Global trade may involve dismal working conditions, but that doesn’t mean the alternative is any better.
Myth #6 on Robert Reich’s list of economic myths is called “Global Trade Benefits Everyone.”
“Have you heard this lie?” Reich opens. “‘Global trade is good for everyone.’” His pants then light on fire. “Ahh!” he screams. “That’s bunk!”
Watching that opening sequence was an immediate déjà vu moment for me, because I had recently come across an article making the same claim as Reich. The article argued that free market economists are simply wrong to claim that “everyone gains” from free trade, because clearly there are some losers.
The ironic part is, that article was written by none other than Bryan Caplan, one of the world’s leading free market economists.
“What makes me so sure that ‘Everyone gains from X’ is invariably a blatant falsehood? Because every change causes price movements, which are automatically bad for someone or other,” Caplan writes. “The Industrial Revolution was great overall, but hurt traditional craftsmen. The Internet is great overall, but hurt travel agents. Congestion pricing is great overall, but bad for cheapskates with high traffic tolerance. Free trade is great overall, but not for workers and investors in industries that can’t survive at world prices.”
But doesn’t everyone at least win in the long run? Not really, Caplan points out. Some people simply die before they are able to reap the long-run benefits, having only experienced the short-run harms. The brutal truth is, “everyone gains” is simply a myth.
In other words, Reich is actually right about this one.
…Kind of.
Costs and Benefits
This would be a rather short article if Reich were simply making the same point as Caplan. “I agree, but Caplan said it better,” would probably be my thesis. But alas, Reich goes in a rather different direction than Caplan does, and that’s where some more rigorous analysis is needed. Here’s how he presents his argument:
Many economists believe in the doctrine of comparative advantage, which posits that trade is good for all nations when each nation specializes in what it does best. But what about costs to workers and the environment? What if a country’s comparative advantage comes from people working under dangerous or exploitative conditions, or from preventing them from forming labor unions, or allowing employers to hire young children? Or from polluting the atmosphere or the ocean, or destroying rainforests and polluting groundwater?
Reich makes a fair point that global trade isn’t all sunshine and roses. Working conditions in some places are atrocious, and environmental damage is also a very real problem. But the fact that working and environmental conditions are far from ideal in many parts of the world does not mean that restricting trade will necessarily make things better. In fact, it’s quite likely that less trade would make things worse, because it would cut off the global poor from opportunities for production and economic growth.
Reich highlights the costs of trade, but there are also immense benefits that the global poor reap from the arrangement. If these benefits outweigh the costs—as they likely do in most cases—then who’s really the advocate of the downtrodden: the ones cheering on mutually beneficial trade, or the ones trying to stop it because they can only see the downsides?
To be fair, Reich doesn’t come out and advocate for cutting off trade. But this raises the question: what exactly is he advocating for? Anyone can point out problems, but the real question is: what solution are you proposing? Maybe he’ll tell us in the next section:
My old boss Bill Clinton called globalization “the economic equivalent of a force of nature, like wind or water.” But globalization is not a force of nature. Global trade is structured by rules negotiated between nations about which assets will be protected and which will not. These rules determine who benefits and who is harmed by trade. Over recent decades, trade deals such as the North American Free Trade Act (NAFTA) and agreements under the World Trade Organization (WTO) have protected the assets of US corporations, including intellectual property.
Reich goes on to list a few ways that these rules have helped large corporations, such as oil companies, financial institutions, Big Pharma, and Big Ag.
Watching this part of the video ushered in a second instance of déjà vu. I remembered reading somewhere, just recently, that NAFTA was rotten to the core, just like Reich was saying.
Yet again, it was a staunch free market economist making this point—Murray Rothbard, in a number of incisive articles that were part of his 1995 anthology Making Economic Sense. The problem, said Rothbard, is that NAFTA was really the opposite of free trade.
“In the first place, genuine free trade doesn’t require a treaty (or its deformed cousin, a ‘trade agreement’; Nafta is called a trade agreement so it can avoid the constitutional requirement of approval by two-thirds of the Senate),” Rothbard wrote in a 1993 article titled “The NAFTA Myth.” He continues:
If the Establishment truly wants free trade, all it has to do is to repeal our numerous tariffs, import quotas, anti-“dumping” laws, and other American-imposed restrictions on trade. No foreign policy or foreign maneuvering is needed.
If authentic free trade ever looms on the policy horizon, there’ll be one sure way to tell. The government/media/big business complex will oppose it tooth and nail. We’ll see a string of op-eds “warning” about the imminent return of the nineteenth century. Media pundits and academics will raise all the old canards against the free market, that it’s exploitative and anarchic without government “coordination.” The Establishment would react to instituting true free trade about as enthusiastically as it would to repealing the income tax.
In short, what is called “free trade” today is nothing of the sort. “Free trade” is just the Orwellian euphemism that the Establishment uses for managed trade.
Having said that, Reich and Rothbard are by no means on the same page here. Reich dislikes these kinds of rules because they appear to help large corporations, whereas Rothbard dislikes them because they restrict trade and competition.
We’ve already discussed in Part 5 why the latter approach should be preferred.
Seeing the Bigger Picture
Reich continues his argument as follows:
Now it’s true that American consumers benefit from lower-priced goods from China, Mexico, and other countries where wages are lower than in the United States. But trade deals have caused millions of Americans to lose their jobs. Between 2000 and 2017, a total of 5.5 million manufacturing jobs vanished, partly due to increasing imports, mostly from China.
Global trade on its own is neither good nor bad. But the way trade is now conducted protects the wealth of those who already have it and burdens those who don’t.
Starting with the jobs point, Reich is right that a more open global economy has resulted in significant changes for American workers, including the loss of many manufacturing jobs. But as Reich concedes, the flipside is that consumers have access to cheaper goods.
Would it really have been better for working-class Americans, on net, to preserve an arbitrary number of manufacturing jobs in perpetuity by putting a check on imports? That sounds like a recipe for economic stagnation, not prosperity. As Hazlitt wrote in Economics in One Lesson, “Paradoxical as it may seem to some, it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second.”
Reich’s closing remarks are probably the closest we’ll get to him proffering a solution. His prescription, it seems, is to change the rules of trade so that they don’t just protect the well-to-do. Though I take issue with his characterization that global trade has only benefited the rich and hurt the poor, his call for change is well taken. I would simply add that the best change that can be made would be for the government to step aside, repeal all trade restrictions, and allow free competition to flourish. That will strip entrenched corporations of their protections while unleashing what Clinton rightly called “the economic equivalent of a force of nature”—tremendous productivity that will improve the lives of rich and poor alike.
Global trade is not neutral. It is, on net, extremely good, for the same reason that local trade is good: voluntary exchanges are win-win and facilitate specialization and the division of labor. In fact, the comparative advantage principle Reich mentioned at the beginning isn’t just about trade between nations. It applies just as much on all other scales.
While it’s important to concede that there are some net losers, what must be stressed is that global trade tends to drastically increase the standard of living for the vast majority of people. By offering opposition to free trade advocates, Reich is actually working against the interests of most working-class people around the world.
So yes, the idea that free trade helps absolutely everyone is technically a myth. But a far more pernicious myth is the one that Rothbard pointed out, and that Reich seems to have fallen for: the idea that the free market is “exploitative and anarchic without government ‘coordination.’”
Additional Reading:
“Everyone Gains”: The Pretty Lie of Economics by Bryan Caplan
Making Economic Sense by Murray Rothbard
I’m All for Free Trade, But… by Mark Skousen
