In Defense of Free Trade

The Context

Recently there was a discussion about free-trade on a mailing list of Caltech alumni that I subscribe to. Part of the discussion actually got me riled up for a rant which I forwarded to the list, and thought I’d post here for good measure as well to spread the debate.

My response was to an e-mail suggesting that “unilaterally violating the WTO treaty” may be the only example the writer could think of where doing that would actually be good for the US (versus unilaterally violating the ABM and Kyoto treaties for example).

The Rant

I’m not convinced that “unilaterally violating” the WTO would be “good for the planet”.  As you mention, there is some evidence that “WTO-related programs have been good for the standard of living in” parts of the world that are less well off than the US on average.  There is also evidence that the free-trade programs have resulted in a “rising-tides raise all boats” phenomenon where the AVERAGE world citizen has seen their lot improve under the regime.  In fact, you are right to state that for the first 200 years the US levied tariffs, but it was with the US’s gradual loosening of tariffs and integration and promotion of free-trade that led to the meteoric rise of the US economy on the world stage (starting the in the early 1900’s and accelerating through Breton-Woods and the 60’s).

But as you point out here’s the rub: While the AVERAGE world citizen has seen their lot improve in the most recent spat of globalization (post 1960), there are some who were previously many standard deviations above average who have seen their lot fall, and yes, those people are the folks predominantly in OECD countries, especially with a focus on unskilled labor.  In other words, US manufacturing and farming workers (a.k.a Hillary’s core demographic).  And without change of some sort, it increases the likelihood that “our kids” will be less well off than us; a first for the US.

Yikes.  What are we to do?

Well, I see essentially four options:
1) Roll-back the free-trade regime under the cover of “it’s unfair to US workers”.

I question the moral correctness of this.  I can just as validly state this option as “continue to support policies that promote huge global inequity in order to ensure US economic dominance.”  Yes, it’s politically popular, but that doesn’t make it right.

2) Keep your pro-free-trade rhetoric but soften it by saying “we need to make sure other countries are fair to their workers by ensuring that other countries have to adhere to the same strict labor, environmental, and anti-monopolistic rules we have.”

This at the surface level deals with the moral problems of #1, but has the same effect, as it allows us to penalize free-traders who don’t run by those rules.  Labor rules in the US took years to evolve and are very US-specific.  Labor relations in other countries tend to develop their own local methods in order to be effective.  It’s naive and wrong to expect our rules work for other countries, and frankly the labor rules that WILL evolve in foreign countries are far more likely to be effective when promoted and fought for by the lower and middle-classes there.  This argument is usually promoted by interests in developed countries purely as a way to protect the developed country, not in the honest desire to improve the lot of the underdeveloped.

Both these options are in the roll-back the free-trade trends of the past fifty years, the second being much more subtle about it.

However, there are powerful forces pushing for free-trade, even if they don’t know they are.  The singles biggest force is not Walmart, or the WTO, or large multi-national-companies.  It’s the folks (like you and me) who, regardless of how much we talk about hating free-trade, continue to look for the cheapest goods we can find and hence do business with those entities.  It’s the folks who have come to accept that clothing should be such a small part of our yearly budget (while clothing prices may appear expensive, as a % of household spending, clothing has fallen drastically over the past 30 years).  It’s the people, some of who make loud noises bashing the era of globalization, but then vote with their wallets to keep breaking down trade barriers.  Now, you should say we should start a movement convincing people to not do this, but I think that’s doomed to fail.  I grew up on a small poor farm in a remote part of Ireland, and I know how much every $ matters when you’re trying to make ends meet.

That’s not to say that going all-free-trade all-the-time is the way to go.  Now the pro-free trade options I see are:

3) Keep going with free-trade as is, recognize that the US will decline from average, but just accept that because it’s morally right.

On this stance, I agree that, if the US went along with it, it would lead to lower income inequality in the world.  And I firmly believe lower income inequality is a good thing.

However, there are many legitimate reasons to suspect the US would not just accede.  You can see already the US starting to pull back from free-trade through increasing protectionist rhetoric and thoughts (much like Jacob’s starting idea).  To me this is worrying for the world but not necessarily frightening.

No what frightens me about this option is that left as is, the US’s relative economic-might would decline in a free-trade world (already happening) but it’s military might would not decline at the same time and in the same proportion.  Much like the Roman empire’s economic-power began to be less Italy-centered around the time of Caesar, it’s hard for me to expect the US to not react by using it’s military might to maintain control of resources of other people   I don’t think this outcome is that unlikely, and it just takes a series of relatively small individual political recalibrations to end up there.  I’ll point out that the Roman people considered that their army was helping spread the rule of law and moral rightness when they invaded countries, similar to our view that a US invasion of Iraq would lead towards “freedom” and “democracy” just taking root.

Which brings me to my fourth option:
4) Recognize that free-trade is overall good for the world, that economic incentives will continue to push us towards that, but that left to the free-hand of the market would likely lead to a less stable world in the short term.  Therefore a more controlled “freeing” is required.

This is the approach that leads me to my current view of what to do with free-trade.  I would like to find some way to maintain the “rising tide rises all boats” rule, but minimize or slow down the rate of the US’s “race to the average.” 

First, the US should position itself to win in the new free-trade and free-movement of intellect world of the future by cornering the market in high-intellect high-margin services.  This is the work that is less easily commoditizable, and the work that today gives the highest economic margins.  And it’s an area that the US is still well positioned to win in.

And secondly, the WTO should invest in retraining or welfare services for those political classes that are left out (apple farmers in WA come to mind), and other countries, even developing countries, should also contribute to a the WTO-fund to help support this (for political cover).  In this way, there is some way to control, or brake, the pain.  The one important tweak I’d make to this rule is that WTO payments cannot go to the children of people who are disenfranchised through free-trade related job-loss; those folks have time to retrain.

Unfortunately we have taken a step back from leading in this area in a few ways: after 9/11 by severely restricting visa input of the best foreign intellects and by becoming increasingly anti-immigrant; starting in the 70’s by passing laws like Proposition 13 (which effectively reduced school funding) and by promoting “equality” rather than “competitiveness” in our school system; and lastly by the rise (accelerating in the 80’s) of promoting the culture of individualistic gain that encourages our best and brightest to see wall-street and silicon-valley careers as “high achievement” rather than public service such as government and teaching.

These are all reversible, but require brave political leaders in the US who recognize that short term pain, for the sake of world-peace and moral-fairness, must be endured.   It also requires pragmatism and patience from leaders in developing countries to see that the moral rightness of reducing inequality must be balanced against the necessity of “the mighty” feeling they weren’t treated too unfairly.

Alas, as I watch the current election cycle, and as I listen to the rhetoric coming from developing countries in the mostly-dead Doha free-trade negotiations round, I fear the consequences of not dealing with the short term pain are going to be avoided, which increases to me the likelihood of much harsher pain for the world in the decades to come.

On the bright side, I’m often wrong 🙂

– Art

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