Free trade has been one of the most hotly contested political and economic issues in the United States over the last three decades. It’s an unusual debate, because it doesn’t pit the usual blocs of conservatives and liberals or Republicans and Democrats against one another. Instead, the strongest proponents of free trade have been those at the political center – moderate Democrats and moderate Republicans. The greatest critics of free trade have come from the left and right – liberal Democrats and conservative Republicans, making for some rather strange political bedfellows. In this chapter, we’ll look at the nature of free trade and examine the arguments of free trade’s proponents and its critics.
Protectionism vs. Free Trade
To make sense of free trade, it’s helpful to understand what came before it. For a long time, many countries embraced an economic policy known as protectionism – policies that inhibit international trade. Countries that embraced protectionism still traded with one another, of course, because it was often necessary. If a country couldn’t produce something – you can’t grow cotton in Sweden, for example, and there is little coal in Japan – then that country was forced to important that product from elsewhere. However, if a country could produce a good, the reigning economic theory was that governments should protect their domestic industries from foreign competition by placing a tariff, or import tax, on foreign products. For example, Germany can produce steel, and in order to protect German steelmakers, the German government would place a tariff on French, British, Italian, American, or Swedish steel. In addition to providing beneficial tax revenue, this tariff would make foreign steel more expensive, and encourage German companies to buy their steel from German steelmakers. This would benefit the shareholders of German companies, and protect the jobs of German workers.
Tariffs could be placed on any kind of import – wheat, cars, glass, coal, chemicals, textiles, etc. And there were other protectionist measures beyond tariffs. A government could place a quota on imports, saying that only so much of a given product could be imported from abroad in a given year. A government could pay subsidies to domestic companies to keep their products cheap, and therefore more competitive against foreign imports. A government could require foreign companies to have a license to sell a product, and limit the number of licenses it handed out. It could enforce trade calendars, banning the import of a certain product during a certain time of the year (this was a popular measure in agriculture). Governments could also manipulate health and safety regulations to keep foreign products out of their country.
Throughout the second half of the 20th century, many countries, including the United States, began to abandon protectionism in favor of free trade. Free trade agreements eliminated tariffs and other trade barriers between countries. In 1988, the United States signed a free trade agreement with Canada. In 1994, this agreement was expanded to include Mexico, and was known as the North American Free Trade Agreement, or NAFTA. In 2005, the United States entered into CAFTA (the Central American Free Trade Agreement) with Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua. Additionally, the United States has bilateral free trade agreements (those that involve just two countries) with Australia, Bahrain, Chile, Colombia, Israel, Jordan, South Korea, Morocco, Oman, Panama, Peru, and Singapore.
American protectionism has made something of a comeback in the last few years, particularly since the election of Donald Trump. One of Trump’s first directives in office was to remove the United States from the Trans-Pacific Partnership, a landmark agreement that would have created a free trade zone that included the United States, Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.
The Trump administration has also been particularly fond of tariffs, slapping an import tax on a wide range of foreign products, from steel and aluminum to solar panels and washing machines. Many of these tariffs have been aimed at China, with which the United States has a large trade deficit, but they’ve also been levied against traditional American allies, such as Canada, Mexico, South Korea, Brazil, Argentina, and the European Union. This has sparked a trade war, in which these countries have retaliated with tariffs on American products.
Proponents of Free Trade
A primary argument for free trade is that it creates a larger market for companies and consumers. Even before it embraced free trade, the United States long benefited from a large home market. It is home to more than five million individual companies and 333 million people. This is beneficial for both companies and consumers. As is discussed in Chapter 31, the more competitive a market is, the better its products will be. Because American consumers live in such a large country, they have a wide range of producers to choose from, and therefore generally have access to a wide variety of cheap, high-quality goods and services. And businesses, of course, benefit from having access to a large base of consumers as well as a large network of suppliers.
