6.4: Liberal Free Trade Policy

Adam Smith’s classic 1776 The Wealth of Nations advocated free trade to push down prices. Specifically, he advocated abolishing Britain’s so-called Corn Laws (grain import tariffs). Starting in the 1830s, David Ricardo and his successors’ theory of the benefits of free international trade stated that all countries benefit if they export products for which they have a comparative advantage, such as climate, natural resources, labor and capital. The classic example was exporting wine from Portugal and exporting wool from England.

Since Ricardo’s theory has math, most economists still believe in comparative advantage. They say that trade benefits all countries with greater economic efficiency and lower prices. However, critics point out that millions of Americans lost their jobs to low-wage countries like China, Mexico and India. This is the classic tension of free trade - lower prices versus keeping jobs.

Free traders also claim that despite lost jobs and companies going bankrupt, overall the economy benefits because consumers get cheaper goods and services. But critics ask who will be able to afford to buy those goods and services if they are unemployed or have low-paying jobs? The U.S. economy currently has large excess production capacity and high credit card debt because people cannot afford to buy. And economists admit that the competition from low wages overseas has held down pay for the jobs that remain in the U.S.

Finally, economists claim that people who lose their jobs will get other jobs. But when thousands of workers were laid off from the GM plant at Lordstown in Ohio in 2019, they did not suddenly get highly-paid jobs as web designers the next day. Only 15% of laid-off workers get retrained and most end up with 50% less pay or no job at all.

The fact is that most of the benefits of free trade go to increased profits by big corporations and to the top 10% who own most of their stock. Outsourcing is now spreading from manufacturing jobs to financial analysis, legal research and software engineering. How will economists feel when their jobs are outsourced to India?

(Note: In addition to the effects of imports and outsourcing, there is also mass job displacement by robots, computers and artificial intelligence, and increasing replacement of full-time jobs by temps and gig workers. The result of all these factors is that the incomes of the bottom 70% of the U.S. population has gone down and the percentage of people who are working has decreased.)

Non-economic factors also come into play against imports. For instance, countries want food security and do not want to depend on other countries. Also, for national and economic security reasons, countries want to maintain their own industrial and technical base, i.e. the capacity to make weapons, technology and other manufactured goods. Most people would disagree with Reagan official Richard Darman, who said, “It doesn’t matter if we export computer chips or potato chips.”

Some are calling Ricardo’s theory of comparative advantage outdated. In The World Is Flat, Thomas Friedman presents arguments that in today’s world, technology, education and government economic policy are the most important inputs into economic development, and that no country has a natural advantage. The rise of Japan, South Korea, China, India and others seems to confirm this.

Today, leadership in manufacturing and technology changes quickly and new techniques and knowledge spread faster and faster. Malaysia went from rubber plantations and tin mines to computer chip manufacturing in 30 years. China and India are gaining a large economic advantage by producing more scientists and engineers. Should the U.S. follow Ricardo’s theory and outsource its engineering to China and India because they are cheaper? Most countries would rather maintain control over such crucial aspects of their economies. For instance, observers criticize Boeing because it has outsourced the technology and production of much of their new airplanes to other countries, causing loss of jobs, coordination problems, technical problems and delays. Along with the shift of Boeing headquarters to Chicago and the opening of a nonunionized plant in South Carolina, this was an outgrowth of Boeing being taken over by financial executives instead of engineers.