Why Liberals Should Embrace Fair Trade, Debate Role Of Tariffs

(Image by kees torn (CSCL GLOBE) [CC BY-SA 2.0], via Wikimedia Commons

On the latest episode of Last Week Tonight, comedian John Oliver made fun of Donald Trump's tariffs and mocked him for not understanding how free trade works.  

Oliver noted that tariffs are paid by importers and typically passed along to US consumers, leading to higher prices. Tariffs could cost the US hundreds of thousands of jobs, Oliver argued. 

Trade deficits "aren't actually always bad, and many economists believe, for very complex reasons involving savings rates and the dollar's special status as the world's reserve currency, that America's trade balance might be more or less where it should be," he said.

Oliver argued that "the overwhelming consensus among economists is that trade between countries generally speaking can create jobs, lower costs, and be a net benefit to both nations." 

But is John Oliver right?

We shall argue that although Trump's tariffs lack a clear strategy and are therefore not the right path for the US, tariffs and other trade regulations should not be simplistically dismissed. Rather, it is time for the US to have a serious and pragmatic debate about trade.   

Free trade means the international exchange of goods and services without tariffs, quotas and other barriers. The term was coined as a reaction to 18th-century state-led economic policies known as mercantilism in Britain and France, and as cameralism in the German-speaking states of central and eastern Europe. 

In the late 17th and 18th centuries, European states used tariffs, subsidies, monopolies and various forms of regulation to promote commerce and manufacturing. The United States, too, used such methods. Alexander Hamilton laid out his vision of government-promoted economic development in his Report on Manufactures.  

In 1776, however, Scottish philosopher Adam Smith criticized mercantilism in his book The Wealth of Nations, where he argued that trade barriers should be removed and that the international division of labour would result in a more efficient and advantageous outcome for all (see Alfred E. Eckes, Jr., U.S. Trade Issues: A Reference Handbook, 2009, p. 2). 

As Cambridge economics professor Chang Ha-joon has explained, the classical school, and later the neoclassical (or neoliberal) school, based on Adam Smith's theories, have come to dominate economic discourse. Neoliberal thinking has become mainstream, and whoever challenges it is attacked as someone who "doesn't understand economics", when in reality the field of economics is made up of different points of view and schools of thought, such as institutionalism, Keynesianism, Schumpeterianism, developmentalism, etc. 

As a matter of fact, while most mainstream economists favour free trade, there are also those who disagree with its premises. 

There is a legitimate argument in favour of free trade. However, one must ask whether the assumption that free trade, as John Oliver said, is a net benefit to trading nations, is really true. Friedrich List and Gunnar Myrdal, for instance, stressed the role of protectionism in developing economies. More recently, Chang Ha-joon and Erik Reinert have made a similar argument, pointing out that the majority of developed economies used tariffs and other barriers while they were industrializing. 

In theory, free trade is supposed to be the free flow of goods and services between countries. After the Second World War agreements and organizations such as the World Trade Organization (WTO), the North American Free Trade Agreement (NAFTA), and the European Single Market, became the linchpins of a global trade network. 

In practice, however, free trade does not really exist. China, for instance, is a state-capitalist country that uses various forms of trade barriers, subsidies and government policies to promote domestic manufacturing and technology transfer. 

The WTO does not have the power to enforce its rules directly. If the WTO finds that a country is violating the rules, it can only give permission to the complaining side to raise tariffs on certain goods. 

Numerous complaints involving China have been filed with the WTO. The European Union has lodged 9 complaints and the US 23. It is hard to argue that there is real free trade when countries systematically ignore rules over decades and the organization that should protect those rules has no direct power to enforce them. 

Second, those who argue that free trade is good for the economy cannot provide any evidence to support the case. Does free trade create more jobs and higher incomes? Let's look at the facts. 

US tariffs began to be lowered in the 1970s. In 1967 the US median household income was approximately $52,335 (all numbers adjusted for inflation). In 2007 it was approximately $58,987. And in 2017 it was approximately 57,617. We can see that median household incomes have basically been flat since the late 1960s and early 1970s. But, as Business Insider noted in 2017, households are burdened by rising costs for education, healthcare and housing. 

For instance, from 2004 to 2008, median household income grew by only 1.5 percent, while median expenditures increased by about 11 percent. By 2014, median income had fallen by 13 percent from 2004 levels, while expenditures had increased by nearly 14 percent. 

