Reconciling Free Trade and Nationalism

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The Trans-Pacific Partnership is dead, the Transatlantic Trade and Investment Partnership is on the rocks, and may soon be killed off out of fear of provoking future populist politics in Europe. Anger at the perceived failures of the North American Free Trade Agreement has propelled an unprecedented president into the White House.

Like it or not, multilateral trade agreements are backfiring “bigly.”

It is true that multilateral deals for the United States and other nations around the globe that have entered into them have brought, among other things, more choice and lower consumer prices, thereby increasing purchasing power for the common citizen, a feat for which they are to be congratulated. Yet for all they have given us, they have returned upon modern society costs that outweigh the benefits.

Humans are not simply cold, calculating, ultra-rational machines that only seek maximization of their material wealth. Many are people in Middle America who daily see the rusting remains of long gone factories slowly disintegrating, along with their dreams. They also care about job security and the stability and continuation of their local economies, which are currently under siege from the mass disruption of globalization.

I will not sell you the fools’ gold that populists across the west like Trump and Le Pen attempt to peddle, that we can go back to having an economy just the same as the developed world possessed three decades ago. Technology bringing automation and the inevitable economic development of once destitute parts of the world are unstoppable forces that we must accept. They have changed the world for good and there is no going back. Yet, we can, as a society, compel our government to act in ways that mitigate the impacts of the economic disruption of this new age, disruption on a scale we have not seen this large since the Industrial Revolution.

That is because right now how we are handling this transition is absolutely disastrous. When cries are heard by those in the developed world about the woes free trade has brought upon them, many advocates of free trade have dismissed their concerns with cold, curt replies:

No jobs in your hometown anymore? Well move.

Low skill jobs are increasingly disappearing due to outsourcing or automation? Get educated.

Yes, that is a slightly caricatured response, but not so far off base from the arguments made by many “pro-free traders.” Is it really any wonder why the economically downtrodden fell into the arms of President Trump?

Many have made the mistake, especially free market libertarians and conservatives, that government has no role to play besides simply stepping out of the way. Yet that sort of complacency by government is exactly what will make our economy less, rather than more, free. We must have mild and managed government involvement now to ward off complete government overreach in the future. If not, we will only aid the rise of populist policies that wish to deeply curtail even the good aspects of free trade via arbitrarily steep reductions in it through the use of massive, unnuanced, blanket tariffs and the complete rejection of all new trade deals.

It doesn’t have to be this way. We mustn’t choose wide-open, no-restriction, free trade many naïve libertarians advocate for (or the slightly more structured multilateral deals the political and economic elite have long preferred), or the fully isolationist “economic patriotism” self-reliance model.

We can choose bilateralism, and reap the benefits offered by both of the other options.

What are bilateral trade agreements? The simplest explanation of them is that they are trade agreements crafted between only two nations, and thanks to their limited scope they allow for something that is much harder to achieve with multi-national deals: customization.

Here are two examples of how bilateral trade agreements could assist in defusing the trade tension found today in the West:

The Mexican-American Border Adjustment Tax

The border adjustment tax is a proposed solution to trade imbalance between Mexico and the United States, which has lost millions of jobs, primarily in manufacturing, since NAFTA was enacted in 1994.

In essence, a border adjustment tax plan with Mexico would cut the American corporate tax rate across the board, while imposing a tax on businesses buying supplies or bringing in goods to sell outside of the United States. This would make up for the lost tax revenues from the corporate tax cut, and incentivize companies to stay within the United States.

Some argue that this increase in price would just be passed to consumers through higher prices. Yet that does not take into consideration that American goods would then be cheaper to foreigners because all American exports under such a plan would be tax free, making them cheaper and more desirable in international markets. Therefore, the value of the dollar would strengthen on the international monetary exchange markets as more foreigners exchanged their currency in for American dollars. This stronger dollar would bring higher purchasing power to Americans back home and help to offset any price increases. Implementing such a policy would not stop the movement of all jobs to Mexico, but it would likely stem the tide to a less intimidating level, easing the fears of average blue-collar Americans.

Yet this is tricky to implement with just Mexico at this time because most changes in trade policy with them would also affect Canada, the other signatory to NAFTA.  Yet America’s trade relationship with Canada is vastly different than its one with Mexico, and the same trade policy would probably not be ideal. This is why multilateral agreements like NAFTA must be scrapped and replaced with independent bilateral agreements, seeing as one size fits all hardly ever satisfies anyone.

Social/Wage Dumping in the European Union

 The European Union, through the creation of the single common market has in essence created a de-facto multilateral trade agreement/area between EU member states.

While successful in promoting innovation and competition within the European economy since its formation in the 1980’s, the common market has helped create multiple disasters as the European Union has expanded to take in post-communist eastern European nations. The de-facto multilateral agreement of the single market came with the condition of the free flow of all member state’s citizens across national borders, not only as a political right to free movement, but also so labor markets would be free of any restrictions.

This sounds like something to champion, and many academics do while reading about it in a book from the comfort of their desk, yet in practice it has been a disaster. It has allowed for the mass exodus of economic migrants from eastern member nations of the EU to the west, where they often are given jobs because they will take wages well below what is customary for western Europeans to maintain a middle class standard of living. This only exasperates the unemployment rates of native workers, which is already high in nations like France, and it also stagnates the development of eastern post-communist nations which suffer extreme “brain drain” as their best minds leave for Western EU nations, instead of remaining behind in their homelands, wherein, given time, they could help raise them to be on par with western Europe’s own stature.

Nations in Europe are unable to stop such labor flow commonly referred to as “social dumping” because the conditions of the single market were set in stone upon the single markets creation, and if they were to change it would have to go through the bureaucracy in Brussels where there is little support for such needed change.

Only through the end of the single market and the return of trade sovereignty to the nation-states of Europe may the nations effected by such policy enact bilateral trade deals that could include preventive measures against social dumping while still allowing the free flow of goods, while ending such movement of labor.

The Time to Act is Now

These two policy directives that could be enacted by Europe and America would allow for trade to continue to flourish across national borders, but also smooth over the rough edges of job loss and wage depreciation that have been common themes during the current state of globalization.

Implementation of these policies can only come if we abandon failed multilateral agreements for customized bilateral agreements. The sooner we do that the better, because that is how we defuse the most destructive aspects of populist economics (while still addressing globalization issues as national-populists desire), and salvage the reputation of international trade, which is currently on life support with a hundred hands grabbing for the plug.

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