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Great article, but one problem I see with your arguments is that eliminating all barriers to worker mobility (workers moving from one place to another) means eliminating unique languages and by extension unique cultures. That is not only unrealistic, it is undesirable because it would result in less diversity. The end goal of this kind of mentality is that we would be a planet of grey people with the same language and the same culture. Even in the best case where we wouldn't need diversity because this grey people could solve everything, I don't think this is optimal for happiness reasons. This might make for a great episode of star trek, but it wouldn't be the type of world I would want to live in... you would have seen everything there is to see by a very young age.
I get the point about the bigger pie and the winners compensating the losers, but wouldn't this also require a world government? Right now the only way to do that is through tariffs, which is the opposite of free trade...
For developing economies it is frustrating that many rich countries are now seriously questioning the benefits of trade and the international trade system they shaped in the past. This is a disappointing message for the developing world that in my view, is just beginning to enjoy the many gains of free trade. The rich world must stand for free trade as a means for helping to reduce poverty in emerging market economies.
Free trade helps large corporations to circumvent national laws to its own benefit. Free trade does not necessarily help the resident state of the corporation.
Governments should agree between themselves to force companies into paying fair share of profits. Otherwise free trade means race to the bottom between states, and companies escaping to the place where they pay lowest taxes, aiming towards 0% taxation. States have ultimate legal and physical power, and are capable of agreeing economic deals between themselves. They should force companies to pay some minimum part of the cost of state infrastructure. Otherwise, no market access and fines for the companies. Such international trade will be free and clear - at acceptable bottom level.
Prior to the Global Recession of 2007-2009, TE had many articles about Global Rebalancing.
Basically China and other newly rich countries would be buying US goods and services.
Whatever happened to that?
The problem may be that big companies formed lobbies, oligopolies and blocked new players on the U.S. market, and their products and marketing strategies are no longer internationally competitive. Consider the claimed best new U.S. product of the 2010s, the Apple iPhone. Fact is that mobile phones of comparable or only a little lower quality are sold in China at several times lower price. Apple cannot sell its products in China at the U.S. prices. Apple is also unwilling to lower the price of iPhones in the U.S.A., because it is its biggest revenue source. Therefore it pays for Apple to keep its hold on the U.S. market by lobbying and regulations, and largely withdraw from the Chinese market. Lobbying is more profitable than competition. Only limited number of iPhones are sold in China, rather like a status symbol. The result is that U.S. products are not exported, and U.S. consumers pay inflated prices for smartphones.
Free trade ideology is based on at least two untruths.
First, implicit, is that the growth is profitable and desirable by itself. Despite economic growth and free trade, wages of lower 50% of workers shrank in real terms in the USA and stagnated in Germany in the last decades. Making a bigger pie is combined with the rich dividing all the growth to themselves, and the poor is served actually smaller pieces. Slogans like 'rising tide lifts all boats' or 'economy, stupid' no longer describe the economy of the 2010's.
The second untruth is that big firms win because of the higher productivity, making the global economy more efficient. As often as not, big firms win because of lobbying and effect of scale, and pressure the government to bully smaller countries politically.
I am surprised that The Economist reproduced such obvious untruths, although it pointed some itself in other articles.
What would happen if the U.S. dollar suddenly became worth half of what it is worth now in foreign exchange? A lot of electronics and other consumer goods (like iPhones, inexpensive clothing and foreign automobiles that are actually imported instead of being made in the U.S.) would double in price, and a lot of consumers would be unhappy. But how much would people's lives actually be worse?
On the face of it, the disruption of the U.S economy caused by imported goods would be much less -- foreign competition would not be anywhere near as much of a threat to U.S. businesses. But I don't know the extent to which U.S. businesses themselves really depend on cheap imported goods and commodities -- not just to compete with other U.S. businesses (which would be exposed to the same price increases) but to function at all. If anybody has an answer to this question, I hope he'll share it.
Nevertheless, I can advance an hypothesis: Much of the disruption free trade has caused in the U.S. economy is the result of the dollar's status as a reserve currency and as the unit of account in various international transactions. The result is that it is worth considerably more than it would be if its value depended solely on a desire to purchase goods produced in the U.S. The public in the U.S. is able to purchase certain kinds of consumer goods cheaply, but the disruptive effect of foreign competition is widespread.
"nothing wrong with a reasonably generous welfare state"
Except that in the United States, many people gauge their self-worth in large part to their ability to do something productive for work and pay their expenses with the earnings from that work. Telling them to exchange reasonably well-paid employment for government benefits that will make them feel like beggars is a great way to stir up resentment and anger. Unfortunately con-men like Donald Trump and perhaps worse opportunists to come can channel that anger into dangerous directions.
Accelerating automation will only make this problem worse.
