Is Trump right about 'free trade'?

Jim Stanford

Donald Trump’s bellicose policies, including new tariffs on steel and aluminium, have raised fears of a worldwide slide into protectionism and trade conflict. The US president’s unilateral and xenophobic approach to trade policy is reprehensible and dangerous from any perspective. But many progressives feel conflicted about Trump’s actions.

After all, he is challenging business-friendly trade deals (including the TPP and Nafta) which labour, social and environmental advocates have opposed for years. And while his policies will clearly make life worse for working and poor people in the US, he is nevertheless speaking to their actual experience: unlike free trade defenders, who continue to pretend that the tide of globalisation has lifted all boats.

Given Trump’s domination of the debate, progressives need to work quickly to distinguish our critique of globalisation from his. In particular, we must flesh out a vision of trade policy reforms that would genuinely help those harmed by globalisation, while rejecting the nationalism and racism that underlies Trump’s appeal.

Established policy elites still ridicule Trump’s belief that trade deals have contributed to the misery and inequality afflicting working class communities in America (and, for that matter, Australia). For them, globalisation must produce winners but no losers. And they trot out theoretical economic models (premised on assumptions of full employment and costless adjustment) to buttress their case. They concede the gains from trade may not have been evenly shared. But they deny that globalisation has anything to do with the erosion of living standards experienced in so many once-prosperous working communities.

This patronising denial is precisely what got Trump elected in the first place. It’s not that depressed industrial towns in Pennsylvania, Ohio, and Wisconsin (the states that put Trump over the top) didn’t ‘share in the benefits’ of free trade. It’s that their economic viability was destroyed by it.

Acknowledging that globalisation produces losers as well as winners, allows us to imagine policies to moderate the downsides of trade – and purposefully share the upsides. The next step is to make a crucial distinction between trade and ‘free trade’. The former is the pragmatic day-to-day flow of goods and services between countries. The latter is the set of specific, lopsided rules embodied in the plethora of trade and investment agreements enacted over the last generation.

Progressives can endorse ... international trade ... without accepting the lopsided, business-dominated vision of ‘free trade’ agreements.

These ‘free trade’ rules often have very little to do with actual trade: describing tariff elimination, for example, usually takes up just a tiny part of the text of each trade deal. The rest is devoted to a raft of provisions securing and protecting the rights of private companies to do business anywhere they want, on predictable and favourable terms.

Proof of the dissonance between trade and ‘free trade’ is provided by Australia’s lacklustre trade performance over the last two decades. Exports of actual goods and services constitute a smaller share of total GDP today, than at the turn of the century. Sure, the volume of resource exports has surged – not surprisingly, since that’s what our trading partners wanted. But resource prices have been shaky, and meanwhile our other value-added exports flagged badly. If the goal of all the free trade agreements signed since then (a dozen) was to boost Australia’s exports, they failed miserably. But of course, that wasn’t the goal: the deals were actually intended to cement a business-friendly policy environment, even in sectors that have nothing to do with international trade.

Progressives can endorse mutually beneficial international trade, and even international flows of direct investment, without accepting the lopsided, business-dominated vision of ‘free trade’ agreements. In fact, a progressive approach to managing globalisation would actually boost real trade more effectively: by supporting purchasing power on all sides, and avoiding the contractionary race-to-the-bottom unleashed by current free trade rules.

Here are six key principles central to a more hopeful and inclusive vision of globalisation.

Preserve the power to regulate

Free trade deals assume government intervention in markets (regulating prices, service standards, investment, and more) is inherently illegitimate and wasteful; they establish ‘ratchet’ rules to limit regulation and public ownership, and lock-in deregulation over time. The failure of market competition in so many areas – in Australia’s case, including electricity, vocational education, and employment services – reaffirms that trade deals must not inhibit governments from regulating businesses, no matter where they are owned.

Eliminate investment preferences

‘Free trade’ deals proffer all kinds of preferences and rights for businesses and investors that have no necessary connection at all to actual trade. Chief among these are the unique quasi-judicial rights and powers granted to corporations (such as investor-state dispute settlement panels); these are an affront to democracy. Progressive trade policy would abolish these preferences, and subject corporations and their owners to the same laws and processes the rest of us face. Similarly, progressive trade deals would aim to relax monopoly patent rights (for drug companies and others), rather than strengthening them.

Manage capital and currencies

Foreign direct investments in real businesses that produce actual goods and services can certainly benefit host communities, but only so long as those operations are subject to normal public interest and regulatory oversight. Retaining the capacity to regulate foreign investment is essential to capturing maximum benefits from foreign investment. On the other hand, volatile, speculative flows of financial capital and foreign exchange have less upside, and more downside. In particular, rules should prevent the common practice of suppressing exchange rates to gain artificial advantage in international competition.

Social clauses that mean something

Most ‘free trade’ deals, the TPP included, feature token language about protecting labour and environmental standards. These provisions are window-dressing: responding to fears that global competition will spark a downward spiral in social standards. Typically these clauses simply commit signatories to follow their own laws – with no requirement that those laws are decent to start with. Progressive trade deals would have safeguards that are enforceable, including requiring participating jurisdictions to respect universal standards or lose preferential trade rights. Where trade partners have different standards (such as, for example, levying varying degrees of carbon pricing), border adjustments must be permitted so that trade competition does not undermine environmental and social progress.

Balanced adjustment

Trade and investment flows never automatically settle at a balanced position – even if a ‘level playing field’ in labour and environmental standards was actually achieved. That’s because competition always has uneven effects, producing both winners and losers. Countries that experience loss of employment and production through global competition (a possibility denied by free trade theory, but commonplace in practice) must be supported with measures to safeguard domestic employment, facilitate adjustment, and boost exports. Chronic surplus countries (like China and Germany) must recycle excess earnings into expanding their own imports, thus bearing a fair share of adjustment – rather than forcing deficit countries to do all the heavy lifting.

Active, inclusive domestic policies

Opposition to trade liberalisation is relatively mild in the highly trade-exposed social-democratic countries of Europe: like the Nordic countries, Germany, and Netherlands. Their extensive networks of social protections provide average workers with reasonable confidence they won’t be economically tossed aside for any reason: whether trade competition, or some other disruption.

That’s why a key component of progressive trade policy must be a general commitment to social protection, inclusion, and job creation. A general context of security and equity better facilitates adjustments of any kind, in response to any source of change. Indeed, collecting healthy taxes from successful industries, and reinvesting them in priorities like infrastructure, training, and communities, is precisely how to harvest the much-trumpeted gains from trade – and pro-actively share them throughout society. That’s much more feasible than hoping those benefits will somehow trickle down of their own accord.

Claims by policy elites that international trade is the engine of all progress are vastly overblown. Our well-being mostly depends on what we do with our skills, energies and innovation right here at home. But real international trade and investment, properly managed, can certainly make a contribution to prosperity. And progressives can advance a vision of a more balanced, inclusive globalisation that has nothing in common with Donal Trump.


Jim Stanford is an economist and the director of the Centre for Future Work at the Australia Institute. This article was first published by the Guardian on 19 March 2018 under the headline ‘Is Trump right about free trade or is there a fair alternative?’ and is reproduced with the author’s kind permission.


Elsewhere:

Suggested citation
Stanford, Jim, 'Is Trump right about 'free trade'?', Evatt Journal, Vol.17, No. 1, May 2018.<https://evatt.org.au/news/trump-right-about-free-trade.html>