The Confusing Issue of Free Trade

When I attended college in the early 2000s, the U.S. had just finished a decade of robust growth that had ended in the “dot com bubble” bursting. Alan Greenspan was still the Chairman of the Federal Reserve, and there was a lot of certainty (or maybe hubris) about economic thought at the time. As a student of economics, I was told deflation was never an issue we would have to worry about. That turned out to hugely false with crashing real estate during the recession we witnessed between 2008 and 2009. Another similar belief was that the world would continue to knock down trade barriers, and global free trade was imminent. I wonder what those same professors are thinking now?

The trading of goods and services is a cornerstone of civilization. None of us produce everything we need ourselves, and we need to trade the specialized goods and services we are skilled at producing for the other goods and services we want. Logically, the more of us we have trading, the more things we will have access to. But this leads to a competitive environment as well, where people producing the same things will need compete for business, and the producer with the lower costs can offer a lower competing price.

When this competition amongst producers happens within our own country, we tend to view it as healthy capitalism. The bad producers might be driven out of business and the better producers survive. But we tend to take a different view of this when we are faced with producers outside the borders of our country. Is it fair if producers from other countries drive ours out of business? Is it fair if our producers drive theirs out of business?  

This concept gets more complicated with the rise of transnational companies. Our producers might find it cheaper to manufacture in a different country and then import the products back to our country. This is great for our consumers, but not necessarily for the labor force. And then it gets more complicated, where maybe only certain parts or resources are imported, but then the entire product is assembled here. Would that technically make the finished good an import, in part?

Then there is the issue of national security. Is it prudent to rely on other countries for certain products that we deem essential? This has been one of the drivers in having an agriculture policy, so that we are assured a domestic supply of food. Some argue energy is also important to national security, but there has never been a real energy policy for the United States. No matter, these national security interests can clearly affect how international trade works too.

Proponents of free international trade argue it keeps products cheap and it keeps all industries competitive over the long run. They can point to Argentina who recently undertook protectionist trade policies, and it led to people having less choices and paying higher costs for domestically produced goods. Argentinians have also complained the goods are now inferior, because the local producers have less competition so they don’t have to worry about producing high quality goods.

Opponents argue free trade costs domestic jobs and devastate industry. A popular example is how a number of Asian countries prevented the importation of American electronics and cars in the 80s and 90s, so that they could protect their own electronics and automotive industries and give them time to develop. The result is now several of these companies are powerhouses globally, because they benefited from protectionist policies early on.  

There is really no way to fully predict how changing international trade agreements will affect the economy. Neither free trade nor protectionist policies yield a win-win solution. However, the only certainty one can predict is there will be a lot of uncertainty, if a country tries to switch from free trade to anti-trade policies or vice versa.