Free Trade Under Siege in Both Parties’ Platforms

Skepticism about free trade has infected the official platforms of the GOP and the Democrats. America will be the loser.

By Samuel Gregg Published on August 31, 2016

Adam Smith, the father of modern economics, recognized that free trade among nations is a hard sell at the best of times. Free trade’s benefits are long-term. It often requires painful adjustments by certain industries and communities in the short and even medium-term as they are exposed to competition. Moreover, some of free trade’s benefits are effectively “invisible.” Consumers, for instance, often don’t notice cheaper goods and services spurred by free trade. What people remember is when a local business shutters its doors because companies in Korea, Nigeria, India or Guatemala can produce the same product faster, often of a higher quality, and at a lower price.

The alternative to free trade is, of course, protectionism: tariffs that raise the price on foreign-made goods, state subsidies for businesses, and a host of regulations designed to disadvantage foreign competitors. The problem is that, over the long-term, protectionism generally doesn’t stave off another country’s competitive advantage. No amount of protection is going to make Greek banks flourish or the Italian whiskey industry best-in-class. To that extent, tariffs and subsidies encourage people to commit themselves to work in industries in which they will find it harder and harder to remain competitive. The same protectionist measures often blind companies to the need to remain competitive if they want to stay in business over the long-term.

Cronyism

Protectionism also encourages unhealthy relationships between politicians and businesses. The latter have an incentive to lobby for favors rather than improve their performance in the marketplace. And politicians expect something in return for passing legislation that favors particular industries and businesses. In this sense, protectionism feeds a major problem already harming American politics and the economy: crony capitalism.

So what do America’s two main political parties think about free trade during a time in which Donald Trump and Hillary Clinton have pledged to reject trade deals such as the Trans-Pacific Partnership, and to renegotiate or adjust past treaties like NAFTA? Let’s take a look.

The GOP Platform: Hedging on Free Trade

On free trade, the official Republican platform contains some planks that are sound, while others are shaky. On the one hand, it argues for a worldwide multinational trade agreement among nations committed to open markets. Another section proposes broadening trade agreements among nations which “share our values and commitment to fairness, along with transparency in our commercial and business practices.” This might be interpreted as “free trade for free countries.” The GOP also maintains that free trade, done correctly, leads to a net increase in American jobs and exports.

Yet Americans’ growing skepticism about free trade, upon which Mr. Trump has capitalized, has infected the Republican platform. It calls, for instance, for more toughly negotiated agreements to advance “the interests of U.S. workers,” greater transparency, and an end to unfair practices by other nations (China being named as a primary culprit) such as currency manipulation and subsidizing businesses. The platform also states that an American president must be ready to “to implement countervailing duties if other countries refuse to cooperate.”

Some of these statements should concern free traders. Imposing countervailing duties on foreign goods and services, for example, will increase the price of those goods. That makes them less accessible to those on the lower end of the economic pyramid, thereby nullifying one of free trade’s greatest benefits for poorer Americans. The same countervailing duties will encourage inefficiencies and uncompetitive practices among many American businesses. That cannot be good for the American free enterprise system.

In other words, measures designed to punish foreign nations and businesses actually end up reducing America’s international competitiveness and hurting millions of Americans in the short, medium and long-term. How exactly will that help make America great again?

Lip Service, at Best, to Free Trade

Perhaps the biggest difference between the Democratic and Republican positions on free trade is that the Democrats seem less enthusiastic about and more skeptical of its overall benefits. The Democratic platform spells out more conditions for any future trade agreements. The platform does state that “openness to the world economy is an important source of American leadership and dynamism.” It was, after all, President Bill Clinton (D) who signed some of America’s most far-reaching trade-agreements.

More ink, however, is split by the Democratic Party underscoring what are regarded as free trade’s negatives. These range from viewing free trade as “a race to the bottom,” to claiming that it has had detrimental effects on “workers’ rights, labor standards, the environment and public health.”

Some of the Democratic platform’s other criticisms of free trade and proposed remedies resemble those articulated by the GOP. China is singled out for not playing fair, whether through currency manipulation or for giving subsidies to state-owned businesses. The Democrats also call for “significantly expanding enforcement resources.” That’s the same thing as the GOP commitment to using “countervailing duties.”

Are We All Neo-Mercantilists Now?

Lurking behind all this is the assumption that in trade negotiations, protectionist measures should only be removed if “the other side” agrees to dispense with a roughly proportionate degree of protectionism. In other words, tariffs et al. are viewed as bargaining-chips by nations rather than what they are:

  1. an imposition of costs in the form of taxes and regulations on businesses and consumers, which impedes the ability of Americans and American businesses to discover and constantly hone their competitive advantages; and
  2. part of the crony-capitalist juggernaut that prevents even a Republican-controlled Congress from shutting down arch crony-capitalist entities such as the Export-Import Bank.

The word for the mindset that ignores these realities is “neo-mercantilism.” This view treats international trade as a zero-sum game, as if one nation’s economic gain can only come at another country’s economic loss. At a baser level, it’s a trade policy that reflects the determination of interest groups and politicians on the left and right to use the state to benefit themselves at the expense of taxpayers and consumers.

All this is a far cry from the economic sentiments expressed in George Washington’s 1796 Farewell Address. There he called for commercial policy to

hold an equal and impartial hand; neither seeking nor granting exclusive favors or preferences; consulting the natural course of things; diffusing and diversifying by gentle means the streams of commerce, but forcing nothing.

In a populist age, however, free trade was always going to be a casualty.

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  • Charles Burge

    Here’s another long-term effect of free trade: as people in other countries begin to rise out of poverty and improve their own economic conditions, there will come a time when they want to buy more stuff. Specifically, stuff that most middle-class people already have: better furniture, computers and electronics, kitchen appliances, more clothes, etc. Even if we don’t directly make all of those items in America, chances are that we make at least some of them. In other words, it’s in our own interest to help people in other countries rise out of poverty, because that increase the customer base for goods that we produce. And don’t forget, that doesn’t just mean tangible things like I mentioned. It also means entertainment, such as movies and music. Economic isolationism is very foolish and short-sighted.

    • Charles, I believe benefits you have detailed are included in the main macro-theory.
      I wonder if you have any view on my posted question?

  • Agreed, the theory is not controversial. While wishing to avoid partisanship, I paraphrase Trump: US has dumb leadership. Any analysis of where this has had a negative effect. It has become more obvious to more citizens that this affects their lives

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