While the elite are denouncing Donald Trump’s tariffs and his movements towards renegotiating NAFTA, they are equally uncomprehending as to why anybody would these moves are a good idea.
And according to economic theory, elite opinion is correct. As an undergrad, I was even asked to teach the basic theory of free trade to the class (the professor was trying an experiment). The basic theory is that if two nations concentrate their labor forces to do what each country does best relative to the other one, they can trade and become better off. In theory, they will be able to obtain products at a lower cost, making their population better off. And indeed, practical experience seems to back the free trade argument as countries that are open to the international marketplace invariably seem to do better than those that aren’t.
The problem with the theory, however, is that it assumes the free mobility of labor. It assumes that when two countries open for trade, the labor that has been displaced can easily move into other industries at a similar wage.
But what if it can’t?
And therein lies the root of the failure. The theory promised, essentially, that free trade would make everyone better off and that whatever pain was caused by labor displacement would be temporary. But we don’t live in a pure free market or a pure free trade world. Domestic economic regulations and various trade restrictions, even if not overt, skew the market. This is the real world; not one of theory. And in the real world, the generation-long experiment has produced real job losses and stagnant, or declining, standards of living for a not insignificant swath of the U.S. population. The fact that a slogan “Make America Great Again” caught on (whatever that slogan actually means), implies that the American experience, for many, has been a disappointing one of late.
NAFTA
When NAFTA was debated back in 1993, the arguments for the free trade agreement was that it would provide products at lower cost to American consumers, lead to economic growth, and help Mexico develop into a first world economy, thereby lowering pressure for illegal immigration. The argument against NAFTA was that there would be a “giant sucking sound” as American jobs were “sucked” into Mexico, thereby throwing Americans out of work. Although offshoring of American jobs has continued all over the world and is not primarily the fault of Mexico, the overall impact on American industrial jobs in certain industries was likely negative.
Although there are arguments regarding the magnitude on American industrial jobs, it is undeniable that if NAFTA was intended to turn Mexico into a first-world economy, it clearly has failed. Although different studies may come to varying conclusions regarding how much NAFTA has helped or hurt Mexico, what is obvious is that the promise of a country with a first-world (or near first-world) economy has not been realized in the nearly-quarter century since NAFTA was put in place. In fact, in many ways Mexico looks increasingly like a failed state, rather than country soon to join the major economic powers.
Free Trade Ideology
The result of these and other factors are causing people to question the free-trade ideology that has been part of the governing consensus over the last 25 years. When a system of thought becomes an ideology, it often means that its assumptions are accepted without question. While the theory of free trade is functional, and countries that engage in the international trading system ARE unquestionably better off than those that don’t. However, the idea that free trade is a win-win for all has not been realized, in part because there is no trading system that is truly free. In addition, the economic models on which the ideology is based tend to oversimplify reality when coming to the conclusions that often flow logically given the assumptions.
In order for an ideology to be sustained, it must be seen to work by the vast majority of people. Part of the failure of this ideology is due to the fact that the costs to many people have simply been ignored or downplayed by the governing structure. These forgotten people have been the losers in the freer trade world, as it has been their jobs and their economic security that has been sacrificed. If these folks were few in number, then they could maybe be safely ignored. But they aren’t few in number, and they are now starting to assert themselves and demanding that their needs be met and that their government stand up for them. We can see it in the election of Donald Trump, but also in the improved prospects of populist parties in Europe as well as the Brexit vote.
Free-trade ideology has failed to deliver on its promise. Some people are losing faith and are starting to look for other solutions.