Donald Trump’s blowhard presidential bid traffics heavily in Muslim and Mexican bashing, of course. But Trump gains traction also from calling the Republican establishment stupid and out of touch (Hmmm…), and questioning whether the US should be footing the bill for defending so many countries militarily. Still, another slice of support stems from his pledge to reverse American ‘free trade’ policy and return to some form of what can only be called protectionism.
Like Trump, Bernie Sanders denounces “disastrous” US trade deals with other countries, claiming that they destroy American jobs and hold down wages, while filling the coffers of mega corporations and the obscenely rich. Both Trump and Sanders draw substantial support from working class voters and those with no college degree – citizens who, if Trump and Sanders are right in their criticism, have lost most from the impact of America’s free trade policies. Competition from the Sanders campaign has forced even Hillary Clinton to water down her longstanding support for US trade deals, part of a bipartisan consensus reaching back through at least the presidencies of Obama, Bush the second, Bill Clinton and Bush the first. This consensus holds that trade deals like Bill Clinton’s NAFTA (North American Free Trade Agreement) and Obama’s proposed TPP (Trans-Pacific Partnership) benefit both America and her trading partners. Polls have long indicated distrust of trade deals in communities dependent on manufacturing jobs. The current election cycle could emerge as a high water mark in free trade policy as political operatives grasp its deepening unpopularity with working class voters. Resistance in Congress to new trade deals may rise now if voters increasingly favour free trade skeptics.
[pullquote]Resistance in Congress to new trade deals may rise now if voters increasingly favor free trade skeptics[/pullquote]
This does not mean that return to some robust form of protectionism is likely any time soon. It would take an extended uproar and debate for the US ship of state to turn from the open seas of free trade toward protectionist shores. The great bulk of college-educated American voters ‘know’ that free trade must ultimately be good for America and for the rest of the world. They learned this in Econ 101: that sub-chapter on international trade dealing with ‘comparative advantage’. Even if they forget the specifics, college graduates firmly grasp the bottom line: free trade is beneficial to all players and protectionism is duuuumb. Those who have not gone to college may not have been persuaded, and it is of course their jobs and wages that have been worst affected by free trade policy, if critics like Trump and Sanders are right. Free trade is a deepening class issue in America.
Shall we take a quick peek back at Econ 101? Recall the contrast between ‘absolute’ and ‘comparative’ advantage in the national production of various items. A country holds absolute advantage if it combines land, labour and capital so as to produce some item at a lower overall cost than other countries do. The more efficient countries should seemingly produce any such item and less efficient countries should seemingly buy them rather than wasting scarce resources producing it themselves. Superficially persuasive, but not necessarily true, held David Ricardo. Rather than producing every item in which it enjoys absolute advantage, the efficient country should instead produce only those for which it enjoys comparative advantage: the lowest sacrifice of other items (opportunity cost) it could potentially produce with equivalent resources. If producing one item costs too much in sacrificed production of others, it should be imported from another country rather than produced at home, even if importing it costs more than producing it domestically. The added cost of importing the item is more than compensated by concentrating resources on producing items in which the comparative advantage allows them to be exported successfully, thereby generating revenue. Revenue from specialized exports will exceed the cost of imports needed from abroad. Meanwhile, every country—no matter how inefficient overall—holds a comparative advantage in producing something. As a matter of logic, there must be some item it can produce at lowest sacrifice of other items it could produce within its resource constraints. It should forego producing those extraneous items and import them instead, using revenue generated by export of the item on which it enjoys a comparative advantage. Again, the export revenue will more than offset the import bill.
These claims can all be demonstrated with some modestly rigorous mathematics. In theory, as we are now assured, this proves that free trade among nations is beneficial to all participating countries. In a global win-win scenario, overall wealth is maximized and the prosperity of each country is optimized if each concentrates on producing its own special comparative advantage item and importing everything else. With some further logic, we can deduce that under unfettered free trade countries will indeed gravitate toward producing and exporting their own special comparative advantage items, while importing all other items from countries with a comparative advantage in producing them. Hence, we grasp how moving toward greater free trade inherently promotes prosperity for each country and the globe at large.
