There are believers that have faith in Free Trade such as multinational agriculture corporations, transnational firms, and job retraining specialists in need of work but it seems America is waking up to the damage inflicted on everyone else by so-called Free Trade. Even folks that haven’t read the Shock Doctrine by Naomi Klein know the deck is stacked against them. Jeff Madrick looks at where we’ve been and where we’re going in Our Misplaced Faith in Free Trade...
The skeptics are on to something. Free trade creates winners and losers — and American workers have been among the losers. Free trade has been a major (but not the only) factor behind the erosion in wages and job security among American workers. It has created tremendous prosperity — but mostly for those at the top.
Little wonder, then, that Americans, in another Pew survey, last winter, ranked protecting jobs as the second-most-important goal for foreign policy, barely below protecting us from terrorism.
Many economists dismiss these attitudes as the griping of people on the losing end of globalization, but they would do better to look inward, at the flaws in their models and theories. Since the 1970s, economic orthodoxy has argued for low tariffs, free capital flows, elimination of industrial subsidies, deregulation of labor markets, balanced budgets and low inflation. This philosophy — later known as the Washington Consensus — was the basis of advice the International Monetary Fund and the World Bank gave to developing countries in return for financial help.
The irony is that during the Industrial Revolution, today’s rich countries — Britain, France and the United States — pursued the very opposite policies: high tariffs, government investment in industry, financial regulations and fixed values for currencies. Trade expanded, and capital flowed anyway.
So how did we get to this point?
Starting in the 1970s, however, under the influence of free-market enthusiasts like Milton Friedman, economists urged further removal of barriers to trade and capital flows, hoping to turn the world into one highly efficient market, unobstructed by government.
The results were often disastrous. The lowering of protective tariffs did not lead to rapid growth in Latin America, which stagnated in the 1980s.
Mr. Friedman’s acolytes also urged the reduction or elimination of capital controls — starting in the 1970s in the United States, and in the 1980s in Europe — along with lower tariffs. This, too, was ruinous. An exodus of short-term investments contributed to financial crises in East Asia, Russia, Argentina and Turkey in the mid-1990s, and to the collapse of the Long-Term Capital Management hedge fund in 1998 (a prelude to the 2008 crisis).
Though these mistakes were recognized, the World Trade Organization continued to push one-size-fits-all rules, premised more on ideology than experience, that hurt developing countries.
If the one-size-fits-all, we are all one happy family Free Trade theory doesn’t work, got any better ideas?
But the consensus was flawed. Even free-trade advocates now admit that American wages have been reduced as a result of outsourcing, the erosion of manufacturing and an ever-increasing reliance on imports. Middle-income countries, meanwhile, have been blocked from adopting policies that might make them world-class competitors. Nations that have ignored the nostrums of the Washington Consensus — China, India and Brazil — have grown rapidly and raised their standards of living. Improvements in poverty and inequality occurred in Latin America only in the 2000s, after the I.M.F. and the World Bank reduced their grip on those nations.
Expanding global markets is a worthy goal, but history offers lessons that can lead to more constructive trade, capital and currency policies.
The first is that gradual reform is more effective than a sudden turn to free markets, deregulation and privatization. Shock therapy in Russia was a failure, and nations from Argentina to Thailand paid a dear price for liberalizing capital markets too quickly. The historical models of sustained growth are clear: gradual development of core industries; economic diversification; improvements in literacy and education, especially for women; slow, deliberate opening of capital markets; and the protection of labor from abusive pay and working conditions.
So should the U.S. continue to pursue the Trans-Pacific Partnership and Free Trade with Europe?
Any trans-Pacific agreement, its terms still a secret, should be discussed in the open with ample protection of worker rights and healthy debate over regulatory changes requested by developing countries or big business. A trade agreement with the European Union makes more sense, but the danger is that environmental, financial and product-safety regulations will be watered down to meet the demands of corporate interests.
Economists are correct that free trade need not be a zero-sum game. But the genuine gains in prosperity from free trade can be maximized, and broadly shared, only if the policy errors of the past 40 years are properly understood.