Free Trade Is out of Fashion

Since Adam Smith presented immutable evidence against the concepts of Mercantilism and Protectionism back in 1776, it has been widely accepted by economists and politicians that the mechanism of free trade between nations is the greatest wealth building tool at humanity’s disposal. Why, then, is this concept increasingly under attack? Populists around the world rail against trade, blaming it for the economic woes of their citizens, and tout protectionist policies they promise will restore dignity and jobs to the masses. In reality, these ideas would lead to a rise in nationalism and fall in overall welfare of the citizens of affected countries.

The first way in which international trade benefits the countries that practice it is through the use of comparative advantages. With the help of international trade, a country is able to focus more labor and capital to the industries it is better suited to pursue. Whether they be climate, structural, or workforce related advantages, each country has an area of the market where they are comparatively superior to other nations. As these advantages are discovered and exploited, the countries are able to trade products in which they are comparatively better at producing, resulting in an increased standard of living for every party involved.

In the United States, a great example of this comes with petroleum. The United States (according to the CIA world fact book) is the largest importer of crude petroleum in the world. On the converse (according to the Observatory of Economic Complexity) the US is the world’s largest exporter of refined petroleum. By pursuing the capital intensive process of refining crude into gasoline, diesel, kerosene, and other products, the United States is able to take advantage of its superior infrastructure compared to say, Mexico, while also taking advantage of Mexico’s cheaper cost of acquiring crude. Through trade, Mexico can focus on extracting oil cheaply and having it refined in the United States without the cost of building the infrastructure to do so. Both countries are therefore able to exploit their comparative advantage and both countries end up with a lower price and more product than before trade began.

Another thing to keep an eye on is the increased nationalism that comes with a populist movement to blame “this country” or “that group of people.” By scapegoating an easy target and not identifying the structural issues that lead to the downfall of industries and companies, focus is wasted on the wrong answer to the right problem. As nations become more prosperous, wages rise. When wages rise past the point where it is economically viable for that company or industry to compete, they adapt through the use of technology or seek lower labor costs elsewhere. In both cases, people in the affected country lose their jobs. The advancement in robotics makes sure that every Ford F-Series pickup comes off the line with perfect welds and less waste every time. This transition to a capital intensive process has kept vehicle manufacturing in richer countries. On the other side, because textiles require a lot of manual labor, firms seek out lower wage countries in order to keep prices reasonable and stay in business.

The solution to the lower employment in industries that advance technologically or rely on low wages is not to lament better times or punish those who seek to be more productive. In turn, training those left behind to be more productive in rising industries would keep employment high and growth strong. Instead of governments creating a culture of punishment and deterrents, they should focus on a culture of incentives and advancement. Better training and a more specialized workforce would pay dividends in the form of higher tax revenue and increased consumer spending. Only by being proactive and continuously training and educating its workforce can the United States avoid leaving people behind ever again.

John Maynard Keynes, considered to be the father of modern macroeconomics, said “the mechanism of foreign trade is self-adjusting and attempts to interfere with it are not only futile, but greatly impoverish those who practise them because they forfeit the advantages of the international division of labour.” Instead of buying into the rhetoric that simplifies a complex issue and promotes a culture of anger and impossible promises, see the world for what it is. Understand that progress moves forward without any regard for an individual or their industry. Countries will continue to exploit their comparative advantages, technology will continue to evolve, and there will always be someone willing to sew a blouse for less money. Keep your workforce ahead of the curve, and populism will return to the fringes.

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