The last election was decided by the industrial working classes who had lost jobs from automation and so-called “free trade.” We look at free trade first.
Free trade is trade without government involvement. It’s as old as the hills. But kings and rulers soon regulated imports, imposing taxes (tariffs) to raise money and limits (quotas) to shield domestic producers from imports.
The British economist Adam Smith showed that free trade might lead to economic growth. In 1776 his Wealth of Nations considered the trade between England and Portugal. Britain’s climate is damp and suited to raising sheep. Portugal’s climate is suited to growing grapes. Each had an “absolute advantage” over the other. So, Britain specialized in wool and Portugal in wine. Tariffs were removed by a free-trade agreement.
Britain’s wool production expanded. Let us say it grew by 25 percent from its Portugal trade. If there were previously 10,000 sheep farms and 100 wool factories, these increased to 12,500 farms and 125 factories. Portugal’s wine output also grew. Prices for wine fell in Britain and prices for woolen goods fell in Portugal.
Not everyone was happy. Portuguese sheep farmers went out of business. This is called “dislocation.” But they turned to growing grapes, so the impact was minimal. Very importantly, we see that economic growth is not a zero-sum game, where for every winner there must be a loser. Economic growth from free trade can produce winners all around.
The British economist David Ricardo took the idea further. Suppose Portugal could produce both wine and wool more cheaply than Britain. Does it still make sense to trade? He showed that it still could. The proof is complicated, but overall, wool and wine outputs both increase for the same amount of labor hours expended. This is like getting free stuff! This is called the principle of comparative advantage. It is the idea behind global trade.
Note some important facts. Governments did not ignore their responsibility to ensure that their citizens were treated fairly. Employment and consumption increased. Prices fell. Everyone benefited. The super-rich did not run off with the gains from free trade.
How do these theories work in practice? Very well: Britain became the “workshop of the world” and free trade led to unrivaled prosperity. Trade was actually “trade.” Goods came in and goods went out.
America did not always believe in free trade. It made the strategic decision to protect its manufacturing industry with steep tariffs. American industry was simply unable to compete with British industry without tariffs to level the playing field. As a result, America’s fledgling industries were allowed to grow behind a “tariff barrier.” Hence, Britain only ever exported 31 steam locomotives to America.
But protection has to be managed intelligently. Simply put, the Great Depression of the 1930s was caused by poorly managed protection, cascading bank failures and the disastrous gold standard. Republicans Sen. Reed Smoot and Rep. Willis C. Hawley promoted the 1930 Tariff Act intending to protect American industry and agriculture. Tariffs were greatly increased. This protectionism was a disaster since other countries retaliated in a “beggar-thy-neighbor” cycle.
America’s exports to them fell by over 50 percent and unemployment rose as a result. A tactic arose of “exporting unemployment” with cut-price exports, with countries trying to undercut each other with ever-cheaper exports to keep their workforces employed. American exporters then lowered their prices, producing a downward global spiral, more bank failures, more unemployment, etc., etc.
Democrats under FDR fixed this mess. They repealed the Smoot-Hawley Act, abandoned the gold standard and introduced the New Deal. Unemployment fell from 25 percent in 1933 to under 10 percent in 1941 (much lower, if we count New Deal projects).
At Bretton Woods in 1944, 44 nations agreed that the Depression’s mutual throat-cutting must be prevented. They set up the forerunner of the World Trade Organization. This is a forum where countries remove trade barriers and resolve differences.
After 1945, countries lowered tariffs to make trade easier. “Dislocation” of workers was not an issue because America’s economy grew rapidly. Sam Walton sold only American-made goods at Wal-Mart. He rejected calls to sell imports as he wanted to keep America’s factories going. His successors did not. They sold cheap imports, pocketed the gains, became fabulously rich, paid their workers peanuts, and let factories close. In the last 15 years, 60,000 have closed due to “free trade” (Bernie Sanders).
This is the exact reverse of the Depression’s “exporting unemployment.” This is importing unemployment. This “fake trade” (Alan Grayson) offered America’s billionaires the chance to get richer at the expense of their fellow Americans. Guess what? They took it.
This threw millions of workers under the bus. Bernie Sanders promised to help them. So did a billionaire with golden toilets. But someone who gave secret speeches to Wall Street did not.