I am, contrary to popular belief, an optimist with regard to how many things we control in our world. I harangue those whose analyses are strictly linear, assuring us that this action will result in that consequence. Linear sequences outside of math and non-human science appear pretty rare to me. Introduce humans and the dramatic increase in variables makes linear projections fairly unreliable.
That leaves us with the dirty fact that some consequence results from human choice (tragic interventions like murder or positive ones like celebrating with birthday cake). Sadly, any consequence does not necssarily favour everyone involved. They simply don’t. I am not trying to invoke some sort of Darwinian survival theme but the consequences out of any choice are worse for some than for others.
The classic example is international trade. The standard of living for most Americans improved dramatically since the implementation of the Bretton Woods system following World War II. Economic theory that more competition and lower tariffs would stimulate growth which in turn raise living conditions and put more money in people’s pockets has been true. Americans on the whole experienced an amazing boom in concert with paying fewer taxes on products purchased from overseas to protect U.S. industry which is what tariffs are (no, China nor the other country suffers from tariffs. The suffering party when tariffs are in place is always the consumer whose decision to purchase foreign products is affected).
The West implemented the General Agreement on Tariffs and Trade in 1947 to establish a preferential trading network among states agreeing not to impose a tariff on any other specific country’s products in order to protect their home industries while trying to amp up production, consumption and trade. For those of us coming of age after the Second World War, we have no memory of the vicious impact of trade wars aimed at protecting a nation’s industries or punishing another country for its actions. Trade wars in earlier centuries were horribly destructive to the populations of most states.
One of the lessons from the cataclysmic wars of the twentieth century was that these protectionist economic measures contributed to causing wars. In general, we approached the post-World War II system with hopes that nations could throw off their ill-fated attempts to protect trade, preferring instead David Ricardo’s theory of comparative advantage. Nations would become most proficient at producing some products which would incentivise others to buy those productar rather than feeling the need to establish their own inefficient industries.
The architects of the post-1945 world sought to use legally-constituted networks of to cooperate to allow this comparative advantage to shine through. These men hoped the constant reinforcement of relationships, whether in diplomacy (the United Nations), trade (the GATT, then later the World Trade Organisation), military (NATO, the Rio Pact, and multilateral defense agreements in the 1950s) would make it harder for a Germany or a Japan to exploit a legally-binding group of like states. .
This idea of globalism was quite a change for Americans as it went against our traditional isolationist beliefs. It was also the first time we recognised that other governments might become major partner rather than states from which we extracted benefits.
The developing world (as we so quaintly called it through the beginning of the twenty-first century) chose a far different trajectory in 1945, pursuing the import substitution industrialisation (ISI) trariff program highlighted by Argentine economist Raúl Prebisch. This theory articulated a strategy to increase capital which could go to building domestic industries rather than falsely hoping they could catch up with the industrialised world by letting time take its course. Prebisch’s theory ultimately became the basis to dependencia theory espoused by many leftist critics across the ‘Third World’. Prebisch acolytes imposed the tariffs but invariably squandered the resulting tariff revenues to corruption and ineffectual industrial programs. Instead of supporting growth through the ‘free hand of the marketplace’, dependencia tended to reinforce nationalist disappointment, distrust, and dependence upon others.
The Soviet model, of course, was a state-centric economic planning model burdened with the state controlling the means of production—and exerting authoritarian rule to assure no one challenged their plight under terrible conditions hardly qualifying as “workers’ paradises”. Inefficiencies and corruption, not to mention hopelessness of the workers attempting to buy substandard products almost always in too short of a supply, contributed to a pervasive sense of ennui and distrust.
The key aspect of this topic is that the overall standard of living for Americans and Europeans, and ultimately Asian Tiger economies, through export-driven trade, the collaborative work across borders on new technologies, and a overall application of the hoped-for cooperation and wished for resulting comparative advantages aiding in production of new products. achievement of states utilisting rather than war-driving nationalist struggles of the past. With technological change, capital flows across boundaries also happened—but with consequences of further limiting assurance of how business would act.
By the beginning of the 1990s, businesses found Asian production sites cheaper and less regulated so they started shifting their production to the region. More goods circulated and growth occurred in Asia but not as much at home. Anger over Japanese car and television sales in America highlighted the difference between those who were seeing their relatively high-paying jobs migrate to Nagoya or Osaka while many Americans could relish the cheaper consumer goods, durables, and cars. Both the producer of the goods and the rest of the supply chain from steel through rubber through electronic gizmos for the dashboard were affected. Automatisation only helped cheapen goods while erasing further jobs for those at home.
