Over the last 50 years or so, and truly accelerating after the collapse of the Berlin Wall, the doctrine that free trade is a good thing has been institutionalized. Although the freeing of trade barriers has largely been a good thing, relative to what the world looked like 60 years ago, the idea that more free trade is always better is erroneous. Simply put, we might have reached a point in which more free trade may be more costly than the benefits would justify.

Although the basic underlying theory is sound, and nations who engage in freer trade are generally better off than those who don’t, there is no free lunch in economic policies. There are costs to any policy that is pursued, even if those costs don’t necessarily show up in the GDP number. The idea that free trade is, in fact, a free lunch is based on the concept that two countries should trade, even if one country can produce goods more cheaply than the other country, if the less productive country has comparative advantage (i.e. the productivity gap between the more productive country and the less productive country is less for some goods than for others).

A simple example would be a world in which Mexico and Italy produce only two products, wine and cheese. It takes Mexico 7 units of labor to produce a wine and 5 units of labor to produce a cheese, whereas it takes Italy 3 units of labor to produce either a wine or a cheese. Although Italy is better at producing both wine and cheese, the theory says that Mexico is relatively less worse at producing cheese (5 units of labor) than wine (7 units of labor). In a non-free trade world, Italy must give up 1 cheese to produce an extra wine, and vice versa. In a free trade world in which Italy produces only wine and trades with Mexico for the cheese it needs, Italy is able to obtain more than one cheese for every wine, and Mexico (which must give up 7/5 of a cheese to get 1 wine in the no-trade scenario) is able to get one wine for say every 6/5 of a cheese. As this theory is expanded, support is generated for free trade across all markets including the free trade of labor (i.e. unrestricted immigration).

What this theory leaves out is all of the costs associated with free trade. True, economic dynamism produces winners and losers, and nobody would seriously argue free market capitalism hasn’t been the greatest force for increasing the basic standard of living in human history. However, the theories assume that as old industries are displaced, new ones arise and the displaced labor is easily able to move into those jobs. This theory pretty well described reality when most jobs were easily learned jobs. However, today’s jobs, especially in the first world, are often highly specialized and it can take years to get really good (i.e. highly paid) at them. In many ways, they are like the craftsman jobs in the Middle Ages that would take years to master. For example, a doctor can’t easily become an auto mechanic, and an auto mechanic can’t easily become a computer technician, and a computer technician can’t easily become a commercial lender. It is not just a matter of retraining one person to do another job. In many cases it takes years of experience to become proficient at the new job. So when jobs are “sucked” out of an economy, in some cases that labor does not simply retrain into another job.  The labor may become permanently unemployed, or may work at a job with less value added, or could end up in another more productive industry. To the extent that the result is the first two cases, that is a net loss to the economy

One other major cost that is often ignored is that the theory assumes (or advocates) allowing the free flow of labor from one country to another. In a world in which everyone was the same culture this wouldn’t be a problem. However, we don’t live in such a world, and cultures do clash with each other as history shown again and again. Allowing unrestricted immigration can produce friction with the host culture which, at the very least, will require government resources to manage it. Sometimes, the friction can get so extreme as to explode into violence. Whether this is a net benefit for host country or not requires a cost benefit analysis. While it often turns out to be a net benefit, it is not guaranteed to be so. Also, the host government must possibly contend with the social costs of displaced native labor with immigrant labor. While the idea that the immigrants are “taking” the jobs of the native-born is easily debunked in an era of full employment or if the immigrants are filling highly specialized positions that the native born lack the skills for, it is much harder to debunk in an era of high native-born unemployment where the immigrants are filling medium skilled positions for which there is a sizeable (and unemployed) native-born labor force.

Overall, the cost of free trade ideology is mounting. For example, global financial interconnectedness has allowed bad housing bets in California to be transmitted around the world and negatively impact, say, Indonesians. And people who see their jobs outsourced and are forced to settle for jobs that pay half as much as their old jobs are not seeing the benefits of free trade. Also, the E.U., which was supposed to increase economic inefficiency through the lowering of trading costs and a common currency, has instead created a lot of economic disruption and instability, rendering the economic benefits less visible or even muted them. While some economic pain is unavoidable in a dynamic economic system, it is imperative that the costs not be discounted. The more losers a policy produces, the more resistance will build to that policy. Although some free trade is a good thing, too much of it could produce sufficient resistance that an open global economic system could be endangered.