Free Trade and Its Foes

Winners and Losers

By | Updated Nov 22, 2016 3:23 PM UTC

In the black-and-white world of economics textbooks, free trade is good for everyone. Each country figures out what it does best, then exchanges the wine or cloth or software it makes with other nations, creating wealth on both sides. Where jobs are lost, they’re replaced by more suitable ones. Or so the theory goes. For two centuries, the virtue of free trade went almost unchallenged by economists and politicians. Now it has become a lightning rod in a populist backlash that helped propel Donald Trump to victory in the U.S. presidential race. Plans for the most ambitious set of new trade agreements in a generation have brought together an unlikely coalition of politicians, unionsreligious groupsinternet freedom activists and conservationists to galvanize public opinion. They’ve refocused the debate on trade’s winners and losers, arguing that the deals gut manufacturing towns, aggravate inequality, degrade labor and health standards and weaken democracy. What happened to faith in free trade?

The Situation

Trump vowed to withdraw the U.S. from the Trans-Pacific Partnership, a sweeping 12-nation trade pact better known as TPP. Instead he'll pursue "fair, bilateral trade deals that bring jobs and industry back on to American shores." During the campaign, he promised to slap punitive tariffs on China and renegotiate Nafta, which joined the markets of the U.S., Canada and Mexico in 1994. At the same time, talks have stalled for a separate pact being hammered out by the U.S. and the 28 nations of the European Union. It's also better known by its clunky initialsTTIP. Fears that it would bring chlorine-washed chickens and hormone-treated meat to the EU have triggered street protests in Germany. There are worries that TPP’s intellectual property and copyright protections would increase drug prices and hurt innovation. Both initiatives have been attacked for the way they could allow companies to use secretive panels to fight trade disputes, sidestepping national courts. Meanwhile more countries are raising tariffs on key products such as steel and imposing anti-dumping duties as trade spats have escalated among the U.S., China, India, South Korea and other nations. The protectionist tide has come as growth in world trade is slowing. 

 

The Background

In the decades after World War II, trade agreements centered on cutting tariffs and removing barriers impeding the flow of goods across borders. A wave of protectionism that crimped economic growth led to the 1947 formation of the General Agreement on Tariffs and Trade, the precursor to the World Trade Organization. Most countries are now members of the global rule-setting body, with China joining in 2001. Since then, studies have shown that competition from China triggered a decline in U.S. employment in industries that faced an onslaught of imports. Similar concerns about job losses dogged U.S. President Bill Clinton when he signed Nafta, however a U.S. government report showed U.S. manufacturing employment rose after that deal took effect. The new generation of trade agreements takes aim at the more complex goal of harmonizing laws and regulations to reduce the cost of complying with different rules. Tensions have been percolating since protesters disrupted the WTO’s 1999 meeting in Seattle, claiming that globalization was despoiling the planet and eroding workers’ rights. 

Source: Bloomberg

 

The Argument

Trade has raised global living standards and enabled many poor countries to close the gap with rich ones. Consumers gained access to a broader range of goods, and in wealthy nations cheap imports drove down the cost of basic items, such as clothes. Even so, the benefits can sometimes be harder to see than the costs. Opponents argue that standard theories underestimate the social and economic impact of free trade, and that gains from new export markets for multinational companies should be weighed against the collapse of manufacturing towns. Retraining displaced workers doesn’t make up for lost earnings, they say, making opposition to free trade a rallying cry for champions of the middle class. Trade agreements could thwart other public policy goals — like fighting climate change or protecting consumers – if they conflict with other regulations. Trade is also a national security issue. With the U.S. rejection of TPP, the spotlight shifts to the Regional Comprehensive Economic Partnership, which would strengthen ties among China, India and other countries with the members of the Association of Southeast Asian Nations. 

The Reference Shelf

  • A QuickTake Q&A on how the Trump-China trade war could play out. 
  • The U.S. Trade Representative’s website outlines the benefits of the TPP and the TTIP.
  • A Bloomberg Politics national poll showed how opposition to free trade is uniting the U.S. like few other issues. 
  • The Center for Economic Policy Research and the Heritage Foundation have published background briefings on the TTIP.
  • An April 2015 report from the Congressional Research Service examined the history and effect of Nafta.

First published July 17, 2015

To contact the writer of this QuickTake:
Angela Cullen in Frankfurt at acullen8@bloomberg.net

To contact the editor responsible for this QuickTake:
Leah Harrison at lharrison@bloomberg.net