Are Free Trade and Free Markets Quaint Ideas From the Past?

 
 
SUMMING UP: Free trade and free markets are great concepts but are often corrupted by politics, globalization, and the relative power of consumers and workers, our readers suggest.
 
 
by James Heskett

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Are Free Trade Notions Repeatedly Victim to Short-Term Thinking?

Free trade and free markets are concepts to which many of us, given our training in economics, aspire. But they inevitably fall victim to the varied and shifting needs of trading partners, the relative power of consumers and workers, and the political realities of modern governments. That appears to be a central message conveyed by responses to this month’s column.

Ian Brinkley raised the issue of shifting needs of trading partners as a problem when he commented, “Different countries subject to the same pressures from globalization have very different outcomes in terms of, say, income and wage inequality.” This suggests, he continued, that domestic social and political choices and the public policy mix are all important. “Rather than turn protectionist, a more productive solution would be to re-examine US domestic policy choices and political priorities.”

GeorgeO teed up the issue of the relative power of various constituencies by asking about the purpose of international trade. “At its core the trade debate can be considered to be a debate on whether the purpose of international trade is to maximize the purchasing power of consumers or if it is to reinforce certain government favoured industries and, indirectly, the people who work and invest in those industries. After more than thirty years when broad international consensus appeared to take the side of consumers we are now seeing the backlash …” Harti commented that, “The problem arises when the capital moves off-shore and the work force can’t follow.” Michael put it more bluntly: “I think many Americans have woken up in a state of shocked disbelief to find out free trade isn’t working for them.”

Celso Maia injected political reality into the discussion by commenting that free trade and free markets, as described by economists in their theories, are both a delusion. “Trade today is pretty much an evil mixture of economics and politics, and markets are often [full] of imposed restrictions (some are ethical, most are not).”

In lamenting the move away from free trade concepts, Thom Dammrich said, “Protected industries and their workers benefit in the short term, but beyond that protected industries become globally uncompetitive, shrink and lose workers.” David Wittenberg raised a highly relevant question when he said, “I’m a purist when it comes to principles. To me, free trade is always superior to managed trade because it is always more efficient… Trade policy is essentially political, not economic… It’s also relevant to ask which time horizon governs such political decisions. If a body politic decides to sacrifice some long-term growth for the sake of the short-term interests of some stakeholders, so be it.”

Are free trade notions repeatedly victim to short-term thinking? What do you think?

Original Column

Free trade as a component of a free market philosophy has been an article of faith among many economists for years, extending back to Adam Smith’s “invisible hand.”

While many members of the management community generally accept the notion of free markets and trade, those unable to compete with imports are sometimes quite willing to request protection, often in the form of tariffs on competing imports.

Now a new look at the issue makes the case for selective protective acts as a way of avoiding the disruptions to businesses and labor associated with a free trade policy that rewards and penalizes businesses with increasing speed. (These acts, by the way, don’t include the broadly based tariffs—equivalent to taxes—we are currently witnessing.)

It reflects the fact that “global” market freedom for capital and goods may work, but market freedom for labor does not. As a result, labor suffers at the expense of the owners of capital and productive capability under globalization and free trade policies. At the risk of oversimplification, the argument is that globalization combined with free markets has created disruptions that have led to social costs. This has fostered populist governments who are promising to reverse the costs by invoking trade restrictions, a process that threatens democracies.

"Rodrik rejects the notion that efficient markets for capital, goods, and labor will always regulate themselves"

Recent books by Dani Rodrik and Robert Kuttner generally support these notions. In his book, Straight Talk on Trade, Rodrik argues that penalties inflicted on labor, especially the less educated, by free global trade leads directly to the inequality that fuels social unrest and its associated costs. These effects are often underestimated.

For example, he points to flaws in the economic analysis underlying the proposed Trans-Pacific Partnership that led to a faulty belief that the Partnership would not produce job losses. He cites the significant gains made by Far Eastern economies in the 1970s and 1980s in spite of significant trade barriers at the time. He also argues that the social value of “good” manufacturing jobs warrants their protection.

Rodrik rejects the notion that efficient markets for capital, goods, and labor will always regulate themselves, producing the appropriate “price” of various inputs to the productive process. He advocates new trade agreements that allow individual nations to employ selective protections such as subsidies, investment regulations, domestic content requirements, anti-dumping rules, and, if necessary, even selective tariffs to protect industries and workers. In other words, something far short of what we generally define as free trade or the invisible hand at work. When combined with an increased safety net of improved job training and relocation incentives for workers, he sees a future of continued market expansion, business profitability, greater social equality, and the increased social stability that this can produce.

Kuttner argues that global capitalism, fueled by free financial markets and organizations such as the International Monetary Fund and World Trade Organization, has increasingly influenced the functioning of nation states to the detriment of labor and society. He argues for a kind of economic nationalism in which nation states are free to create “mixed economies” where profit-making businesses function alongside other institutions such as labor unions in an environment in which all are subservient to democratically elected governments.

Are free trade and free markets quaint ideas from the past? What do you think?

References:

Thomas L.  Friedman, The Lexus and the Olive Tree: Understanding Globalization, 2000 Edition (New York: Farrar, Straus and Giroux, 2000)

Robert Kuttner, Can Democracy Survive Global Capitalism? (New York: W. W. Norton & Company, 2018)

Jeff Madrick, Staying the Invisible Hand, The New York Review of Books, June 28, 2018, pp. 44-46.

Dani Rodrik, Straight Talk on Trade: Ideas for a Sane World Economy (Princeton, N.J.: Princeton University Press, 2018)

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