In Part One of this series, I discussed the best, largely-unspoken argument in favor of free trade, where the increasing fungibility of goods and services will largely circumvent any attempts to make effective one-on-one trade deals. In this second part, I want to address what is, in my view, the best populist argument against free trade too often ignored by its advocates.
My contention is that we, the collective people, have failed to address one very simple reality. The beneficiaries of open, multilateral trade are very real, but they are largely future beneficiaries, and as yet anonymous. Meanwhile, the people and businesses most hurt by free trade today have names and faces. They are real people and businesses, and they are often directly put out of business by foreign competition.
The “comparative advantage” argument
Every economist will be able to recite the classic proof of “comparative advantage,” first articulated by David Ricardo in 1817. This concept lays out how theoretically all countries are better off if they focus on producing the goods in services where they have a comparative advantage, and not just an absolute advantage, over other countries.
How this works out in a system of free trade is that new businesses will form to create goods and services that can now be sold both domestically and abroad, while some businesses in industries where no such advantage exists will close as noncompetitive. Theoretically, the former will more than offset the latter as the overall benefits of efficiency accrue to all consumers in the form of lower prices, and each country participating in multilateral trade is better off in aggregate.
The problem here is that nobody is yet employed in those new businesses that have not yet been started, or old businesses that will hire new people to expand into new markets. The future beneficiaries are “us” in the form of lower prices and better selection of goods, but of stuff we haven’t purchased yet, or perhaps even seen on the market. The future new employees are still in school, or employed in less productive industries right now. The investor beneficiaries currently have their money tied up in less productive businesses, waiting to fund the new and better investment opportunities.
Names and faces
But when one factory in one particular town closes because it can’t competitively bid against a lower-priced foreign player, real people with names and faces lose their jobs. Real families are forced to relocate to find work, or they become dependent on local economic aid. Schools and other local institutions are hurt as the tax base declines and younger people leave. You can put a name on those closed schools and empty shopping malls, and you drive past them every day.
The cross-state region of Appalachia has long been pointed to as the “poster child” here, but we have also seen, over many years, that small towns and cities are emptying across the Midwest, towns that were once home to prosperous, locally-owned manufacturing and service businesses. We have also see the impact in some major cities like Detroit as well, while other big cities have successfully turned the corner from their past.
But despite the obvious economic decline, there has been little done in coordinated terms to address the “big picture” on this issue by either major political party when in office. Attempts like Lyndon Johnson’s “War on Poverty” fell far short of goals. And instead of taking the reins up for themselves and demanding action, small towns and big cities often seem to get stuck a cycle of self-fulfilling defeatism.
Looking outside our blinders
Our national pride seems to keep us from looking at how other countries address these problems, but I ran into an interesting example of industrial policy while traveling through the Norway fjords in 2015. In an unlikely place called Brønnøysund, a town of 5,000 people halfway up the 1,000-mile-long Atlantic coast, I came across a large governmental office.
This town had suffered great economic challenges, as did others along this remote coast, with the decline of the fisheries and their related businesses in the 1970s. Even the North Sea oil boom passed them by. In 1980, the Brønnøysund Register Centre was established to maintain a small set of official government registers, and it now maintains a long list of digital records, most significantly the Register of Business Enterprises. Effectively, if you set up a legal business or other organization in Norway, this is the office you work with, and it has grown both in size and technology capabilities to service the entire country.
If Norway operated like most of the U.S., this office would certainly be in the capital Oslo. In the U.S. we replicate these functions at the state level, so here the equivalent office would be in a state capital, say Des Moines, Iowa. But instead, this office was part of a coordinated plan to build better roads and communications linking these remote communities, as well as supporting education, using the employment needs of the government to assist local economies outside the capital.
So, the question is why in 2018, with all of our means of communicating virtually, do so many state and federal governmental offices need to be in the biggest or most central city in the state, which is typically a place already doing quite well economically on its own? Yet in each state there are regions away from the capital struggling economically.
It is difficult to tell private business where to locate, although we are very willing to bribe them with a lot of tax breaks, far too often in places where they are redundant. Think how many Walgreens and Lowes stores have been rewarded with huge tax incentives to build right near existing CVS and Home Depot locations, and vice versa. Meanwhile, other communities are too often left out of the economic growth opportunities.
State and federal governments are different from private business, however. It is “our” choice whether we will use our collective governing power to stanch the persistent jobs bleed in the smaller cities in the state, like Fort Dodge or Mason City in Iowa, as long-time “cash cow” local businesses get sucked up and emptied out by huge consolidated corporations. Alternatively, will we commit to a better balance of economic opportunities by using technology to “devolve” operations more equitably across our respective states?
That is but one proposal that comes to mind when addressing the “names and faces” affected negatively by a more open trade policy. Just closing down the trade policy won’t solve any problems, and it will only makes the larger country poorer.
I don’t have any easy answers here, but I can contend that we really have not treated this side of multinational trade and technology modernization with any social priority. It might cost money, after all, and that would mean more taxes! But those same economists that correctly recommend a more open, multilateral trade policy can put a value on the overall economic growth created by these policies. We just need the collective courage to capture some of that gain and redirect it more equitably to those “names and faces” that paid the price for our overall gain.
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