Free Trade Again

Matt and Kevin are posting about free trade again, so I’m being the free trade skeptic again. (How about you? Anything new with you?)

As always, I’ll start off by saying that free trade is in many respects a good thing, etc., etc., and that under certain circumstances it might have been a very good thing.

Free trade defenders always point to the formal economic principle of comparative advantage and claim that it proves that with free trade, everyone is always better off. Even at best, though, it doesn’t prove that; the most it can prove is that, on the average, free trade between two countries makes both countries better off. Not “everybody”.

One major American product is labor, and Indian and Chinese labor, by and large, have an enormous comparative advantage over American labor. So perhaps America should reduce its production of labor, and stress products for which we do have a comparative advantage.

Problem solved, except that most Americans have nothing to sell but labor. What then? Well, they collect unemployment for a few months, and then they hunt for work for another few months, and then they become “discouraged workers”. And then — voila! — they disappear from the statistics, and everything is fine again.

It is dogmatically asserted by all free traders that the tradeoff is even — one job exported, one job imported. There may be some formal tendency of the system to gravitate that way, but isn’t this an empirical question? What has actually been happening?

On the one hand, maybe our big partners like China and India aren’t playing the game the same way we are. There is, after all, an enormous trade deficit. And on the other, maybe our exporting firms are exporting products which are less labor-intensive. So what are the facts? (I don’t know, but I don’t think we can get them by extrapolating from the formulae in our Economics 101 textbook).

From the point of view of labor, free trade tends to force labor producers (i.e. workers) to compete with overseas workers whose pay is much lower. And even these workers (e.g., in China and India) have to compete with workers elsewhere who are paid still less (e.g., in Egypt and Bangla Desh). And maybe this is a good thing on the whole, but it’s certainly not good for everyone. Specifically not American workers.

Kevin Drum points out that if one job is lost and one gained, the loser will be angrier than the winner is happy (what’s called “prospect theory”). This again assumes a parity that may not exist, but even if there is a one-for-one exchange, and even if the jobs are equally good, there’s no real advantage in breaking even like that — certainly no advantage big enough to justify the messianism about free trade. You really need a better than one-for-one ratio. So maybe prospect theory is a good guide — if you’re only going to break even with free trade, you better not do it.

As usual, I will conclude that free trade might have been a good thing. (Yes, I’ve failed to mention some of its benefits here). But combined with our present economic slump with its jobless recovery, and the relentless long-term reduction in public amenities (especially medical insurance, pension plans, and access to education), and finally the lack of real commitment to the various proposals floated to soften the impact for displaced workers, I find it hard to be sure that free trade was a good thing.

And certainly the Democrats made a big political mistake by sacrificing a chunk of their core constituency in the name of the global general welfare. Clinton’s allies in the free-trade battles were mostly Republicans — and most Republicans are anti-labor pure and simple. With free trade, the Republicans won, and both the free-trade Democrats and the protectionist Democrats lost — to say nothing of labor.

And the Democratic party is now that much weaker, and the Republican Party that much stronger.