Simple question, but it has a two-part answer.
IF it is free trade between roughly equal economies with similar labor costs, everyone benefits. That’s just more competition. Free trade in most goods with say England would in general be a net plus.
However, IF the trade is between an industrialized and an unindustrialized economy, the only winner is big corporations and their management. Not the workers. Big corporations win, workers lose.
For an example of trade between unequal economies, free trade between the US and Mexico, and between the US and China, have both been hugely damaging to the US economy. The problem is simple.
If I own a factory just on the US side of the border, I can move my factory one kilometer south and pay $3 per hour for my labor costs instead of $18 per hour. I’d be an idiot not to do that.
Up until 1994, that was not a problem. What made the difference? NAFTA, the North American Free Trade Agreement. It lead to what H. Ross Perot presciently called the “giant sucking sound” of jobs being sucked across the border to Mexico.
As a factory owner, if I moved my factory to Mexico I’d get rich paying my new workers three bucks an hour. But what about my old employees? Suddenly they are all out of work. Dozens of families devastated.
Now, the benefit of free trade is supposed to be cheap Mexican goods … but if you lose your job, inexpensive avocados are meaningless.
That is the problem with free trade. Yes, it’s great to have cheap goods IF YOU HAVE A JOB. But we have shipped millions and millions of factory jobs overseas.
Many people seem to be puzzled at the huge and growing current disparity between the wealthy and the poor. Others seem mystified by the fact that the working-class income in the US hasn’t changed much since the eighties.
Both of these are adverse results of free trade between unequal partners. The constant shipping of factory jobs overseas has left a big working-class labor surplus in the US. Inevitably, following the laws of supply and demand, this labor surplus has depressed working-class wages for decades.
But at the same time the same free trade between unequal partners has enriched the corporate ownership and management. The combination has led to the aforementioned widening gulf between the wealth of the rich and the poor.
A note. People often say something on the order of “But free trade works well between the states of the US.” This is true. However, there are a couple of reasons why. The first reason is that we have national labor laws that ensure that there is not a drastic difference in labor costs. These include national minimum wage laws and more importantly, national health, medical and safety standards whose costs apply everywhere. This national framework plus a shared history and long-time economic connections mean that the economies of the states are roughly equivalent. Contrast this with undeveloped foreign economies where there are no such laws and no such shared history.
The other and perhaps main reason that free trade works in the US is that workers can move to where the better-paying work is. This means that employers must provide some given level of pay and benefits to attract workers, or they’ll go where wages are better.
However, none of that is true with respect to say Mexico or China. They don’t have equivalent worker protections. They don’t have workmen’s comp and safety regulations of the kinds we have. There is no free passage of labor from here to China or the other way. And beyond that, because their own economies are so screwed up, people in those countries are willing to work for three beans a day plus a dry place to sleep.
Here is a historical view of what the siren song of free trade has cost the US. After World War II and up until the 1980s, we were running on the old system with bilateral trade agreements and the occasional trade war. And it was a time of general economic growth of all sectors including the middle class. Go figure …
But since the eighties, the tariffs have been gradually removed year after year as the proponents of free trade and globalization have gained power and imposed free-trade and anti-tariff policies.
As you can see, currently we are losing money through our foreign trade at the rate of about two-thirds of a trillion dollars per year. Since 1980, we have sent a total of nine trillion dollars overseas.
Nine terabucks, that is serious money. It is half of our national debt. It is money which we could be paying to our own factories and to our own farms and to our own workers and keeping it circulating within the country … but instead, free trade is steadily sucking that money out of the country. And that doesn’t even count the lost jobs.
So … how do we know that this change in our long-term trade balance of payments is due to the free trade lunacy? It is perhaps clearest with Mexico, since the change in the trade policies happened on a certain date—the date when the North American Free Trade Agreement (NAFTA) went into effect. NAFTA eliminated tariffs and opened the doors to free trade between the US, Mexico, and Canada. For the US-Canada trade this didn’t make a lot of difference, because the economies were and are not all that different. But with the US-Mexico trade, the economies are greatly unequal, and look at what happened.
