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Why I Oppose Free Trade - the short version

by Bill McGaughey

 

I am not an economist. I make the following argument on the basis of presumed common sense.

I oppose free trade despite the prevailing economic opinion. Free trade is a sell-out of the American worker. I am an American with no direct interest in this issue but I do have a feeling that it is being misrepresented.

Free trade means that goods are traded across international borders with nonexistent or low tariffs. What’s wrong with that? It’s that the people who produce the goods live in one country and those who consume the same goods (traded across international borders) live in another. Therefore, the consumer market is not being replenished. Ultimately, this economic model is unstable. Consumer income should be tied to wages paid for productive work.

Under NAFTA, an international agreement to trade goods between North American countries without tariffs, production once done in high-wage countries such as the United States and Canada has moved to Mexico, a low-wage country. Therefore, the cost of production can be immediately reduced. If the produced goods can be sold at the same price as before, profits will improve.

In this situation, there is no improvement in work methods. The increase in profits comes about simply because work that was previously done by well-paid workers can now be purchased at a lower cost if performed by low-wage workers in another country. Therefore, the managers can claim to have done a superb job with respect to improving profitability. They will, of course, deserve increased compensation for their excellent managerial performance.

Why are wages lower in Mexico than in the United States? It is because the process of industrialization is more advanced in the United States than in Mexico. As U.S. businesses in the past introduced new technologies and business methods, they were able to sell goods more profitably. Workers, often organized in unions, demanded an increased share of the revenues and profits that were improved. There was an upward spiral of increased sales and wages.

This did not happen in Mexico whose economy was more primitive. Production and wages remained at a comparatively low level. U.S. business managers took note of this and began to think of how they could utilize the lower-paid Mexican workers to their advantage.

To summarize, free trade allows U.S. businesses to increase profits by producing goods in countries where wages are low and by selling the same goods in high-wage countries at the same prices as before, thus increasing profitability. The more highly-paid U.S. workers, no longer protected by tariffs, are laid off.

The owners and managers of businesses benefit from this arrangement. Production workers in the high-wage countries lose. It is not managerial expertise that has caused the improved profits but the opportunity for businesses to receive the same productive service from workers at a lower cost.

Now let’s look at the players. Isn’t it good for businesses to prosper by playing this game? It’s surely good for the managers and owners of U.S. businesses. It’s bad for the American workers who are replaced as jobs that they previously held move abroad.

To the extent that the business managers are loyal Americans, one would think they would have more sympathy for citizens of their own country, but that may not be the case. There may be a history of bad blood between business managers and unionized workers that caused the managers not to care about their fate. There may also be the selfish advantage of improved compensation for the managers personally. Heck, they’re businessmen, not saints.

It is, however, the policy of the U.S. government that allowed free trade to take root in North America. Those who make decisions on behalf of the government are our elected officials, primarily those who sit in Congress and in the White House. Why would such persons allow job prospects in America to deteriorate on their watch? There are two reasons really: bad ideology and cash-driven political support.

With respect to ideology, one must acknowledge the role that academics have played in trade policy. Almost without exception, economists at our respected colleges and universities support free trade. Trade protectionism is thought to be a sign of economic backwardness. We as a nation shouldn’t use this as a crutch. Sounds good, doesn’t it?

There is also the fact that politicians need money to run their election campaigns and it is business interests, primarily, that can satisfy this need. Therefore, no smart politician would come out too strongly against free trade.

But Donald Trump did. This is what made him so interesting to me. Out of the blue, Trump came along criticizing NAFTA - years after I ineffectually voiced the same concerns. Here was a highly successful business leader saying that free trade with Mexico was bad for America. He was lending support to a universally acknowledged “heresy”. And now the same man has managed not only to remain politically unscathed but be elected President of the United States. This is something new.

In opposing free trade, Trump was thumbing his nose not only at the business community (without receiving support from organized labor) but at respectable economic opinion. My only criticism is that he has framed the trade issue in terms of disparaging Mexican identity when it is really U.S. business and political interests that were responsible for NAFTA and the harm it has caused for their fellow citizens. *

I do not blame Mexican workers for taking advantage of the improved opportunities that free-trade policies in north America have given them. In their place, I would have done the same thing. Rather, I blame those - primarily, the President and members of Congress - who were charged with protecting American interests. In supporting free trade on disadvantageous terms, they have betrayed their fellow citizens.

Bill Clinton, you were one of them. There are also others.

In a more perfect world, we would ride the progress in technology to a more prolific abundance that everyone could share. So, let’s play down the blame game if we can and see if the new Trump administration takes us to the right place.

 

* Today, February 1st, we are ten days into the regime of the Trump administration. I feel compelled to report a certain anxiety. Among Trump’s first moves has been to impose a ban on immigration from seven nations in the middle east in order to curb Islamic terrorism. Curiously, the terrorists who bombed the World Trade Center and committed other hostile acts came from none of those countries but mainly from Saudi Arabia whose citizens were not banned from entering the United States. So I wish to temper my initial enthusiasm for Donald Trump with a wait-and-see attitude.

 

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