Because of its large market, the United States was relatively slow to embrace free trade. That began to change as larger markets emerged around the world. The European Economic Community was formed in 1958, and would later evolve into the European Union, a twenty-seven member free trade area that is home to nearly 450 million people. The ASEAN Free Trade area, a bloc made of ten countries in Southeast Asia, is home to more than 660 million people. Mercosur, a five-member South American free trade area, has a population of nearly 300 million. These free trade agreements, coupled with the economic emergence of China and India, home to more than a billion people each, threatened the economic supremacy of the American market. So, the United States began to scramble to assemble its own free trade agreements. The combined population of NAFTA, CAFTA, and the dozen countries with which the U.S. has bilateral agreements is greater than 800 million people. These free trade agreements have more than doubled the size of the American market, providing a broader consumer and supplier base for American companies, and greater choice for American consumers.
Proponents of free trade also argue that it leads to greater economic efficiency. Free trade theory centers on the idea that some countries have a comparative advantage when it comes to producing certain products. In other words, some countries are really good at producing certain things, and maybe not so good at producing other things. Advocates of free trade argue that countries should specialize in what they are good at producing. At the same time, they should avoid the production of goods they can’t make efficiently. If Country A is in a position to efficiently produce steel, but not textiles, and Country B is in a position to efficiently produce textiles, but not steel, it makes sense that Country A should specialize in steel, Country B in textiles, and that they should offset those differences by trading with one another. By allocating more resources to the products for which they have a comparative advantage, and by freeing up resources by not producing goods that take too much effort, production becomes more efficient. In short, free trade means increased efficiency, which means greater profits for everyone.
Proponents of free trade argue that it has even loftier benefits. They argue that free trade prevents wars. It is definitely true that countries that are economically invested in one another (i.e., that trade extensively) are less likely to go to war with another. Advocates of free trade also argue that it is key to lifting vast segments of the earth’s population out of poverty. If more countries embrace free trade, then more countries will specialize in what they are comparatively good at, which will lead to greater efficiency, and greater profits. Those profits will then be reinvested into new technologies, which will lead to more innovation, which will lead to higher standards of living for everyone.
Critics of Free Trade
A leading concern about free trade is the effect of outsourcing. Outsourcing is the movement of jobs (mostly in manufacturing) from higher wage countries to lower wage countries. Free trade agreements enable corporations to move these jobs with little disruption to their supply chain.
This creates environmental concerns. Production is often outsourced from countries with relatively strict environmental regulations to countries with much weaker environmental standards. This, of course, damages the local environment in poorer countries, with increased air, water, and soil pollution. It also has negative consequences for the entire planet, since poorer countries often have fewer regulations restricting carbon emissions, which contribute to climate change. Additionally, outsourcing often moves production of manufactured goods thousands of miles away from their markets, increasing fossil fuel consumption through longer-distance transportation.
Outsourcing also creates labor issues. Manufacturers will often seek out the cheapest labor they can get away with, creating what labor activists refer to as a “race to the bottom.” Workers in high-wage countries suffer because their jobs disappear, something that Midwestern industrial cities are painfully familiar with. But their loss is not necessarily a poorer country’s gain. The same manufacturing jobs that leave a wealthy country will pay dirt-cheap wages, and often feature unsafe conditions, when they arrive in a poorer country.
When it comes to poorer countries, critics of free trade often speak of artificial specialization. Theoretically, each country benefits from free trade because it gets to specialize in what it does best. The reality for a lot of poorer countries, however, is that their “specialty” is having extremely low wages and a poisoned environment.
As mentioned at the start of this chapter, the leading critics of free trade tend to be either very liberal or very conservative. American liberals criticize free trade because it exploits workers both at home and abroad, and because of the environmental damage associated with it. American conservatives believe that free trade weakens the United States by making it too dependent on other countries, and often promote economic nationalism – policies that encourage Americans to exclusively invest in, and purchase from, American companies. It is not a coincidence that President Trump’s trade policy was named “America First.”