The Rise of Free-ish Trade

The Rise of Free-ish Trade

By Samuel Rines and Katherine Morille

The Western economic malaise of the past decade has given way to a sudden rise of populism. Free trade, once touted as the fix for increased global competitiveness and economic stability, is now the national enemy.

Western elected officials are arguing for protectionist policies in an attempt to drive more domestic growth. They want to increase tariffs and barriers to entry into their markets. After years of slow growth, free trade is under attack.

Each country has a competitive edge

Most economists agree that the entire global community gains from free trade. Countries have competitive advantages they can exploit in order to assure higher GDP and standards of living.

For many emerging markets, this competiveness comes in the form of labor costs. For many developed markets, services and advanced technologies assure their place in the global economy. Both are advantages that can be exploited by trade relationships.

Yet the economic benefits are not equal between countries. Some industries lose out when trade agreements are struck. This is where today’s free-ish trade is coming from.

The trade agreements themselves are not the issue. Rather, the problem stems from the perceived dissolution of the social contract that guarantees steady jobs and slow wage gains. For many people, work has never been so unsure or wage growth so flat.

President Trump drew on this economic uncertainty. He united voters in the Midwest by vowing to bring jobs back to America. He lifted the plight of the industrial worker to the national conscience. He argued that the way forward was not global cooperation, but rather a strong domestic framework from which to act: “America first.” But none of this will come for free.

So now what? Populism is growing and more people are calling for a return to “every nation for itself.” The return of free trade is being viewed as an economist’s pipe dream.

Enter the rise of “free-ish trade.”

Free trade is a pipe dream, so we’re left with free-ish trade

To quote Xi Jinping, “The elephant in the room, China, historically has had severe protectionist policies and even a pegged currency. This is no longer the case.”

Chinese Premier Li Keqiang recently wrote:

Above all, we remain convinced that economic openness serves everyone better, at home and abroad. The world is a community of shared destiny. It’s far preferable for countries to trade goods and services and bond through investment partnerships than to trade barbs and build barriers.

But here is the problem. The yuan is only partly free-floating and is still strongly managed—regardless of the direction. And trade is not truly free. This may not be outright manipulation, but it is not a free market.

People are seeking to go back to normalcy… but they fail to realize that this stability was transitory, not permanent. Everyone longs for the era of fast GDP growth and the golden age of manufacturing. But manufacturing, as a fraction of total employment, has been declining since the 1940s.

Even the often-cited modern wonder of Germany has seen its manufacturing employment numbers shrink precipitously. That’s because manufacturing employment volatility has less to do with free trade and more to do with a shifting global economy.

It’s natural to look for a scapegoat to blame for the lack of growth. But hating free trade is not the answer. Protectionism won’t bring back enough jobs… and could do more harm than good. The US is highly competitive in a number of sectors, but this edge could be blunted if a trade war breaks out.

This slowdown in growth is a malaise that affects the entire global economy… not just the US. Slow and steady is now the new normal. In order to flourish in that environment, market participants must rely on each other and look forward together, not as enemies but as allies.

Sadly, few politicians are running on a platform of international reliance. Instead, alarmist policies are being crafted for short-term marginal benefit at the expense of allies. With that as the alternative, free-ish trade feels fair.

And so, free trade dies an unhappy death

Free trade policies like the TPP don’t stand a chance in the current environment. President Trump has demanded a renegotiation of NAFTA. But most likely, it will still exist with increased caveats. This is the free-ish trade that we can expect.

The champions of free-ish trade are those who still benefit from softer borders. More free-ish trade should be expected. But free trade’s day has passed.