Free Trade: I Want to Believe

Bloomberg has an article showcasing the winners and losers of a manufacturing company’s move from southern Kentucky to northern Mexico. First the losers. “Randall Williams and his wife, Brenda, were two of those workers. For three decades, they helped assemble the hermetically sealed motors that power air conditioners sold all across America. At the end, they were each making $16.10 an hour. That kind of money’s just a dream now: Randall fills orders at a local farm supply store; Brenda works in the high school cafeteria. For a while, he said, their combined income didn’t even add up to one of their old factory wages… ”

Then there are the winners. “Just as the Williamses were being informed by A.O. Smith that they’d be let go, a young Mexican woman named Zoraida Gonzalez was hired some 1,200 miles away in the hardscrabble town of Acuna, just over the Rio Grande from Texas. To replace its Kentucky output, A.O. Smith was ramping up production in lower-cost Mexico, a move facilitated by the signing a decade earlier of the North American Free Trade Agreement. Gonzalez was brought in to help handle phone calls. Now 30 years old and in charge of payroll, she makes about $1.75 an hour…”

In theory free trade should make more winners than losers. A company that offshores manufacturing should save money. This money will go into hiring other employees  whose jobs cannot be sent abroad, or be paid to investors in the form of dividends. This money will stimulate demand or be used for more investment, creating jobs that will replace those lost by the Williams’s while at the same time lowering the cost on the things they buy, though the Williams’s might have to relocate to get those jobs.

Unfortunately the theory isn’t working that way in practice as a recent paper by M.I.T.’s David H. Autor, UCSD’s Gordon H. Hanson, and the University of Zurich’s David Dorn of the University of Zurich found. “Instead, unemployment rose both among manufacturing and nonmanufacturing workers, suggesting that the ill effects of increased trade had a spillover impact on the larger local economy. On top of that, average weekly wages declined. In general, places like Tennessee were very slow to adapt to the new economic reality—their elevated unemployment rates and diminished wages persisted for a decade, the paper’s authors estimate. The workers there are also saw a lower lifetime income.”


Even the free trade cheerleader The Economist takes American companies to task for hoarding cash saved by offshoring and other job cutting measures instead of plowing it back into the economy. “Abnormally high profits can worsen inequality if they are the result of persistently high prices or depressed wages. Were America’s firms to cut prices so that their profits were at historically normal levels, consumers’ bills might be 2% lower. If steep earnings are not luring in new entrants, that may mean that firms are abusing monopoly positions, or using lobbying to stifle competition. The game may indeed by rigged.”


One of the theories of Karl Marx’s insomnia cure, “Das Kapital” is that under capitalism money tends to accumulate as winners take all and leave scraps for everyone else. When it accumulates it is less useful than when it is spent. It then becomes up to the government to step in and redistribute it – at least until money is completely abolished. Or something like that. I think that’s as far as I ever got in that billion page long book, required reading in my Marxist Economics class taught by a real honest-to-goodness Israeli Communist.


Free trade is supposed to improve the economic prospects of everyone in aggregate. For losers like the Williams’s, there should be winners not just in the USA but in their own communities. But that is not happening. Instead of leading to greater prosperity, free trade has created stagnant wages and diminished prospects for American workers. The economy booms when a company opens, and everyone in the area prospers as the wages filter through the economy. Then the jobs are lost in one area, but gained by another as the wave of prosperity crosses borders and improves the life of those like Ms. Gonzalez.


But the wave will not stop in Mexico. As prosperity descends on northern Mexico, wages will increase and reach a point where there will be an economic incentive for companies to find cheaper labor elsewhere. This has already happened in Latin America as many of the jobs created by NAFTA move from there to China. And even the Chinese are feeling pressure from lower wage nations such as Vietnam, Cambodia and others. People float in an economic sea, and become prosperous as the wave of prosperity raises them up, but then makes them less so as the wave moves on. The question then becomes: Are the people better off after the wave recedes? Will another follow it?


And that’s where the Williams’s come in. Ask them if they are better off. Then pull the lens back and look at the communities in America’s rust belt cities and see whether cities like Pittsburgh, Detroit and Gary are better off today than they were forty years ago. As the paper by Autor, Hanson, and Dorn proves that next wave of prosperity may never come for some.


Marxist Economics class aside, I was educated to believe in the free trade. Even after I suffered the indignity of training my foreign replacement at my tech job, I wanted to believe that my community was better off under the free trade than it would be without it. I remember talking with a reporter about how America’s real religion was free market capitalism, and that our nation had embarked on a great experiment based on the faith that the the free trade would benefit everyone.


But after decades of trade deficits, wages that haven’t changed since the 1970s and the American worker’s Red Queen’s Race, I think it’s fair to ask, has our faith been well-placed?

20 Comments

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  7. Brent Parrish:

    Good article, Scott. I’m all for free trade. But it’s not “free trade” when you have 30,000+ pages of regulations starting with GATT. Then we have NAFTA. There’s been other proposed “free trade” agreements that are anything but. Take the Trans-Pacific Partnership (TPP) trade deal, for example. Out of 29 chapters in the TPP text, only five chapters cover trade. My point is that these “free trade” deals are not really about free trade at all, but rather creating political and economic unions with other nations. You don’t need 5,500+ pages of regulations (see TPP text) to conduct free trade. It’s semantic manipulation.

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