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Misconceptions about free trade and globalization

In this most interesting election year, there has been a lot of discussion about the desirability—or the lack thereof—of free trade and the phenomenon that we now call globalization.

Let us focus first on free trade. Many have criticized free trade deals for being job killers. There are, of course, related complaints about how free trade supposedly enhances the power of corporations and promotes economic inequality, but it is fair to say that the criticism of job loss appears to have had the greatest impact on the American electorate.

However, this “job loss critique” is fundamentally misguided because the basic objective of a free trade agreement is not to create jobs but instead to enhance trade in goods and services. In fact, the contemporary trade models that I am familiar with are unequivocal in their prediction that the outcome of free trade will be losses in some sectors of a nation’s economy. More specifically, the sectors of a nation that export goods and services to other nations generally benefit from free trade and the sectors that compete with foreign imports typically lose. Therefore, workers gain or lose from free trade depending on the sector in which they are employed.

If there are going to be some job gains and losses from free trade, then what happens in net terms? In particular, does a nation gain or lose in net terms from free trade? The answer is that in the general case, we cannot tell definitively. Why then do so many politicians keep singing the praises of free trade? The reason is that there is a sense in which free trade is welfare- improving relative to restricted or no trade, but the underlying economic argument is nuanced.

Simply put, what economists mean when they say that free trade is superior to restricted or no trade is that the winners for free trade win by more than the losers lose. In other words, the winners could compensate the losers for their losses and still have the nation come out on top. The important word here is could. In this argument, no compensation is actually paid to the losers. So, the case for free trade rests on hypothetical compensatory payments that could be made to the losers but are rarely made in actual instances.

Against this intellectual background stand the real losses that many American workers have suffered as a result of, for instance, manufacturing trade with China. These losses are real and painful and yet we, as a nation, do very little to alleviate the plight of workers negatively affected by free trade. We do have a small number of federal initiatives such as the Trade Adjustment Assistance program, but these programs are really a drop in the proverbial bucket.

Because many in the American electorate do not comprehend the purpose of a free trade agreement and the sense in which free trade is a good idea, the “job killer critique” continues to gain traction, and it is difficult to generate support for the idea of free trade. This state of affairs prevails even though free trade—with adequate compensation for losses—is probably a better idea than most of the alternatives presently under consideration.

The story is similar for globalization. Using an argument similar to that used above to delineate the sense in which free trade is desirable, one can credibly claim that the world benefits from globalization. However, the moment one moves away from this general principle, pesky details emerge. In this regard, Branko Milanovic’s excellent new book, “Global Inequality,” shows us that it is important to keep three points in mind. First, the gains from globalization are not evenly distributed. Second, the big winners from globalization have been the Asian poor and middle classes. Finally, the big losers have been the lower middle classes of the rich world.

The last point above describes the situation confronted by workers, frequently manufacturing workers, in nations such as the United States and the United Kingdom. Seeing no benefit in their own lives from increased economic integration, which is a key part of globalization, workers see no reason to support continued integration. I would argue that this state of affairs is a key factor that explains the recent Brexit vote in the U.K.

Politicians in the United States and elsewhere have not done a good job explaining the senses in which free trade and globalization, with apposite safeguards, are in the best interests of the global citizens that many of us have now become. At least in the United States, if this is not done relatively quickly, we may all be faced with an electoral outcome that will lead to an extended period of buyer’s remorse.

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology. These views are his own.

8/12/2016 (c) 2016 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email rbj@rbj.net.

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