out economies struggling to develop, and lock in advantages to established economies.
The argument from the Right is that Free Trade doesn’t work when successful emerging economies, such as China, take advantage of temporary low wages and their own formal or informal protectionism. Lower wages in the emerging economy can devastate important sectors of a competing advanced economy, while keeping out exports that could compete in other sectors of the emerging economy. In other words, developing countries can use Free Trade to destroy some sectors of economies in advanced countries.
The argument FOR Free Trade is that, over time, the dislocations caused by open markets will lead to tremendous benefits that will be equitably distributed among all parties. But, the issue is: how much time? For devastated industries and displaced former employees in a particular country, it may take a generation for the benefits of increased national wealth to create new industries based on new inventions. While that is not a long time for a country, it is a very long time for an individual.
A middle-aged worker who loses his job to foreign competition may find that learning the skills needed for a new industry is impossibly expensive and takes too long. That worker may never be employed in a job that supports him as he had lived before. This creates a personal disaster that could affect large numbers of people.
In the short term, Free Trade can devastate a particular economic segment. This may balance out, in the long run, but time and the unequal distribution of benefits pose a political problem.
Globalization and Its Consequences
Dani Rodrik, a professor of economics at the John F. Kennedy School of Government at Harvard University, has argued that “unmanaged globalization” is undermining democracy.
“The promise of free trade is undeniable: Everybody likes those everyday low prices. But the consequences of the differential distribution of the benefits of globalization are becoming disturbingly clear: For the upper classes, the world is their oyster. For the lower classes, the world is their competitor.”
Those who can take advantage of the global economy can benefit from Globalization, while those who don’t have the resources and skills are left behind.
Because of the uneven distribution of the “fruits” of Globalization, wedges are driven between upper and lower classes in the developed economies. As a result, there is a disconnect between the lower classes in developed economies and the citizens of other nations, who are painted as enemies by populist demagogues.
The fundamental problem is that economic globalization is having a distorting effect on politics all over the world. In the U.S., resentment over the ill effects of trade has been manifest for almost 15 years. In areas hard hit by job losses caused by trade with China, voters have been electing more extreme legislators, exacerbating the polarization that has made Congress so dysfunctional.
By its uneven distribution of gains, economic globalization is fostering undemocratic tendencies. This has been illustrated in the Brexit vote and the results of the U.S. election, and will most likely manifest itself in voting in Italy and other European countries in the coming months.
Possible Solutions
It is incumbent on economies around the world, including here in the U.S., to pay greater attention to education, re-training, and “trade adjustment assistance” for workers who are displaced when industries are disrupted by Free Trade.
This is not a new idea; in fact, it has been a component in the party platforms of both the Democrats and Republicans for years. But, it has never been addressed seriously; rather, it has been reduced to a platitude. Now, it is a moral imperative.