Protectionism and Free Trade
(Brexit and Donald Trump)
The general view of economists from both the left and right is that free trade is an excellent idea that benefits all nations. In other words, if the US is best at producing high quality low cost computers and worst at producing high quality, low cost clothes, the US should specialize in computer production and either leave clothes production to others who can do a better job or redesign its clothing design and manufacturing to make it competitive in world and domestic markets.
In general since the Second World War, the US has espoused and implemented free trade with world training partners, which worked well as long as the US was a manufacturing colossus during the 40s and 50s. However beginning in the 60s and 70s, the American competitive edge began to decline, and Germany and Japan rebuilding after World War Two proved able and often superior competitors in manufacturing. China and Mexico are currently perceived as competitive threats.
Presidents Bush, Clinton, Bush and Obama have all negotiated trade agreements for freer trade with partners from North America, Asia and Europe. This has generated substantial push back from both labor and business leaders whose domestic production has not been able to meet global competition. Think the auto and steel industries. The perceived result is far cheaper goods to American consumers but laid-off workers and American manufacturers moving production to Mexico and China where labor is cheaper.
Britain is tomorrow on the verge of a vote to leave (Brexit) the free trade economy of the Eurozone. This is the largest free trade zone in the world. The potential dangers to the British economy and those of its European partners are severe, but untested. Donald Trump has supported the Brexit; President Obama and Secretary Clinton have urged Britons to reject it.
In this country, Presidential candidates Donald Trump and Bernie Sanders have been highly critical of both NAFTA (Mexico and Canada) and the Trans-Pacific Trade Partnership (includes countries such as Japan, Korea, Indonesia and Vietnam, but excludes China). Donald Trump would impose high tariffs (taxes) on goods emanating from Mexico (35% tariff) and China (45% tariff). Bernie Sanders voted against NAFTA and most every other trade agreement; his argument is that US workers should not have to compete with poorly paid workers in the developing world. Hillary Clinton has had a mixed record on free trade; she is more of a free trader than either Trump or Sanders; her husband played a key role in securing the passage of NAFTA; she helped negotiate the Trans-Pacific Trade Partnership while she was Secretary of State, but during the primaries she opposed it; she opposed CAFTA (trade with Central American countries) while in the Senate.
Most current trade agreements are better characterized as “fair trade” rather than free trade; i.e. they include environmental and worker protections; they are tough to negotiate and always face a tough battle for Congressional approval. They have too often been lacking effective complementary social legislation to retrain laid-off workers. While Obamacare now helps provide their health insurance, we need effective legislation that helps with funding the retraining and transition to the next job and these jobs need to pay decent wages. The Trade Adjustment Act beginning in 1939 was a start on this kind of necessary complementary legislation, but it has been frequently evaluated as ineffective and needs to be revamped.
Why should we care? The Smoot Hawley Tariff Act (signed by Herbert Hoover) which increased American tariffs to their highest in 100 years is generally ascribed as one of the root causes of the depths and length of the Great Depression of the 1930’s. It bean a series of trade wars and retreat into protectionism; it was repealed under Franklin Roosevelt who began the process of moving toward free trade agreements – an economic consensus that continues today although the political consensus is fraying very badly. The last thing we need in our recovering economy is to start a trade war with our trading partners.
Prepared by Lucien Wulsin
June 22, 2016