Four Ways to Save Free Trade

Stocks tanked, Big Business wailed—but to no avail. “If they don’t want to trade with us anymore, that would be fine with me,” Trump said of the Chinese.

Such a startling statement from a sitting American president would have been unthinkable even a couple of years ago. Now it’s just part of our day-to-day discourse on economic policy. While the U.S. delegation was wrangling in Shanghai, Democratic candidates were heaping abuse on trade during their presidential debates. Senator Bernie Sanders (I-Vt.) complained of the “awful trade policy which allowed corporations to throw workers in this community out on the street.”

Once a pillar of American foreign policy, good for the country and the world, trade is now the Black Death of the middle class, a scheme for unscrupulous foreigners, in cahoots with global elites to swindle the average Joe out of his paycheck. Rather than a cooperative endeavor to promote economic growth and investment, trade has become a worldwide “us-vs.-them” struggle for jobs, technology, and factories.

It’s not much better from the Beijing side. Chinese leaders like to portray themselves as the new champions of globalization, and as the biggest beneficiaries of global economic integration, they should be. But their constant promises to “open up” have become a farce. China remains one of the most protectionist major economies—closing markets, restricting capital flows, and subsidizing favorite sectors. The fact is the Chinese leadership has done more to undermine confidence in the free-trading system than anyone else. Amid this rising economic nationalism and tariff-heavy confrontation, trade is suffering. The World Trade Organization expects global trade to grow only 2.6% in 2019, down from 3% last year.

How critical trade is to our money, our daily lives, and our future is forgotten in all this anger. The worldwide exchange of goods still shapes where we work, what we buy, and what we pay for it. Trade helped lift unprecedented numbers of people out of poverty over the last half-century and contributed to what is likely the greatest surge of wealth in human history. But I won’t regurgitate here the case for free trade. My fear is what happens to the global order without free trade to hold it together. Trade was part of a greater mission—to unite disparate nations with conflicting ideologies and strategic interests in a common cause of global prosperity. Without it, the risk is higher that the world disintegrates into competing, potentially hostile powers, engaged in a zero-sum race to the bottom.

We need to have a more honest discussion of what’s really gone wrong for the average American family. People think they are victims of globalization; in fact, they are feeling the yawning disparity between rich and poor, particularly in the U.S. Although trade has played its part in that problem, it’s just one cause—as I address below—and a minor one at that.

Of course, trade on its own isn’t a magic cure-all for conflict. Historians point out that intensifying economic integration in Europe didn’t prevent the outbreak of the First World War. But it’s also widely accepted that the protectionism and economic nationalism of the 1930s not only deepened the Great Depression but contributed to the rise of fascism and to World War II. We can also make a case that one reason relations between the U.S. and China have remained peaceful and stable (at least until recently) is the high degree of economic cooperation between them. So more trade is better than less.

I’ve witnessed the wonders of trade. My first overseas post as a journalist was to Seoul in 1996. As I studied South Korea’s economic history, I came to realize that it was theCountry That Trade Built. Thirty years before, Korea was desperately poor, divided by war, and given little hope by economists of becoming much more. But South Korea is now a member of the rich-countries club, the Organization for Economic Cooperation and Development. It was all because it capitalized on the world’s free-trading system. First, its factories pumped out shoes and toys with cheap labor, then they graduated to ships. By the time of my arrival, they’d upgraded to microchips. Whatever Trump says, trade creates wealth.

Some Republicans insist the U.S. president’s trade wars are just a strategy to foster freer trade. That’s self-delusion. Declaring himself a “tariff man,” Trump has imposed them on everything from washing machines to steel to tomatoes to beer kegs. And he has company on the antitrade bandwagon. The one significant trade deal his administration negotiated—the United States-Mexico-Canada Agreement, aka “Nafta 2.0”—is stalled in Congress, perhaps hopelessly.

Even Democratic presidential candidate Joe Biden said he won’t join the Trans-Pacific Partnership (TPP), a trade pact negotiated by the administration in which he served as vice president. Senator Elizabeth Warren of Massachusetts, probably the political polar opposite to Trump, can sound downright Trumpian when it comes to trade. “We will engage in international trade—but on our terms and only when it benefits American families,” she recently wrote. Her “plan” on trade deals is effectively a plan not to do trade deals. Warren wants to open the negotiating process to unions, consumer groups, and Congress in a quest to make them friendlier to the American worker. But a second-grade bake sale couldn’t get off the ground with so many players involved, let alone something as complex as a trade pact.

