The raw end of the free trade deal

Any economic change creates winners and losers.  “Creative destruction” is the economic concept that innovative, efficiency-promoting advancements also tend to displace segments of the preexisting status quo.  Uber generates benefits for consumers, but disrupts the taxi industry.  Automation makes consumer goods cheaper, but imperils jobs for workers.

Globalization has been one of these economic changes.  The rise of globalization promised vast new global wealth from lifting barriers on the movement of goods and people.  And on the whole, American consumers have immensely benefited from cheaper consumer goods and the bounties of global trade.  But globalization also triggered tectonic shifts in American workplaces.  Industries that, in a pre-globalized world, provided a good living to millions of working-class Americans suddenly faced international pressure and increasingly offshored their workforces to faraway countries.  Spurred by globalization, these companies picked up and left countless American communities in the dust.

In a fair political economy, the deal is supposed to be that we take a slice of the gains from broad economic innovation to compensate those on the losing end.  In theory, we could take some of the surplus wealth generated by free trade and direct it to those Americans who have been hit hardest by this creative destruction—those whose jobs have vanished and whose towns have dried up.

But that hasn’t happened.  Despite the diffuse gains of globalization, we haven’t provided much in the way of targeted help to those who have been net losers.  And those who perceive themselves to be net losers have noticed.

The missing compensation from globalization is becoming the defining political issue on both sides of the Atlantic and is scrambling political divisions.  At the New York Times, Nate Cohn writes that the Brexit vote signals “the emerging split between the beneficiaries of multicultural globalism and the working-class ethno-nationalists who feel left behind.”  Pro-Brexit votes flowed in from traditional Labour Party strongholds in working-class neighborhoods, with the dagger for “Remain” coming when 62 percent of Sunderland, a once reliable pro-Labour region, voted to “Leave.”  Similarly, at the Washington Post, Matt O’Brien writes that Brexit marks the beginning of the revolt by globalization’s losers—disproportionately concentrated in the working- and middle-classes of rich-world countries.

And let’s not forget Donald Trump, who has made walling off borders and tearing up trade deals—in effect, reversing globalization—the calling card of his nationalist campaign for president.  And who formed the core of Trump’s base?  A “certain kind of Democrat,” according to Cohn; specifically, less educated white registered Democrats who nonetheless identify as Republicans in the South, Appalachia, and the deindustrialized North.  Just like the “Leave” vote sweeping through working-class Sunderland, Trump’s ethno-populism has resonated with white working-class voters and the economic devastation they face in 2016.

So what to do?  Must globalization either march forward or else reverse itself to stem the political unrest fueling its working-class resisters?  Not necessarily.  There is a third option between globalization and no globalization, and it’s global capitalism paired with robust social insurance regimes.  As Marshall Steinbaum of the Center for Equitable Growth points out, “we once solved the problem of the conflict between capitalism and ethno-nationalist backlash with social democracy.”

We’ve fallen far short of that solution.  Whether a Bernie Sanders-style social democratic overhaul or a more targeted approach to aid those displaced by free trade, we have done little to cushion Americans against economic upheaval.  The rise of globalization has dovetailed with decades of stagnant income growth, mounting inequality, and ever-growing financial strain on American families.  Yet the United States hasn’t adopted the kinds of social insurance protections needed to match the increasing volatility and insecurity of twenty-first century capitalism.  And while we provide a small program to retrain and compensate certain workers who have lost out due to free trade, we do relatively little to otherwise target help to the communities that are hit the hardest.

Which means we’ve failed to live up to our end of the bargain.  Creative destruction is immensely valuable and can do wonders to improve overall well-being.  But it inherently causes destruction, and that destruction doesn’t just dissipate with time.  We’ve reaped the diffuse benefits of globalization, but have done little to level with those bearing the targeted costs.  This failure is a big part of the discontent we’re seeing rock both sides of the Atlantic now.

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One thought on “The raw end of the free trade deal

  1. Very well put. Winners have choices, losers have theirs taken away by robots, relocation and tax evasion, not to mention trillion dollar wars. Once upon a time there two parties moderating each other’s ideologies but now they have all morphed into one neoliberal growth for growth’s sake machine, tax cuts or no tax cuts fiance capital does not create jobs it creates profits wherever it can

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