Free Trade Part 2: Wielding the Double-Edged Sword
In Free Trade Part 1, I outlined some of the ways in which free trade can benefit our economy and our national security. It has the potential to vastly improve our economic welfare, as well as helping to stabilize potentially dangerous poverty stricken regions abroad. Like most useful tools, however, free trade must be used responsibly to avoid causing more harm than good.
The fundamental problem with free trade agreements is not that they cause any sort of net economic loss to either country. Protectionist politicians and lobbyists often point out that free trade can hurt American industries by exposing them to increased competition. That’s true as far as it goes, but it’s also quite misleading. Industries in which the United States has no comparative advantage are indeed often hurt by free trade, but the benefit to consumers, and to American industries that do produce more efficiently than their foreign counterparts, is invariably greater. Thus, the net effect is positive, but free trade has massive redistributive consequences. This redistribution is the real second edge of the sword.
Whenever the U.S. government signs an FTA, it changes the demand and supply for many goods produced by American companies; companies that may employ vast numbers of American workers. For goods that are kept at an artificially hight price within the U.S., the price drop due to free trade translates to cutbacks and layoffs. These changes make the industry, and the U.S. economy as a whole, more efficient, and consumers benefit from the lowered price. Nevertheless, the United States can be left with a large number of professionals trained to work in a shrinking industry. These workers now need to retrain to work in a different, more competitive field. Without a source of income, such retraining is often difficult or impossible.
One way to get around the labor redistribution problem is to subsidize the inefficient industries. American agricultural subsidies are a good example. Unfortunately, though, subsidies tend to negate the benefits that free trade yields in the first place. Consumers still benefit from the lower prices that come with free trade, but the benefit is lost again in the form of taxes to pay for the subsidy itself.
Worse, the combination of large subsidies with free trade agreements can have some dangerous consequences abroad, particularly in the case of agricultural subsidy. Many poor and unstable regions of the world have agriculturally based economies. When a country with such agrarian regions lowers trade barriers with the U.S., the local farmers are rarely able to compete with the artificially low prices of American subsidized food exports. As a result, while the foreign country as a whole experiences a net economic gain, the poor, agrarian regions of those countries can become even worse off. The problem is compounded by the fact that many of these regions have minimal education, and so there is little opportunity for locals to retrain from farming to more competitive industries.
A good example of this problem is the North American Free Trade Agreement, or NAFTA. Mexico as a whole has undoubtedly benefited from NAFTA, as has the United States. Unfortunately, however, the same cannot be said of the poor Chiapas region of the country. The subsistence farming culture of Chiapas was wholly unable to compete with American food imports. As a result, on the same day that NAFTA was signed, the reactionary Zapatista movement seized several villages and engaged in open rebellion against the Mexican government.
Imagine, then, what the consequences might be of an FTA with Pakistan, for example. If the agreement can be structured so as to benefit the border region, then free trade might help stabilize the region by injecting money into the Pakistani economy. If, however, we push free trade policies without due consideration, price changes from U.S. exports could end up destabilizing the tribal region still further.
The correct response to these problems is not to abandon free trade, or to lower trade barriers only on goods that won’t cause much displacement. Instead, the solution is to facilitate the redistribution of labor. If our agricultural industry employs many people who would need to retrain to work in other industries, rather than perpetually spending millions on agricultural subsidies, we should be spending that money on programs that will enable agricultural workers to find jobs in more competitive industries. The costs associated with retraining and reeducation are high, but they are short term. Eventually the market settles, and displaced workers find employment in other sectors, producing a stable and efficient economic structure. Similarly, in countries with poor and unstable regions, free trade can be a stabilizing force when used in conjunction with a solid education program, as well as funding for production shifts.
Unfortunately, as yesterday’s DOHA failure indicates, the agricultural lobby in the U.S. makes it difficult to adopt good proactive policies on trade liberalization. In the absence of agribusiness influence on the hill, a smart policymaker would lower agricultural subsidies, diverting the money into retraining programs instead. With the subsidies down, DOHA-style agreements would finally become workable, and America would see a rash of new export markets. Better yet, the dangers of destabilization in poor regions would be much reduced, and the benefit to third world economies could be a real benefit in combination with a more comprehensive engagement plan. Sadly in the current political environment, such changes seem unrealistic.
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