Free Trade – Another Look

Free trade advocates have dominated economic thinking in Washington for decades.  In August 2018 I posted an article in this blog questioning some of its assumptions.

The Spring 2020 issue of National Affairs contains a defense of free trade  written by Richard Reinsch, II, editor of Law & Liberty. His target is the industrial policy aimed at reviving jobs and increasing wages in the manufacturing sector, including policies targeting free trade. Reinsch wonders why there is so much focus on manufacturing jobs, which currently constitute only 8 percent of employment.

Reinsch argues that the loss of manufacturing jobs in the U.S. is due mainly to technology change, rather than trade. Job loss notwithstanding, the U.S. manufacturing sector is “robust and highly productive,” according to Reinsch. Policymakers should not be insisting that we come to its aid at the expense of consumers (i.e., all of us) who benefit significantly from the low prices free trade produces. Reinsch does not minimize the problem of lower male participation in the American workforce. But he declines to blame the problem on free trade in general or on China in particular.

Reinsch agrees that there should be exceptions to free trade to account for military and security concerns, such as those raised by China’s lead in 5G broadband technology.  Reinsch says that “Any nation serious about its continued existence must have these policy conversations and make appropriate decisions regarding its military posture. If certain restrictions on trade are needed, they should be imposed.”

Actually I would cast the protective trade net somewhat wider than Reinsch.  Our recent experience with the coronavirus shows that we must be more self-sufficient in times of crisis. 

Given the massive benefits that free trade has conferred, Reinsch believes that, as a general policy, we should all want it and support it.  I am no economist, but I question some of his arguments. 

I have seen how so-called free trade works out in real-life situations. 

For example, let us consider a textile plant in North Carolina circa 1990.  It employs 2,000 workers and is the economic hub of a small town,  It is operating with old and sometimes obsolescent equipment that is gradually replaced or refurbished as circumstances permit.  Entry level workers are hired at near minimum wage and gradually work themselves up to a reasonably comfortable living wage.  Parents, children and grandchildren often work at the same plant.  Only the plant owners can be described as affluent.  The plant is in competition with other similar enterprises all over the country, and constant innovation is required to maintain or grow market share. Profit margins are low, meaning very little flexibility regarding worker wages, benefits, etc.  The plant is subject to many government regulations at the federal and state level relating to minimum wage, worker safety, waste disposal, etc. etc.

In 1990 a textile plant opens somewhere in southeast Asia with the benefit of foreign investments and perhaps a local government subsidy.  The equipment is state-of-the-art.  There is no minimum wage and few or no regulations   It may even become what is known as a “sweat shop.”  The Asian plant can produce and ship goods to the United States that are far less expensive than equivalent products of an American plant. The American textile plant goes out of business and the town deteriorates.  The former workers try desperately to find new jobs. 

The same sort of thing happened to the Midwestern automobile industry and to the Pennsylvania iron industry.  Other factors were involved, of course, but the impact of so-called free trade was often devastating, and it should never be minimized by  economists swilling their morning cups of coffee in a comfortable government office.

We have never had real free trade.  As President Trump has frequently said, China and other nations have taken advantage of us for years.

I maintain that trade is not free trade unless the same rules apply to all those nations that participate —  roughly equivalent minimum wages adjusted to reflect the local cost of living, environmental (anti-pollution) restrictions, worker protection regulations, etc.  At the same time, artificial quotas and other trade barriers would need to be removed and governmental subsidies tightly controlled.

Perhaps these moves would result in an increase in consumer prices, but the benefit should be greater economic stability for us all.

And finally, we would have free trade that’s fair trade.

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