Free Trade and Its Foes

Winners and Losers

By | Updated June 20, 2017 3:34 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, 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’s the target of a populist backlash that helped propel Donald Trump to the White House. Plans for ambitious new trade agreements have brought together an unlikely coalition of politicians, unionsreligious groups and conservationists to galvanize public opinion. They’ve refocused the debate on trade’s winners and losers, arguing that it can aggravate inequality, degrade labor and health standards and weaken democracy. What happened to faith in free trade?

The Situation

Fulfilling a campaign pledge to rewrite trade policy, President Trump on May 18 notified Congress that he intends to start renegotiating the North American Free Trade Agreement, the 23-year-old deal binding the U.S., Canada and Mexico, in 90 days. Notably, Trump chose not to withdraw from Nafta completely, as he had threatened. Weeks earlier, he instructed his trade team to fix or terminate U.S. agreements — including its participation in the World Trade Organization, the body that monitors trade among 164 members — found harmful to U.S. interests. Trump also backpedaled on a promise to label China a currency manipulator and to hit it with punitive tariffs, instead agreeing to a liberalizing deal that gives certain exporters from each country better access to the other’s market. But even as opinion polls show support for free trade rebounding modestly in the U.S., Trump continues to criticize countries that have large trade surpluses with the U.S. In a May 25 closed-door meeting with European Union officials, he said: “The Germans are bad, very bad” for having a $65 billion surplus in traded goods with the U.S., German media reported. One of Trump’s first moves as president was to withdraw the U.S. from the Trans-Pacific Partnership, a sweeping 12-nation pact better known as the TPP. That doesn’t bode well for stalled free-trade talks between the U.S. and the 28 nations of the European Union, 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 also worries that intellectual-property and copyright protections in the TPP would increase drug prices and hurt innovation. Critics attacked both deals for allowing companies to use secretive panels to sidestep national courts in fighting trade disputes. Trump seems to dislike trade agreements involving multiple countries, but more two-way trade deals, including one with the U.K., may be in the offing. 

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 WTO. 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, although a 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. Here’s a guide to trade-speak:

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.-led TPP effectively dead, the spotlight shifts to the Regional Comprehensive Economic Partnership, a pact championed by China to build trade among Asian countries. 

The Reference Shelf

  • A QuickTake Q&A on how the Trump-China trade war could play out and another on the RCEP
  • A QuickTake Q&A on why Trump’s tariff threats are taken seriously and another on the threat to the WTO .
  • 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.
  • A May 2017 report from the Congressional Research Service examines the history and effect of Nafta.
  • The pro-trade Peterson Institute published an analysis of what Nafta had achieved 20 years after it took effect.

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:
Paula Dwyer at pdwyer11@bloomberg.net