Unfortunately I can’t find a longer set of historical data, but the change is clear. Up until 1994, our balance of trade with Mexico was about zero—we bought about as much in the way of Mexican goods as we sold them of US goods, so there was no net outflow of dollars.
The above figure shows clearly what NAFTA is currently doing to our economy—it is costing us sixty billion dollars per year. It gets worse. Since NAFTA went into effect, it has cost us a total of just under one trillion dollars.
This is a trillion dollars that could have gone to US factories and US workers. Now, would that have meant more expensive avocados and more expensive Corona beer and more expensive electronic gear and so on down the line?
Absolutely … but to offset the higher costs, we’d have a trillion dollars more circulating in the economy to buy expensive avocados. And more specifically, much of that money would have been paid to US workers instead of foreign workers. So the money would not only be here, it would be in the workers’ pockets.
This means that the cheap goods that come from free trade are a false economy—the cheap goods are more than offset by the damage to the economy.
Let me note that this idea is far from new. It has been known for centuries. Here is Philipp von Hörnigk writing in 1684 on “Nine Points On How To Emulate The Rich Countries” (emphasis mine);
Ninth, except for important considerations, no importation should be allowed under any circumstances of commodities of which there is a sufficient supply of suitable quality at home; and in this matter neither sympathy nor compassion should be shown foreigners, be they friends, kinfolk, allies or enemies. For all friendship ceases, when it involves my own weakness and ruin. And this holds good, even if the domestic commodities are of poorer quality, or even higher priced. For it would be better to pay for an article two dollars which remain in the country than only one which goes out, however strange this may seem to the uninformed.
So avocados will indeed be more expensive without free trade… but free trade isn’t free. Philipp von Hörnigk is correct. Without NAFTA that trillion dollars would still be circulating in our economy, Yes, we got cheap avocados, but it has cost us a trillion dollars that have left the economy forever.
Obviously, this constant money hemorrhage of six hundred billion dollars per year cannot go on. It will lead to our eventual ruin. President Trump is right that we need to renegotiate all of these agreements. We need to remove and reduce taxes. We need to remove and reduce regulations. We need to improve conditions for starting and running businesses.
And more than anything, despite the screams of the free-traders, we need to impose tariffs. All of the freedom from taxes and regulations can’t compete with $3/hour labor. For that we need tariffs.
Sadly, free traders react to tariffs like vampires react to daylight, with shock and horror. They say thinks like “But … but … that might lead to trade wars!”.
So what? Why are people so afraid of trade wars? They happened from time to time when I was a young man … minor clouds on the economic horizon. People just bought something else.
In addition, is there anyone who thinks that the US is likely to lose a trade war? We have the largest and strongest economy in the world … or at least we did until we shipped 70,000 factories overseas. But the President is doing all he can to reverse that trend, and to date is having success.
Finally, people say that the President can’t bring the jobs back because they are gone forever, lost to automation. Me, I say that’s crazy. Carrier Air Conditioning was about to move a factory to Mexico just after the election. It was not because of awesome Mexican robots. It had nothing to do with automation. It was because of awesome Mexican wages … $3 per hour.
Are jobs lost to automation? Yes, every day … but automation and factories moving overseas are two very different and generally unrelated problems.
• Yes, if we impose tariffs at the Mexican border, avocados and Corona beer and other Mexican goods will cost consumers more, and
• Despite that, everyone ends up wealthier when the dollars remain in our own economy.
The choice is simple—expensive avocados and American jobs, or cheap avocados and no jobs … tough choice, huh?
PS: I ASK that if you comment, please QUOTE THE EXACT WORDS YOU ARE DISCUSSING, so we can all be clear on what you are referring to.
The best text on this matter is How Rich Countries Got Rich … And Why Poor Countries Stay Poor. It lays out these ideas much better than I can.
My own previous posts on the subject are here.