IndustryWeek's elite panel of regular contributors.
For decades, economists have claimed that free trade delivers the greatest good to the greatest number of people. Good for workers, corporations, shareholders and the country. This idea has been accepted by both Democrats and Republicans and is based on the principle of comparative advantage.
Dating back to the 19th century, the principle assumes that when two countries trade, both will achieve higher national incomes because each will specialize in areas where they have a cost advantage. They can abandon industries where they are less efficient (like, for instance, manufacturing) and move workers to industries where they are more efficient.
However, this is not what has happened to the U.S. in the last 40 years. The principle of comparative advantage is flawed because it assumes that all industries are the same and a worker can equally make a living in any industry. Yet instead of workers going to industries where they can get comparable wages, they are forced to work in the service industries for wages that are from 20% to 38% lower than a manufacturing wage.
Comparative advantage also assumes that when a foreign competitor gains the upper hand, the international value of the dollar declines, bringing trade back into balance again. But this doesn’t happen in the current free trade market because competitors game the system by manipulating their currencies, keeping the dollar artificially high.
Another assumption favored by most economists is that importing cheap goods with low prices is beneficial to American consumers. But if a lower price point comes at the expense of high-quality jobs and a strong blue-collar market, then the positive (consumer price) is trumped by negative job loss.
When jobs and production are exported to low-wage countries, the higher-wage country suffers production cutbacks, job loss and failures of supplier companies. This eventually leads to the market dictating that workers accept lower wages and reduced standards of living. It means the wages of higher-wage countries converge to a global midpoint known as “regression to the mean.”
Free trade has been very hard on workers, manufacturers, suppliers and industries, and has inflicted pain on the weakest members of society. The benefits have accrued primarily to the affluent and multinational corporations. Free trade has become a one-sided process where the benefits flow to capital and the costs to labor. For working Americans, it has become a race to the bottom.
Winners and Losers: ITC Report
To really understand the outcomes of free trade, one must examine the winners and losers. There is a government report by the International Trade Commission (ITC) from June 2021 that analyzes the results of 16 Free Trade Agreements (FTAs) from 1985 to 2020. The report is an attempt to put a positive spin on FTAs , but a careful analysis of the report shows little benefit and a lot of problems. The overall takeaway is that there was very little growth or job creation, and most of the economic benefits went to the multinationals and investors. Here are some conclusions from the ITC report:
· FTAs were good for white-collar but not blue-collar workers. The employment gains were 0.3%, and the biggest gains were for college educated male workers (195,000) and college educated women (150,000). FTAs have been very bad for blue-collar workers, particularly workers without a college education, women and people of color.
- Free trade was good for big corporations like General Motors but not small or midsize supplier firms.
- FTAs were very good for imports but not exports. Exports added 1.6% and imports added 3.4%, making the trade deficit worse. A rise in imports that is double the rate of exports suggests a net loss of jobs.
- GDP rose only 0.5% between 1985 and 2017, and real income rose only 0.6%.
- The Government Accountability Office found that there were limited efforts to enforce agreements and there were many labor rights violations.
- Free trade increased trade deficits. Trade deficits began in the late 1970s and have grown to exceed $1 trillion in 2021, an inconvenient fact largely ignored by politicians and economists. According to the Economic Policy Institute, trade deficits have eliminated nearly 5 million good-paying manufacturing jobs and 90,000 factories.
Who Really Benefits from Free Trade and a Growing Trade Deficit?
1. First on the list of beneficiaries are the multi-national corporations who have plants in Asia and get to export cheap products back to America. Corporations like General Electric, IBM, and Caterpillar,
2. Multinational retailers like Apple, Costco, Target, Wal-Mart and Amazon, who get to import billions of dollars’ worth of cheap goods.
3.Wall Street firms like Blackrock, Vanguard and J.P. Morgan, which get to finance the loans we must have with our trading partners to finance our deficits, so that we can keep buying their products.
4.The real winners: The wealthy in all of the trading countries—not the citizens, workers or manufacturers.
Making these kinds of sacrifices is a noble sentiment but it is based on hypocrisy. Why should the workers in the lower- and middle-class be asked to do all of the sacrificing while the multinationals and their shareholders gain all the spoils?
The Opposite View
In a 1986 article, "The Folly of Free Trade," economist John Culbertson said: ”We have elevated the economic theory of free trade to the status of a national theology, and we allow its simple dictums as if they were immutable laws.”
That is still true today, but the cracks are showing. The fallacies don’t match up to the bold claims of the free-trade economists.
Culbertson says the foreign manufacturer will gradually exploit new knowledge and technologies by “capturing more and more of the product’s value-add and eventually discarding the empty shell of the American business.” Which is what happened when the U.S. semiconductor industry had to be bailed out by the government.
A Faustian Bargain
Just as Dr. Faust in German folklore traded his soul for riches and magical powers, America’s multinational corporations have knowingly accepted the rise of trade deficits and cheap imports, the erosion of American industries and jobs and the loss of their technologies to their competitors in the pursuit of short-term profits and minimal GDP growth. I think that the Faustian bargain is self-defeating for the multinationals, because what is surrendered is ultimately far more valuable than what is obtained. Economists and politicians, however, have traditionally agreed with this tradeoff.
We Need Fair Trade
We need to change the idea of free trade and adopt a “fair trade” policy. To stop the decline of the middle class, we need to consider the following:
1 What is missing is an equitable economic model that serves the majority. We clearly need a new economic model that protects workers and industries and stops the exploitation of low-cost foreign workers at the expense of Americans.
2. We need to build reciprocity into our trade. The former trade negotiator Peter Navarro has urged Congress to pass a Reciprocal Trade Act, which would allow the U.S. to impose reciprocal duties on all countries that have higher tariffs if they do not lower their tariffs and value-added taxes.
3. To import foreign products so that American consumers can have low-priced goods requires continually growing the trade deficit. You don’t have to be an economist to reason that a country can’t pile up debt faster than its income forever. We need a national goal to reduce the trade deficit and focus on balancing our trade budget.
4. If the Biden administration is really interested in growing manufacturing and establishing fair trade, they will have to stop currency manipulation and do something to reduce the overvalued dollar.
5. The Trump tariffs with China are working, and we need to continue to use them to slow the flood of cheap imports and move towards a balanced trade budget.
Michael Stumo, CEO of the Coalition for a Prosperous America, summarized the problems of free trade when he said recently that “free trade policies are a silent attack by multinationals on tens of millions of working-class citizens, with special weaponry targeting minority workers trying to achieve the middle-class dream.”
Michael Collins is the author of a new book, “Dismantling the American Dream: How Multinational Corporations Undermine American Prosperity.” He can be reached at mpcmgt.net.
