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The Pros and Cons of Free Trade

What is free trade? Free trade means that nations agree to trade goods and services without government interference – no tariffs, no underlying government regulation. The concept of free trade is supported by mainstream economics (neoclassical) which assumes that there is a level playing field worldwide; that free trade means governments do not help the private sector. But when the U.S. made a deal with Canada and Mexico to promote free trade, the North American Free Trade Act (NAFTA), manufacturing jobs were lost to this country.

There is no denying that free trade has had an enormous impact on employment in some sectors in this country. Look at Mexico. Labor is cheap in Mexico so many American manufactures moved their plants to Mexico. Between 1994 and 2002, the U.S. lost 1.7 million jobs, gaining only 794,00, for a net loss of 879,000 jobs. Nearly 80% of these jobs were in manufacturing. California, New York, Michigan and Texas were hit the hardest because they had high concentrations of the industries that moved plants to Mexico such as motor vehicles, textiles, computers, and electrical appliances. (Source: Economic Policy Institute, The High Cost of Free Trade, November 17, 2003)

We all know that the U.S. government subsidies our agriculture. This means that when NAFTA removed tariffs, corn and other grains were exported to Mexico below cost. Rural Mexican farmers could not compete. At the same time, Mexico reduced its subsidies to farmers from 33.2% of total farm income in 1990 to 13.2% in 2001. Most of those subsidies went to Mexico’s large farms, anyway.(Source: International Forum on Globalization, Exposing the Myth of Free Trade, February 25, 2003; The Economist, Tariffs and Tortillas, January 24, 2008). So thousands of farmers lost their farms and yes, indeed, many migrated to the United States for work.

There is another side to it. Free trade also increases employment in certain sectors. But what if free trade is taken away. For example, what is the impact of tariffs on China? Consider solar panels.  "Because American-made and now-taxed imported solar panels will be more expensive, fewer solar panels will be purchased. This means as many as 88,000 solar panel installers may lose their jobs while only a few thousand U.S. jobs will be gained in solar panel manufacturing." So thousands of jobs will be lost because Trump placed tariffs on Chinese solar panels.

Also, there are studies pointing out that NAFTA sometimes worked - a study by the U.S. International Trade Commission at the request of Congress found that the trade deals, including the controversial North American Free Trade Agreement (NAFTA) and pacts with Central American countries and South Korea, boosted net U.S. employment by 159,300 jobs in 2012 over levels that would have occurred without them. So it is not so simple. Free trade is both a plus and a minus.

And now we get to the heart of it. Paul Krugman supports free trade. "You may remember Bernie Sanders using Denmark as an example. It’s a good one: much better wages, a much stronger social safety net, a mostly unionized work force. But Denmark is as open to world trade as we are. It’s domestic policies — from taxing and spending decisions to pro-labor policies in the service sector — that make the difference. Universal health care and the right to organize matter a lot more for workers than trade policy." (These comments were made before Trump beginning tariff wars).

So what Krugman is saying is something many don't want to hear. We can have free trade if we take care of our workers. Increase wages whether union or not, provide a better safety net, get the workers organized. And we would be fine in free trade.


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