In Europe, the problem with welfare is that it is volatile. Citizens already given their wealth to the state by accepting higher taxes. However, it is extremely difficult to actually demand something back from the state. State services, for example the unemployment benefit, are cancelled or hollowed out - they buy less and less although shrink not so much in formal terms. It is better for people to demand from the state to force companies to pay their share of costs of the state.
To pay for this larger government that dispenses benefits for those affected by free trade, doesn't that taxation then act as a drag to the benefits that free trade theoretically delivers? Ending up with little to no real benefit for free trade?
That needs to be part of this analysis.
The picture painted in this article is very incomplete.
The Economist asks what can the country do where some people lose out to others in the benefits of free trade. A better framing of the question in relation to the US and China would be - What can countries that have a non sustainable trade deficit do compensate itself from a continuous deficit to the GDP and wealth due to the one sided trade? That would go to the root of the problem which is unsustainable trade deficit by some countries that keep their exchange low by not freeing the currency, but subsidies, by biased treatment of foreign companies by the government and cultural biases that exist in a country and attitudes towards foreign goods (Japan) etc.
You cite Japan, on what grounds?
Trade barriers by Japan are largely a thing of the past, just go there and look around and talk with the companies who made it there.
If you would cite China I agree.
No mention of the environmental crisis that's inherent within free trade, why?
You can't compare a country that has cheap and uneducated labor, with little Safety standards, and little Environmental standards against a country that has an educated workforce and high Safety and Environmental standards.
TE's "open borders" for free-flowing capital means that capital will flow to the lowest cost/highest profits countries.
That why the environmental crisis isn't mentioned
(it would make their argument look like Swiss cheese).
This entire discussion implicitly assumes that imported goods and services are paid for with exported goods and services.
And thus completely misses the reason why free trade has gone wrong.
Why not assume the opposite? What would happen if a country had no exports, and instead imported an extra 20 percent of what it consumed, paid for with money borrowed from the countries that were the exporters?
In time foreigners would own 100 percent of the importing country's capital stock, and its residents would lose all of their capital income. Additional borrowing would be required to maintain its standard of living.
That borrowing would not have any capital assets as a foundation, but would instead by backed by a promise that the borrowers or their descendants would live in poverty in the future in exchange for having "lived richly" in the past. Eventually, 100 percent of all future labor income would also be going to pay back the debts.
Would someone be willing to concede that at that point, with 100 percent of all the labor and capital income of everyone in one country going to pay debts to people, firms and governments in other countries, there might be a problem?
You need to add to your scenario one more assumption: the borrowing is denominated in the currency of the borrowing country, which is fiat money that can be printed at will. I don't think that eliminates the problem, but it complicates it.
The repeated mantra 'remember the pie is bigger' begs the question of whether the measurement of the pie is actually accurate. GDP does capture some elements of economic well being; however its failure to adequately reflect:
the damage to well being of the lack of secure jobs,
the destruction of community, including mom and pop enterprises destroyed economic change,
the costs of additional infrastructure from shifts of population caused by free trade,
the decay of abandoned infrastructure in abandoned places
increased housing costs in the areas of economic expansion
means that the assumption that the pie is really bigger is questionable. Add in the extra taxes needed to pay to ease the pain of the transition...
Trump and Brexit voters are on the receiving end of these effects, and have articulated their response by their votes. The economics establishments - fixated on GDP and failing to measure the costs of these other effects - is in denial that they have any reason for their complaints.
To explore one example in more detail:
If I am born and grow up in a town with an established, prosperous industry which will offer all comers a reasonable wage in exchange for a reasonable amount of work, then that has a capital value to me. I also have the value of the network of relationships that I have built up when growing up: 'friends and family' - so that when I have personal crises, have children etc., I have these people easily available to provide meaningful support (think people cooking for my family when a new baby arrives, babysitters, company in the pub).
However if the industry is destroyed by free trade, I immediately lose the security its job guarantee offers. I progressively lose the network of friends as they are forced to move to new areas where they know noone. If I move away, my children will seldom see their grandparents or other members of their extended family; in the long term those grandparents will end up lonely and isolated because their children are so far away.
Of course the people at the top of the economics profession have no experience of these things, as they undoubtedly moved to go to university, and probably did again to do their further studies and then for their tenured posts. With no experience of the benefits of that sort of community, they inevitably ignore those costs when applying their calculations of the size of the pie - and then call those who oppose free trade on the basis of these sorts of losses of ignorant.
Economists - you must do better!!
The economic pie may be bigger or not, but the poor are served objectively smaller pieces. Median salaries in the USA shrank in objective terms in the last decades. The rich divide the pie so that all growth and more is eaten by themselves.
Median salaries in the USA shrank in objective terms in the last decades.
Open borders for capital flow means that there are more workers worldwide competing for the same job.
Too much Supply (labor) leads to prices falling.
But at least credit was expanded so US workers could buy a $700 phone every 3 years and pay $100/month to use it, among other ways to "consume mass quantities."
