• J.S. Mullen

On the Prospects of Free(r) Trade

In the second half of the twentieth century international trade expanded. As tariffs, capital controls, and regulations were dropped, loosened, and standardized hundreds of millions of workers in places like China and India were raised out of poverty, while in industrial and post-industrial countries the living standard of the average person grew apace. Despite these benefits, since 2008 growth in international trade as a percentage of world GDP has stagnated. Though it has recovered its pre-crisis levels, increasing the free movement of labor, capital, and commodities faces political resistance from protected native industries and populist politics of the left and right. So what can we expect regarding the prospects of trade in the coming years?

As a leading organ of establishment opinion, whenever Foreign Affairs makes a topic the focus of one or several of its editions it bears taking note of the contents. Take as evidence the recent bipartisan passage of a quarter of a trillion dollar, five year industrial policy aimed at building up U.S. domestic capacity for “strategic competition” with China in the coming years in the fields of advanced technologies and manufacturing. The prescriptions of the “Strategic Competition Act,” as the massive new spending bill is called, could very well have been lifted from Foreign Affairs’ March/April issue.

In the case of its most recent issue, the topic was trade. A theme running throughout was globalization, its impact on workers, and their political impact on trade policy, specifically in the creation of the conditions for trade wars. As one of the most influential publications in the country, a shaper of and reflection of hawkish liberal elite opinion, the good news is that what we find isn’t all bad. In fact, several astute recognitions stand out:

- That increased trade is a net economic plus, and a slight majority of Americans recognize this.

- That the various popular forms of protectionism, from Buy American provisions to other direct subsidizing of uncompetitive domestic enterprises, tariffs, et cetera, don’t help workers.

- That the number of jobs lost due to changes in trade are fraction of those due to technological innovation and displacement.

- That contrary to the popular narrative, the United States has actually been pulling back and insulating itself from world trade over the last twenty years.

In light of these facts an argument is presented that the fragile interdependency of global supply chains highlighted by the onset of the pandemic will propel a recommitment to global integration in the coming years. Drawing on multiple historical analogies, it is postulated that in the same way the first putative wave of globalization rapidly accelerated the modernization of European states and raised the living standard of the average person to such a degree that social unrest was subdued, and that the deregulation, tax cutting, and international trade exposure of neoliberal capitalism beginning in the late 1970s and early 80s wrenched the U.S. economy from the doldrums of low growth, high inflation, and consumer and commodity shortages, so too will the present crisis spawn a frenzied recommitment to dropping barriers to the movement of capital, goods, and workers.

This is a pleasant picture, but is it overly rosy?

Indeed, the authors recognize that attempts at further opening up trade have become politically hazardous. For despite the overall numbers being comparatively small, the narrative surrounding the decline of the blue collar industrial class in the states of the rust belt has been politically compelling. During the 2016 Democratic and Republican primaries, one of the single strongest predictors of a vote for Donald Trump or Bernie Sanders in the above states was total trade exposure to China and Mexico. In the wake of the 2016 Presidential election, the Trans-Pacific Partnership (TPP) was killed, and NAFTA significantly revised. With Joe Biden’s early buy American push, his leaving in place of many of his predecessors’ tariffs, and Congress’ quick action to pump money into select domestic industries, it seems both sides of the establishment are rushing to gain their share of the political advantage by capitalizing on the suffering of those American workers negatively affected by changes in world trade patterns.

When he was campaigning for President in 2008, John McCain was savaged by the media for his purportedly heartless response when speaking to a gathering of concerned manufacturing workers who had recently lost their jobs due to outsourcing. The reality is, he essentially said, was that their jobs weren’t coming back. Unfortunately for those desirous of a return to the long days of dangerous work with heavy machinery, the truth is that they won’t be coming back – not unless the United States were willing to inflict massive economic damage on itself. This fact does not prevent politicians from enflaming public passions, playing on feelings of nostalgic longing and anger at perceived betrayal. Buy American campaigns are not new, nor are tariffs – nor are they unique to the American experience. The facts about the protectionist policies in question haven’t been in doubt for over a century.

The truth is that increased international trade has made us all better off in one or a variety of ways. Granted, the gains were not evenly, or proportionately, distributed. This is true both in a geographic sense, with gains and losses in employment often being intra-state, and in the growth in income by high earners in certain white collar professions rising disproportionately faster than wages in the broader domestic labor markets – the middling and lower wages of which have ceased tracking both gains in total factor productivity and inflation for several decades. Identifying these as political impediments to further opening of trade, a host of contradiction-laden prescriptions are proposed by Foreign Affairs’ slate of contributors – among them professors at Harvard and Princeton:

- Correctly identifying the deleterious impacts of government intervention in fostering specific industries, which become ossified and inefficient in their entrenchment, new subsidies are recommended to replace those already in existence.

- Arguing that the wealthy are unfairly taxed too little, taxes sure to be regressive in their impact are proposed.

- Worse still, regarding such targeted interventions as they do as harmful or inefficient, such as the Trade Adjustment Assistance program, which is meant to help workers who have lost their jobs specifically due to changes in global trade patterns, sweeping, blanket interventions are proposed – the expansion of the Affordable Care Act, as well as the tried and failed standbys of retraining and job placement.

While populist politics often makes for better headlines, arguably the more sustained threat to increased global trade is in the creation of new subsidies, tariffs, or other government programs or intervention. While many will no doubt excuse apparently temporarily expedient protectionist measures in the name of national security, they should be quickly reminded that every subsidy, every tariff, every regulation, creates a new lobby unto itself – the sole purpose of which is to maintain the subsidy or benefit for whomever receives it. As many of the industries being targeted by Congress’ latest Presidentially approved spending barrage are geared toward future production, future innovation, it seems apropos to inquire whether this 250 billion dollars is a one-off event or an initial down payment on a new kind of technological arms race with bloated industry favorites.

Lastly, despite continual rhetoric through the early part of the year to the contrary, there can be no doubt inflation is arrived and the question is now how severe it will become. Another question might be whether or not the inflation was surreptitiously anticipated and welcomed as a means of creating a weaker dollar to benefit U.S. exports.

Though the numbers tell us we’re better off, there can be no doubt trade has been increasingly weaponized in international affairs and heavily politicized domestically. Though the U.S. had always ignored some violations of the GATT by its partners, the WTO’s 2019 ruling expanding the national security exception to violations of WTO rules is likely to feed into the mood of the current climate. Contrary to the hopes expressed that COVID will spawn a surge in recommitment to increased global openness, more likely is a continuation of the more cautious piecemeal approach exhibited by the U.S. and U.K. over the last five years. Pulling out of previous commitments they no longer liked, or significantly restructuring or attempting to restructure them, they also selectively engaged in the expansion of trade, as in the case of the U.K. joining the TPP.

While meeting with the G7 this past week, Biden called out Beijing multiple times and ended a long-running stalemate over trade with the EU – precisely the recommendations of the contributors of another of Foreign Affairs’ previous editions. If past experience is to be trusted, we can expect a hard push in the coming months for the prescriptions outlined above, which essentially aim at creating a generous social safety net by taxing the wealthy while opening up space for localized solutions to local problems, with the hopes that these will combine to effectively diffuse any discontent resulting from changes in global trade patterns resulting from attempts at further openness and integration.

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