While the media focus on what Donald Trump may or may not do if he loses the US election, there was a side to the recent presidential debate that was all but ignored. Both candidates were protectionist in their rhetoric, and in the long run, the victim will be us all.
International trade makes the world a wealthier place. It also makes both countries in a two-way trade agreement better-off, at least in theory. But there are losers, especially in the short run. US politics has veered down a dead-end, focusing on the losers from international trade and as a result, risks making the USA, and probably the rest of the world, worse off.
The purpose of trade is to facilitate specialisation. So two countries, or regions in a trade agreement, can focus on what they have a comparative advantage in, and reduce exposure to sectors where they are less efficient – comparatively speaking.
Note the word comparative; it is crucial. Say that the US is slightly better at making cars than China, but as a result of a trade deal, makes less cars and China more. This does not make the deal a bad one. The purpose of the trade deal would be to enable the US to focus on industries where it is much more efficient than China. But for displaced workers, such logic may seem harsh.
In the recent presidential debate, Donald Trump talked around the subject, but he did say: “We're going to re-negotiate trade deals. We'll have more free trade than we have right now, but we have horrible deals. Our jobs are being taken out. NAFTA, one of the worst deals ever. Our jobs are being sucked out of our economy. You look at all of the places that I just left, you go the Pennsylvania, you go to Ohio, you go to Florida, you go to any of them, upstate New York, our jobs have fled to Mexico and other places. We're bringing our jobs back. I'm going to renegotiate NAFTA.”
And “We're not going to let our countries be raided by other countries where we don't make our product anymore...I'm going to create tremendous jobs.”
On the Trans Pacific Partnership, or TPP, Mr Trump said: “We're not making things anymore, relatively speaking, our product is pouring in from China, pouring in from Vietnam, pouring in from all over the world. I've visited so many communities, this has been such an incredible education for me...I've gotten to know so many — I've developed so many friends over the last year. And they cry when they see what's happened. I pass factories that were thriving 20, 25 years ago and because of the bill that her husband signed and she blessed 100%, it is just horrible what's happened to these people in these communities. She can say that her husband did well, but boy, did they suffer as NAFTA kicked in because it didn't really kick in very much but it kicked in after they left. Boy, did they suffer. That was one of the worst things that's ever been signed by our country. Now she wants to sign transpacific partnership.”
Mrs Clinton said: “When I saw the final agreement for TPP, I said I was against it. It didn't meet my test. I've had the same test. Does it create jobs, raise incomes and further our national security? I'm against it now, I'll be against it after the election, I'll be against it when I'm President.”
Right now, free trade is not a popular concept in the US. But whether it was free trade or automation that has led to job losses in sectors that used to be big employers is a moot point.
What is clear, is that trade creates more wealth overall. Unfortunately, it appears that this wealth created has largely been restricted to a modest number of people, exacerbating inequality.
So there is a three-way choice.
Just carry on as before, engage in free trade, and ignore the social consequences.
Rein back on trade deals, see less wealth created, but at least help mitigate against a feeling of unfairness, and maybe inequality – but risk sparking off a global recession, and repeating the errors of the 1930s.
Or tax some of the extra wealth created via free trade to, in some way, alleviate the condition of those who lose out from trade. Frankly, the best way to do that is maybe to get the real beneficiaries from free trade, large companies, to pay more tax.