In 1967, unemployment stood at 3.8%, while in 2017 it stood at 4.4%. 

So, if free trade is good for jobs, incomes and prices, why is it that over the past decades incomes have remained flat, unemployment is not lower, and the cost of some of the most important items in the market basket such as housing and education has risen? Where is the evidence to support the claim that free trade achieves what its supporters claim? A look at other developed nations will show similar trends.

Germany, for instance, has achieved massive trade surpluses over the past decades. This year alone, the country's trade surplus is expected to reach $299 billion. And yet, Germany suffers from rising inequality and lack of social mobility. While the country's welfare state mitigates inequality, there is no indication that free trade has resulted in significantly better living standards than before tariffs and trade barriers were reduced. 

Third, when it comes to trade deficits, the chart below shows that once tariffs were lowered, the US began to incur massive trade deficits in merchandise. 

(By James 4 [CC BY-SA 4.0]  via Wikimedia Commons)

Some economists view trade deficits in a positive way because they bring lower prices for consumers and help business finance new investments. Other economists, however, believe that long-term trade deficits are unsustainable because they must be financed with borrowing  (Eckes 2009, p. 6).

Neoliberal economists argue that trade deficits are not a bad thing. A New Yorker article explains that a trade deficit means that a country "exports less than it imports, but also that the rest of the world is over-investing in that nation ... A country that maintains a stable, modest long-term trade deficit is likely to have higher employment and more investment in the future than it would if it managed to balance its trade each year." 

However, other economists, for instance those influenced by Keynes' theories, argue that trade deficits can lead to financial crashes. And in fact, since the Bretton Woods system was ended in 1971 and trade imbalances have increased, economic crises have multiplied.

From 1950 to 1971 the Western world was almost free of economic crises. After trade liberalization, by contrast, numerous crises have occurred. For example, the 1982 Latin America debt crisis, Black Monday in 1987, the savings and loans crisis of 1989-1991, the 1990 Japan crisis, the 1997 Asian financial crisis, to mention only a few.

Of course, the biggest crisis in recent history was the 2008 crisis. According to economist Michael Pettis: "what has happened in the past few years as the world adjusts to deep imbalances is neither unprecedented nor should have even been unexpected. The global crisis is a financial crisis driven primarily by global trade and capital imbalances, and it has unfolded in almost a textbook fashion." (Michael Pettis, The Great Rebalancing: Trade, Conflict, and the Perilous Road Ahead for the World Economy, 2013, p. 2).

Fourth, trade is not free because trade is political. Trading with a state-capitalist one-party dictatorship like China is not just a problem because it forces one to put business above human rights concerns, but also because as the authoritarian elites amass money, their grip on society tightens, and their ability to influence other nations increases. Russian meddling in the election process of Western democracies should be a warning that such actions on the part of dictators will continue and become ever more sophisticated.

While it is right to point out the inconsistencies and mistakes of Trump's tariffs, it is also important not to dismiss trade barriers and regulations both in economic and geopolitical terms. More free trade has not resulted in more and better jobs in America, and those who argue otherwise should provide facts instead of relying on catchphrases. The American middle class, for sure, has not felt that their living standards have got much better over the decades. Free trade has not led to global democratization, either. Rather, over the past few decades authoritarianism and radicalism have risen in many countries.

A 2006 Forbes article mocked people who complained about their living standards. "[D]espite their material prosperity, the Medians are a grumpy lot," the article said. "A June 2006 study by GFK-Roper group showed that 66% of Americans said that their personal situations in the 'Good Old Days'--defined by the bulk of respondents as anywhere between the 1950s and the 1980s--were better than they are today. And in May, a Pew Research Center poll showed that half of U.S. adults believe the current trends point toward their children's future being worse than their own present."

And that was before the recession hit. Those people were right, yet pundits ignored and belittled their concerns. We can see that discontent is a long-term issue, and it is a long-term issue because people's incomes have been stagnant, costs for basic needs have been rising, and opportunities have decreased. Telling people that free trade is great, although the vast majority have not benefited from it, is delusional, even dangerous. 

Instead of defending free trade dogmatically, liberals should rethink trade issues, experiment with tariffs and regulations, put the middle class, national security and human rights first, and develop a more strategic and effective trade policy than the Trump administration's.