Missing The Other Shoe

Globalization and free trade have accomplished what was intended, the lowering of prices. Trade always lower costs. Even if Country A produces all goods less expensively than Country B can, the overall price of goods for Country A’s citizens decreases if it trades with Country B. This counterintuitive concept of comparative advantage was first explained by Robert Torrens, and you just have to believe me that this is true, unless you want a painful game-theory explanation.

Unfortunately, the concept of free trade has a second part, the free movement of labor. It is fine and dandy to say that “if shoes are manufactured more cheaply in Argentina, then you should be able to buy all of your shoes from Argentina”, but the shoemakers in Ohio have a say in how that proceeds. The Ohio shoemaker cannot simply move to Argentina to resume making shoes. The classic economist’s free-market retort would be that the Ohio Shoemaker is encouraged (by market forces) to engage in employment in another industry. But, in a democracy, the Ohio shoemaker has found that he can simply support politicians and policies that limit trade to Argentina. This is a significantly easier alternative for the Ohio shoemaker, even if it damages the welfare of most other citizens.

Without the free movement of labor, voters of dwindling industries have turned to nationalism and isolation to protect themselves. As in the example above, this hurts the overall welfare of the citizens but is an option afforded to citizens in democratic countries.

It is possible that China is uniquely situated to take advantage of free trade without the free movement of labor. Their policymakers can simply dictate the re-training of their citizens to profitable industries with no fear that the citizens could vote for policy changes against it.

This is not to advocate against free trade or to advocate for communist policies. Rather, I seek to highlight the inherent flaws in free-trade policies for democratic nations unless there are programs to assist citizens employed in declining industries. This can come in the form of training programs and investment in burgeoning industries or state subsidies allocated to pay wages of workers in declining industries. Both would require taxing the population, but they are both better alternatives than nationalism, isolationism and politicians voted in by the angry Ohio shoemaker.