Of course, Ricardo’s elegant argument offers no assurance that there will be no individual losers from transnational free trade. US manufacturing workers may lose jobs to China and Mexico, for example, and have their wages bid down to keep jobs from leaking further away to places where labour is cheap. Common Ricardian responses to this problem are: 1) that with cheap imported goods widely available, US workers have higher living standards despite falling incomes because gains from cheaper goods outweigh income losses; and 2) that jobs and wages from successful US export sectors will rise so much as to offset job and wage losses in declining sectors. With respect to (2), gains garnered by winners can, in theory, be used partly to compensate losers so that all Americans wind up better off. This would probably not take the form of outright distribution from winners to losers through the tax system. How could we tell who is how much of a winner to tax him fairly and who is how much of a loser to receive a given level of benefit? And why should such a compensation system apply only to gains and losses from trade, not also to those from other kinds of economic policies? More likely, re-distributive compensation would take the form of general taxation and expenditure on, say, training dislocated workers for ‘jobs of the future’.
[pullquote]In a global win-win scenario, overall wealth is maximized and the prosperity of each country is optimized if each concentrates on producing its own special comparative advantage item and importing everything else[/pullquote]
Training dislocated workers for jobs of the future has failed, partly because devoted resources have been paltry, but also because there might be too few ‘jobs of the future’ to go around in the first place and because the dispossessed may lack the needed skill-sets even with training. Whatever the reasons, America’s former manufacturing working class, with its joblessness and falling wages, finds little solace in cheap T-shirts from China and living-large lifestyles for their better-placed college-grad friends. Working class resentment of free trade, fuelling Trump and Sanders, comes mainly from white voters, while the black working class continues to support Clinton. This may be because the black manufacturing worker class barely came into existence, during America’s mid-century heyday, before losing its toehold on good jobs and wages (last in, first out) well before the time when free trade could easily be fingered as the suspect it has later become.
When examined critically, Ricardo’s theory turns out strikingly weak as proof of free trade’s universal superiority. Ricardo himself claimed only that his theory showed the possibility of win-win free trade, not its inevitability. The win-win scenario depends on critical assumptions and overlooks critical dynamic considerations. Confront Ricardo with the real world and his win-win tautology collapses into muddle. It assumes non-mobility of capital across borders and absence of exchange rate interventions, neither of these remotely true in today’s world. It also assumes that countries face no limits on capacity to produce what they export or shortages of cash to pay for crucial imports. Factoring out dynamic realities, Ricardo’s proof is at best a static snapshot of efficiency at a given moment. But short-term efficiency does not mean long-term growth, which is less about using current productivities than about transforming them to higher levels. And Ricardo fails to grapple with the fact that when cheap imports produce job losses and factory closings, idle labour and productive plants cannot magically and instantaneously shift to other uses. Instead, the economy may limp along for prolonged periods at less than its full capacity, more than wiping out static short-term gains of free trade. Nobel laureate James Tobin quips that, “It takes a heap of Harberger triangles (economist jargon for short-term trade gains) to fill an Okun gap (the shortfall between actual production and full capacity).”
Trump will probably lose to Hillary and that could quickly shut down any Republican Party shift away from free trade. But millions of white working class voters have registered their anger over free trade. A savvier and less doctrinaire Republican leadership could snag that voting bloc by subjecting free trade to critical review. Hillary supported NAFTA via her husband’s presidency and supported TPP as Obama’s secretary of state. Although Bernie has forced her not to advocate free trade in this election, his working class voting bloc may fail to shift Democratic leaders away from free trade. At least equally likely is that Democrats will concede the white working class bloc further to the Republicans if the Republicans move to seize it. Hillary probably does not need that bloc in order to beat Trump, so deeply loathed by so much of the electorate. In the long run, the Democrats’ connection with the white working class has been fading for at least a generation. Support for the Democrats comes increasingly from college-educated professionals whose parents and grandparents voted Republican. In apparent consonance with this shift of professionals from Republican to Democrat, Democratic Party opinion has shifted toward free trade. Although a 2009 poll showed that only 36% of Democrats viewed foreign trade favourably, that figure has now jumped to 63%, Sanders voters notwithstanding. Some 51% of Democrats now favour a next president who supports free trade and 25% have no opinion. This makes the Democratic Party more sympathetic to free trade than the average voter. Only 41% of registered voters polled favour a next president who supports TPP. It may not happen, but it could: Democrats increasingly become the party of professional elites like Republicans of old, while Republicans make themselves over as a working-class party like Democrats of old. Such a Republican working-class party would of course for the time being be very, very white.