The Costs & Benefits of Free Trade

Sanders skeptics frequently raise the objection that, if Obama couldn’t pass much of his ideal legislative agenda, then what hope does Sanders have? While I can certainly see where this concern comes from, Nicholas Lemann makes the interesting point in his NY Review of Books article on Reagan that although Reagan is hailed as a transformative president, in matter of fact he was remarkably hands-off during his time in office and also failed to pass much  of his legislative agenda. Reagan shifted the US political climate not by creating specific new programs (or, more accurately, the termination of existing programs), but instead by altering the framework within which he and other politicians argued and justified their respective political programs. He moved the whole political realm to the right, even though he never reformed welfare like Clinton did, and was never able to get tax rates as low as G. W. Bush was able to. In light of this, I wonder whether a Sanders presidency would similarly shift the pendulum back towards the left, even without huge legislative achievements such as free university and single-payer healthcare. To my mind, this is the most plausible political revolution that Sanders offers.

This is the larger promise of a Sanders presidency, and that alone might be sufficient to gain my vote. But, that being said, there are specific issues on which I don’t see eye to eye with Sanders, and I think most notable amongst these is the issue of free trade. Indeed, I seem to be out of step with much of the Democratic electorate, many Trump supporters, and many of my liberal friends on the issue of free trade for whom this topic seems to be a big vote winner. Sanders hammered Clinton on this in the most recent debate, has been emphasizing it on the campaign trail and was rewarded for this with one of the biggest upsets in political history: victory in the Michigan primary in the face of polling showing him down by up to 20 points!

Now, there’s a difference between free trade (or open markets) and trade agreements. Although they certainly have their place, I’m skeptical of extended trade agreements that largely protect established businesses through intellectual property rights laws, new drug patents, and the like. In these cases, the burden of proof is on the trade agreement to prove its worth. By contrast, and maybe this shows my naiveté and ignorance, I’m inclined to think that reduced tariffs and more open markets are likely to bring about good outcomes. Not brilliant outcomes, or overnight transformation. We’re not all going to boom economically as Hong Kong did. But, although there will be costs, the benefits are likely to be there and I think I’d need to proof from the other side that more open markets would do harm. After all, what’s the alternative? Tariffs on imported goods? How does that help? Let’s say we add tariffs as Trump explicitly proposes (I’m not able to see a clear endorsement of new tariffs from Sanders, although he has voted agains the elimination of tariffs and duties on numerous occasions, so I assume he’s at least weakly in favor of them). A 100% duty on foreign cars would make them twice as expensive as their American competitor models and would certainly push just about all Americans to buy an American-made car. I can see how this would ensure that American car manufacturing jobs wouldn’t go to Japan or Mexico as the savings in labor would clearly be offset by the increase in taxes, but would this really lead to an improved economic position for most Americans? I’m not sure it would because now all American manufacturers have an incentive to increase domestic car prices by, say, 50%, and so although these American auto-workers will keep their jobs, it’s not clear that they, or many Americans, will now be able to afford the cars (or as many as) they otherwise could. All this is to say that the alternative of free trade — increased excise duties and tariffs — seems not to be a solution to any problem, which is why I find myself at least broadly in favor of free trade. So, why is Sanders getting so much support for criticizing free trade on the campaign trail? Why do so many of my liberal friends have an abiding skepticism of free trade? 

On the one hand, yes, they’re skeptical of protectionist trade agreements, but in addition to this, I think that maybe the way that free trade distributes benefits and burdens gives free trade a sour taste to many people. To see this, consider Mancur Olson’s insight from 1965 that when the benefits of a policy are concentrated and the costs of it are diffuse, then even if this policy is a net-loser for the polity, it’s quite likely that it will be passed into law. In the US, for example, each person has to submit their own tax return, and many pay around $40 for a computer program like Turbo Tax or H&R Block to help them to prepare and file the forms. It would be simple for the IRS to do all this automatically, after all, they know how much tax has been paid and is owed as they have to compare your submitted tax form to the details they have on file. So, the IRS could send each person a projection of how much tax they’ve paid and how much is owed, that each person could then either agree to, or then buy a $40 tax program to contest the IRS’s data. But, this doesn’t happen. Why not? Olson might say that to some extent it’s because the costs of the current system are quite diffuse (each person might save $40 and a couple of hours a year). By contrast, the benefits of the status quo are extremely concentrated, as H&R Block and Turbo Tax would lose billions in revenue that they receive in the form of $40 from each person. Consequently, each and every citizen has only small reason to agitate for reform to the tax system as the benefits to change are distributed, but H&R Block has massive incentives to heavily lobby to prevent changes, and indeed they spend a huge amount in lobbying.

How does this relate to free trade? Well, in the case of free trade, the benefits are often broadly distributed. Each of us gains a dollar every couple of weeks by paying less for toothpaste, or a couple of bucks every week for marginally cheaper coffee. Or, we benefit by working more efficiently and increasing our productivity by being able to coordinate with workers around the world, orby off-shoring menial tasks that would otherwise slow us down, so we can instead work on the higher value tasks that pay us more. Over all, these benefits are either small, frequent and diffuse, or they are hidden and obscure. By contrast, the costs of free trade can be highly concentrated and significant. You’re a cold-hearted bastard if you can watch this video of 1,400 people losing their jobs because the factory is moving to Mexico, and not feel deeply sorry for these workers. Real people lose their jobs, income, healthcare, many of their friends and colleagues because they have to move, and many will take lower paying jobs. And what are you going to tell them to feel better? Don’t worry, the free trade agreement that cost you your job also caused your mocha latte to be 87c less than it would otherwise be? 

Coming out of this, then, I’m inclined to think that at least one reason why many of my liberal friends are against free trade is because they have seen such videos and heard stories of penny-pinching companies firing thousands of workers in order to move production to other countries. In such circumstances, it seems like greedy company executives and stockholders benefit from free trade while the hard-working employees get the shaft, and I for one (in the post-Reagan era) am skeptical of even more public policy that favors capital over labor. But this obscures the broader benefits that free trade brings. There are winners and losers, but over all, the benefits handily outweigh the costs. It is just because the costs are so concentrated that it appears otherwise. 

Anti-free trade invective might be a vote winner on the campaign trail, but I for one want my politicians to look past appearances and do what’s best for the country more broadly, and so I hope that Sanders and others would either pull back or amend their anti-free trade positions. I suppose my ideal policy position would include general support for free-trade agreements matched with a clear plan and well-financed program to compensate those who lose their jobs to factory relocation, to retrain them into other well-paying jobs, whilst also attempting to diminish the dislocating effects of such change. Maybe my liberal friends will eventually come to see the issue that way, too. Until then, I hope that his anti-free trade policies will have a positive effect of bringing political focus on to the real and discrete costs of the new economy and the effects on the middle class of this country and thereby help shift the political pendulum from Reagan's era, even if no Sanders' anti-free-trade policies become enacted.