In short, others were replicating our success, under the free trade system, to enjoy growth. The lower costs of living and supply of labour in many of those countries meant that the jobs in some of the traditional U.S. industries such as coal, steel, car manufacturing, and other durable goods were no longer as competitive because of the complex interplay of American workers’ increased salaries and the cheaper goods produced elsewhere.
U.S. workers began souring on free trade enterprise when its value for some sectors began slipping, even as new ‘successes’ occurred for others. This was first true for thoe at the lower end of the pay scale where wages were not outstripping inflation. Their products, often for generations had become cheaper when made elsewhere. The workers often found no successes in retraining schemes so a sense of hopelessness set in. During the 1980s, American workers in Detroit, Youngstown, Cleveland, and Pittsburgh demanded government protection against Japan capitalising on comparative advantage, flaunting their cheaper goods for Americans to suck up at cheaper prices than those of their neighbours across the street. Additionally, automation complicated job retention further, making free trade the consequence of inattention or malevolence on the part of politicians or the media or someone other than the workers who felt they had been lied to about free trade. This heralded even bigger problems when China, with its even vaster cheap labour pool, overwhelmed the free trade structure by exporting goods made with capital from ventures between western and Chinese companies.
Many Americans workers were horrified to learn that the GATT and its successor, the World Trade Organisation, prohibited their government from stepping in to punish those countries hurting our industries. Those sectors still benefiting seemed unaware or unympathetic to this changing reality. Frustration grew throughout the Clinton, Bush 43, and Obama administrations as an increasing number of sectors and industries were less competitive and Americans lost their jobs.
Free trade is a great system but it does not guarantee a perpetual state of dominance that we had in the 1940s. Its consequences include some positive and some negative for all within its reach. The peculiar state of utter success and ability to set rules for the post-war world had so many more implications than many Americans signed up for or understood for decades. Yet many jobs that American workers are gone forever, industries fallen prey to competition in other countries or protectionist trade policies aimed to dump goods on the worlds most consuming society.
One of the major questions confronting this country is whether we think the benefits of the global trade system outweigh the dangers of withdrawing from it.. An International Monetary Fund report today worries that greater protectionism seems on the horizon, a prediction that would hurt overall growth.
Our leaders in the 1940s, trying to craft a new world while finishing a devastating global war, would have served all of us better by acknowledging that free trade over the long run would hurt some industries and workers. Put another way, free trade by its nature leads to winners and losers, an unavoidable fact as the complexity of an economy evolves. No candidate nor politician has the ability to control the entirety of the modern globalised world, regardless of their promises or intentions. There is no single boogieman or woman, nation or people. Some industries will thrive, then others fail but only time makes that evident. Workers may face obsolescence or they may find their jobs become much more valuable but the whole of the economy or any individual makes it impossible or a single industry to ‘fix’ things'.
This is a bitter pill for many of us. It speaks to the essential nature of agility in addressing changes in demnad for a product of any sort. But the sense of guarantees that employment with a single firm or industry can follow generation upon generation is over. It is ironic this is occurring at the same time as so many Americans demand ‘freedom’ to make their own choices. They did not realise that they might well not have the freedom on free trade after all.
Would reimposing tariffs help us? Some think so but others adamantly say no. I think it would definitely affect our interest in multi-national coalitions as we would hear more negativity about our ‘allies and partners’ meeting their contributions and commitments as it is. We need flexibility and agility on these concepts as they apply to our country.
Agility is perhaps the single most valuable attribute for today’s workers, here or abroad as it applies to everything in our lifes. We need agility as strategists to navigate our marriages, our relationships with our kids, our physical environment, and in anything I can conjure up. Staying committed or rejecting free trade and coalition-focused policies both will have major consequences. That is not arguing against them but stating reality that we need consider before acting rashly.
Thoughts on the future of free trade? How do you see the weight of the choices and consequences? I genuinely welcome them as I have learned from the comments on the columns from the weekend. Thank you!
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Be safe and be well. FIN
Alan Rappeport, ‘I.M.F. see steady growth but warns of rising protectionism’, NYTimes.com, 16 April 2024, retrieved at https://www.nytimes.com/2024/04/16/business/imf-global-economic-growth.html