Free trade – the new bogey
Updated: Nov 18, 2020
It seems as if the world of populists has recently found a new economic bogey: free trade. Rather run away screaming, than ever go into a free trade agreement again is the motto. During his election campaign President-Elect Donald Trump referred to the American free trade agreement with Mexico and Canada as “stupid” and kept continuously emphasizing that he would immediately stop negotiations on the Trans-Pacific Partnership as a president. It is obvious that transatlantic efforts on a free trade agreement will probably suffer the same fate. Trump is not alone with his point of view – his plans meet wide-ranging approval among European populists such as Marine le Pen in France. More and more liberal politicians join the anti-free-trade-trend. However, they are mistaken.
Free trade opens our employment market to Mexican workers who are stealing our jobs. Free trade enables China to flood our market with cheap import goods and on this way, destroys our industry. To put it straight: free trade is to blame for the decline of the American dream. This is how the simple economic world of Trump and his many supporters looks. Well if it is that easy: closing the gates seems to be the necessary conclusion. Restricting foreign goods in order to protect the domestic economy is hyped as the healing solution. Back to the good old days when we were alone but happy. However, looking back in history isolation does not have a really good tradition, neither does protectionism.Do not get me wrong, free trade is not the universal healer for all the problems we have. A trade agreement´s success indeed depends a lot on how the deals actually are designed. Nevertheless, in the long-run free trade is the only way to boost economic growth.
Already in the early 1840s economists such as James Wilson developed the theory of protectionism being absolutely not economically effective. Tariffs and quotas on import goods prevent foreign suppliers from entering the market which decreases competition. Producers on the home market than simply have no motivation to improve their goods since consumers do not have any real alternatives to choose instead. They just have to buy things their home industry produces to whatever price the companies ask for. Contrary to this, free trade has the potential to widen the market´s product range and decrease prices. Free trade enables international markets to work together properly. Let´s have a look on American burger producers who are clearly good and experienced in what they do. As good as Mexicans are in making tacos. To humper trade between the USA and Mexico could consequently lead to the USA market being expected to produce its own tacos which would probably be only half as good as the proper Mexican ones. The same would be the case for burgers in Mexico. Another consequence could be that there just won´t be burgers for Mexicans and tacos for Americans any longer. What a sad life would that be?
Do not get me wrong, free trade is not the universal healer for all the problems we have. A trade agreement´s success indeed depends a lot on how the deals actually are designed. Nevertheless, in the long-run free trade is the only way to boost economic growth.
Trump´s flirt with the idea of protectionism and isolation is based on fear of all that is new and foreign and the mistaken belief of locking out globalization could lead to stability. However, the opposite will be the case if the USA withdraws from free trade: they will be run over by globalization. Once, they decide to just observe from the sidelines it will become an impossibility for the American market to keep up in terms of competitiveness.
Sorry Donald, you will have to put your nostalgia aside: globalization is a fact, not an assumption. Deal with the challenge!