Free Trade Will Lose The 2016 Election

The rise of Trump in the United States shocked the political class because it was out of touch with shifting mood among the electorate. I warned this would happen years earlier, in part from polling data on issues such as illegal immigration, and from applying socionomic theory. The same is about to happen on trade. Just as Trump pierced the political class' control over the political debate, the debate on economics is about to be blown open.

Steve Keen demolished Keynesian and neoclassical economic models in Debunking Economics and in 1,000,000 economists can be wrong: the free trade fallacies, he explains why the Ricardian theory of trade is flawed:

Unfortunately, like so much else in economics the model of Free Trade is, to quote the humorist H.L. Mencken, “neat, plausible, and wrong.” The theoretical fallacies at its core have been there since David Ricardo first coined his model of comparative advantage during the political battle to repeal the “Corn Laws,” which restricted the importing of cereal crops into England.

The arguments in favour of the Corn Laws included the belief that if trade were unregulated, English industry—in particular its agriculture—might be wiped out by foreign competition. Ricardo, in a brilliant debating ploy, conceded his opponents’ case that a rival country (Portugal, which was then one of Britain’s major rivals) was better at both agriculture and manufacturing than England and then preceded to “prove” that England would still benefit from Free Trade.

He assumed that in Portugal 80 men could produce a quantity of wine (say, 1000 gallons), whereas England would need 120 men to produce the same amount and that Portugal was more efficient too at producing cloth—needing 90 men to produce a quantity of cloth (say, 100 square yards of cotton) whereas England needed 100.

Without trade, both countries would have to produce both goods for themselves so that per 1,000 workers, Portugal would produce some combination lying between the extremes of 12,500 gallons of wine and 1,100 yards of cotton, while England would produce a combination lying between 8,333 gallons of wine and 1,000 yards of cloth.

If however Portugal specialised only in wine and England specialised only in cloth, the total output would be 12,500 gallons of wine and 1,000 yards of cloth. This is more than the total output of the two countries in the absence of trade. With Free Trade, they could specialise in their comparative advantages and welfare in both countries would be higher.

This argument was so clever that it aided the campaign to repeal the Corn Laws and it has seduced almost all economists ever since.

But there is an obvious fallacy to this neat and plausible argument: To effect specialisation, England has to shift labour and capital from wine to cloth (and Portugal has to do the opposite). Arguably labour can be retrained—a vigneron can become a machinist—but how do you convert wine press into a spinning jenny?
It may be even harder to retrain workers in today's modern economy because the jobs that are leaving or being destroyed by automation are lower skill jobs. People doing low skill jobs are not going to be retrained to work in the knowledge sectors.
The obvious answer is that you don’t. Instead, you sell the wine press and buy a spinning jenny with the proceeds. But because of the introduction of trade, the price of wine in England would have fallen, so that the sale price of the wine press will also fall (economists have modified Ricardo’s model to introduce curves where Ricardo had straight lines, so that total specialisation is no longer required and there would still be some wine production in England under the “new” model of Free Trade), while the price of spinning jennies will have risen, given the new export market to Portugal. Some capital is necessarily destroyed by the opening up of trade and it applies in reverse in Portugal as well.

Since capital is destroyed when trade is liberalised, the watertight argument that trade necessarily improves material welfare springs a leak. If economics were a real science, this real-world complication to Ricardo’s argument would be considered, but it has never been seriously addressed.
Another problem with free trade in a time of rising nationalism is that trade deals now supersede domestic law. In many countries, voters are choosing walls and fences to protect their gardens. Dani Rodrik has looked at how free trade empowers a nation's elites at the expense of the electorate.
More on the political trilemma of the global economy
Today the prevailing worry of progressives is that an oligarchy of financiers, investors, and skilled professionals has captured the polity and is using globalization as a way of imposing its policy priorities. What globalization does for these groups is actually to expand their political opportunities, rather than constrain them. In effect, globalization becomes an instrument for narrowing the scope of what governments can do (in taxation, spending, and regulation) so as to advance the interests of this particular oligarchy.

The defining feature of a democracy is that the electorate can decide on their own path and future, even when it may conflict what a narrowly based, internationally mobile elite want – and that is what hyper-globalization restricts.
Free Trade Doesn't Work by Ian Fletcher is another work criticizing free trade.

Eammon Fingleton has written on manufacturing and trade here: Eamonn Fingleton Archive

U.S. economic policy, from the reserve currency, to interest rate policy, to trade, has been mainly in service of Wilsonian wing of American politics since the end of the Cold War. Wall Street owns the U.S. Treasury and the FIRE economy rules Capitol Hill. The banks peaked in 2008 though, and a rising regulatory burden has seen their economic power slowly squeezed. Manufacturing has been on the losing end of Fed and trade policy, but that may be coming to an end. Even without any change in policy, low cost natural gas and other factors such as automation are working in manufacturing's favor, and with greater economic success comes greater economic influence. Add a change in political sentiment and a rapid change in fortunes could follow.

Dormant economic and political factions are rising amid a period of increasing political volatility. Few expect long-lasting changes in economic policy, particularly when the global free trade system is ready to score great victories with the TPP and TTIP. Many political experts thought Trump would never win a primary as late as November though, and certainly he would not be the nominee. If he wins, a couple of years from now, the TPP and TTIP may be as dead as Jeb Bush's campaign. Even if Trump loses, it sounds like Clinton will ape him on anti-trade rhetoric. This will greatly shift the Overton Window, re-centering the debate on nationalist policies.

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