Free Trade, Politics, and the Wealth of Nations
Editor, This Week in Geopolitics
The controversy over the Trans-Pacific Partnership has escalated in the United States. At this point, both presidential candidates oppose it. Donald Trump appears to oppose most multinational agreements, including noneconomic ones. He believes that such treaties do more harm than good. According to some, it puts poor countries at a disadvantage
—at the mercy of multinational corporations.
Others say such treaties transfer jobs to low-wage countries, enriching multinational corporations and hurting workers. Interestingly, the Republican Party has aligned itself with those who demonstrate against globalism at every meeting of the G-20. It is interesting but not surprising, as the question of free trade has become a pivotal issue, transcending ideology.
Free Trade: Nice in Theory…
The argument that has increasingly dominated since World War II is that free trade (trade without tariffs or regulation) is superior to protectionism in principle. Bilateral and multilateral free trade agreements have proliferated since then. The issue is whether it is preferable pragmatically.
The argument for free trade was best made by David Ricardo in the early 19th century. At its heart was the theory of comparative advantages. It assumed that every nation had one product, or a group of products, in which it had some advantage over other countries. If that nation concentrated on its most valuable activity, it would maximize its revenue.
In addition, allowing others free access to your market will give you continual access to a wider variety of goods at lower prices. Therefore, opening your own market is beneficial, even when not reciprocated. In theory, this is a persuasive argument. The problem is reality.
The reality is that most nations, including the US, engaged in protectionist practices prior to World War II. Some were beneficial. Some were not. They were the rule in the 19th century and coincided with massive global economic growth. In the case of the US, the surge in the American economy after the Civil War catapulted it into the top tier of global economies, even surpassing the leading powers.
Some have said that the US would have surged further without tariffs, but that is unlikely. At most, they made no difference, and in all likelihood, they were critical to growth.
But What Happens in Practice?