A peculiar newspeak describes the current trade as 'free trade' despite the fact that it carries lots of regulations which benefit big business. Monopolies and barriers on entry are examples. These barriers to free competition are invisible to the 'free trade' ideologists.
For example, when an internet giant dominates small local companies by the effect of scale, it is free trade. But local companies cannot get free access to technologies nor giant's database of marketing information - this is blocked by IP and regulations. The ideology of globalists somehow does not care how that influences free competition. The same goes about differences of lobbying power between companies and countries.
Such newspeak language show that 'free trade' degenerated to dead end.
To me, free trade means negotiated trade. If I'm a pie maker, I'm free to buy my apples from any grower in the country - whoever will give me the best deal. And now with the internet, I can easily buy them from anywhere in the world - and will if the foreign growers can overcome their freight disadvantage relative to my domestic sources - and if governments (ours and/or theirs) don't artificially distort the meaning of "best deal".
There is little evidence of long-time advantages of one country producing an industrial component. The whole argument that free trade is more efficient rests on that assertion. This assertion is however a say-so, outside few rather specialized branches of industry determined by geography (like agriculture and mining).
25 years ago it might be believable that worlds economy is optimal when Germany specializes in high-technology machines and East Asia specializes in production of rice. However, it takes East Asia few years to master production of a given high-technology good, and switch from being an importer to producer.
We take for granted that free trade does not extend to free sale of t-shirts produced by children. Similarly, multinationals like Amazon and Uber should face tighter regulation worldwide.
Agreements between governments are needed to avoid race to the bottom. Companies should be prohibited internationally from such shameful abuse of free trade as a company which pays tax on 0.1% of its national profits, or a company which employs drivers without any social security. Great economic achievement of 20. century were international treaties to prevent slave labor and tax avoidance. Citizen groups, non-profit organizations and governments should lobby for similar international treaties to civilize multinational free trade.
Excellent as a 10-minute introductory topic on free trade to someone in middle school.
Laughable in any other context (e.g. as an article in The Economist).
It is so 20. century outdated talk.
First, free trade as a single concept is empty ideological talk. There are tens of separate cases where free trade fails, which need to be solved separately for the benefit of people and the economy. Purpose of the economy are people, and free trade is simply one of palette of tools, not an economic Golden Calf to worship.
Second, nonsense talk that fair compensating the losers is the duty of governments. Multinationals will keep the profit, but governments should pay the cost? Nope, the role of government is to keep free trade out of areas where it makes harm, and force multinationals to pay their fair share. Mr van Reenen imagines multinationals picking the best opportunity, and governments paying for retraining, for moving workers, for supporting the unemployed. How should governments get funds for that, Mr van Reenen? Robbing Peter to pay Paul, by cutting other social services? Nope. For example, corporations should be forced to pay for training workers, instead of just expecting to pick experienced staff. Many forms of short-term contracts and gig work should be banned, for their economic model is pushing cost of social security on taxpayer.
As soon as I finished this article I was determined to make some of the same general comments you have made. You are correct - how will government pay for the policies this author has purported to endorse at the end? Did he not say at the start of the article (or was it something else I just read) that free trade was about lowering tariffs (hence government revenue)? And has taxation of large multi-national business not been dramatically lowered over the course of the last 30 or 40 years, to the point where some gigantic corporations pay no tax at all? The tax burden as I understand it has been shifted off businesses and onto personal income tax and consumption style taxes on individuals.
Absolutely correct - the multinational corporation takes ALL of the benefits of free trade and assumes NONE of it's detriments. In fact just today I read about two Toyota factory re-furbishments in my country being subsidized by both provincial and federal governments to the tune of hundreds of millions of taxpayers dollars. MORE corporate welfare!
If I honestly believed that government actually did anything for the average truly competitive private sector worker I might trust that they could offer some solutions but they can't and wont. They are utterly in the pockets of special interests at both ends of the political spectrum. I also might have some faith in our entire political and economic system, but it is continually proven to be unmerited by the policies and conduct, and then consequences of government action and more frequently non-action every time I open a newspaper or read a magazine article.
Free trade might be mutually beneficial to countries at roughly equal levels of economic development but it is problematic, to say the least, in the long term for first-world countries trading with developing countries. The western world's industrial base has been GIVEN to China by the multi-national countries based in the west. They have benefitted enormously in the short term at the expense of the working classes in the west. And ultimately we are seeing that those western based multinationals have allowed the creation of the competitors who will destroy them. Also, is a country like China EVER going to allow it's factory-workers to enjoy a comparable standard of living to a western country? I seriously doubt it. The place is the bottom-of-the-barrel in terms of wages, working conditions, social welfare, environmental protection, etc. etc. etc.
Economists sure have a lot to answer for, their Johnny-come-lately realization of the consequences of their policies is truly infuriating. But of course the consequences never impact them do they? That should change.