What happens if the world follows Trump and Warren? Well, I’ve seen that, too. A grad-school internship brought me to New Delhi in 1991. It was a bewildering experience. Hardly any of the brands stacked on store shelves were recognizable. On the streets were antiquated cars better suited for a museum. The city was sickeningly poor. The problem was, in part, India’s decidedly antitrade economic model. Its post-colonial politicians believed trade was “rigged” and the only way to grow rich was to substitute imports with domestic industry. The results were uncompetitive companies, pitiful consumer choice, and far less wealth and development than Asian countries such as South Korea already enjoyed. A looming financial crisis forced change. In one of their first reforms, liberal-minded ministers took a blowtorch to much of the country’s trade regulation.

Trump and Warren don’t want to go as far as India did, but with “tariff man” in the White House and alternatives intent on turning trade agreements into social-action programs, can free trade survive? Yes, it can. And here’s how.
 
New champions must take the lead. What’s going unrecognized by many in Washington is that free trade isn’t as unpopular outside the U.S. It’s telling that the 11 remaining participants in the TPP finalized the pact even after Trump pulled the U.S. out immediately upon taking office. Japan, long resistant to opening its home market, wasn’t only instrumental in keeping the pact alive, but also inked another free-trade agreement with the European Union, which took effect in February. A few months later, African leaders launched a continentwide free-trade agreement, aiming to create a common market with 1.2 billion people.

Outside Washington, Trump and Warren look more like outliers than trendsetters. That has consequences for America’s economic future. Rather than setting rules for global exchange, the U.S. and China might find they’re getting left out of new bonds being forged in their absence. That’s already happening. U.S. farmers have lost some of their market in Japan to competitors in countries that signed the TPP.

Those governments that still support free trade have to step into the breach, take the lead, sign more deals, and keep the pressure on the backsliders in Washington and elsewhere to rejoin the trade game or risk getting shut out of critical markets. (It would help if those promoting trade would avoid their own pointless disputes, such as the mini-trade war Tokyo is now waging against South Korea.)
 
Change the sales pitch. As Princeton economist Alan Blinder has pointed out, selling the positives of free trade to a skeptical public is extremely challenging. The idea that everyone is better off trading with each other, rather than making stuff at home, is somewhat counterintuitive. The details of productivity gains fall flat before heartstring-pulling tales of unemployed workers and closed factories. Economists usually promote trade based on its economic efficiency (as they are trained to do). That means they stress lower prices for consumer goods and bigger profits for corporations. The way to alter the narrative is to focus on how trade helps workers. It’s perpetually portrayed by its opponents as a job destroyer, but it’s also a major job creator. Economic theory, furthermore, proffers that those jobs are better jobs. By allowing countries to specialize in industries in which they have a comparative advantage, trade makes workers more productive and, therefore, gets them higher wages. One study of the effects of the North American Free Trade Agreement by the Peterson Institute for International Economics figured that the jobs created in the U.S. by increased exports to Mexico paid 7% to 15% more than the jobs that were lost.
 
Strengthen the WTO. In June the trade ministers of the Group of 20 reaffirmed a commitment to reforming the WTO, with a “sense of urgency.” That’s certainly warranted. One reason Washington resorted to trade wars to solve its disputes is a perception that the WTO isn’t doing the job. Trump is the loudest critic—he’s even threatened to withdraw the U.S. from the organization—but he’s far from alone in being frustrated with its ineffectiveness. Some question whether fixing the WTO is possible or if it’s even relevant. But try we must, because the alternative—a world trading system without accepted rules—is a recipe for endless conflicts that feed economic nationalism. A lot needs to get done: limiting permitted exemptions, stiffening rules to address harmful practices (such as government subsidization and the role of state-owned enterprises), and giving the WTO greater power to penalize noncompliant countries. The negotiations to craft and implement such reforms will be complicated. They should start with improving the process of dispute settlement.
 
Close the income gap. Those who oppose free trade do so because they believe it’s bad for the welfare of American families. Trade, we’re told, benefits chief executive officers but leaves the wage earner with a raw deal. But it’s all too simple to blame job-stealing foreigners for problems created very much at home. Today, about 6.7 million fewer Americans are working in manufacturing than there were 40 years ago. Those vanishing jobs have hurt hardworking families and the communities they live in. But not all of them were lost to trade. Advancing automation and other technology had something to do with it, too.

To blame the deterioration of the middle class on the loss of a few million jobs in one sector over a period of decades is patently ridiculous. Politicians have to find the will to tackle the real roots of the problem. That would entail controlling the costs of education and health care, making tax policies more just, investing in job training and schools, and restoring workers’ rights and union power, to name just some necessary changes. Making trade “fair”—whatever that means—won’t cure these ills, nor will it save the American dream. If progress is made on making the U.S. economy more equitable, trade wouldn’t seem so evil anymore.

©2019 Bloomberg L.P.