Free trade is no longer a no-brainer for economists

IT IS AN old truism that economists can never agree on anything. But if you ask economists about this embarrassing fact, they will often point out that on one issue, the profession is in almost complete agreement. That issue is free trade. Surveys of economists show a strong consensus that trade barriers reduce a country’s well-being in the long run. The old pro-trade arguments of economists such as David Ricardo and Adam Smith are still mainstays of introductory economics courses.

Interestingly, free trade is also one of the issues where economists disagree most with the general public. For example, a survey by Roger Gordon and Gordon Dahl of the University of California-San Diego found that while almost four out of five people thought the “Buy American” provisions of the 2009 fiscal stimulus would be good for US manufacturing employment, only about one out of 10 economists concurred. Given this disagreement, you might expect that the general populace would eventually move in the direction of expert consensus. Instead, there are a few signs that the opposite is happening.

Export-Import Bank

For example, conservative-leaning economists have been complaining that liberal economists have not been sufficiently enthusiastic in their opposition to the renewal of the Export-Import Bank, which subsidises US exports.

In an essay for Econ Journal Watch, a right-leaning publication, Veronique de Rugy, Ryan Daza and Daniel B Klein ask why their ideological counterparts failed to join the free trade bandwagon: “Working from a list of the top 200 economics blogs, we examine the discourse on the ExportImport (Ex-Im) Bank. We find that classical liberal economists were very often highly vocal in opposition to the institution, but that left economists were mostly silent.”

The point the post makes is an interesting one: If economists are as profree trade as many claim, why are only a few willing to stick their necks out and advocate for liberalising trade policies?

The truth is that the bulk of the profession was silent on the issue. That could be simply because Ex-Im is small potatoes, not worth spending political capital on. But this isn’t the only sign that the free trade consensus among economists might not be as emphatic as in previous decades. For example, Jagdish Bhagwati, one of the defenders of free trade and globalisation, has made a distinction between free trade and international capital mobility. The free flow of financing across borders, Bhagwati says, is a source of dangerous instability.

Capital mobility

Nor is Bhagwati the first economist to make this claim. But free trade and capital mobility go hand in hand – international investment drives the creation of global supply chains. If we restrict international capital flows, we force financiers to restrict investment to their home countries, which will have a damping effect on trade.

Economists are also questioning free trade from another angle. We’ve known since the time of David Ricardo that even if free trade makes a country richer overall, many of the people within that country can be left worse off.

Until recently, this problem was usually waved away, but recently economists have begun to take it more seriously. A landmark 2013 study by David Autor, David Dorn and Gordon Hanson found that competition from China had destroyed jobs and lowered wages in many US industries, especially manufacturing.

As for the Trans-Pacific Partnership, support from the economics profession has been muted. However, some of that might be because of the intellectual-property protections in the treaty, which many consider a trade restriction rather than a liberalisation.

At any rate, for the first time in many decades, there are cracks in the edifice of the free trade consensus. The reason is easy to see – economic theory has been overtaken by macro events. The entry of China into the global trading system since 2000 has been disruptive. Meanwhile, boom-bust cycles in global financial markets have left economists bewildered.

Some astute economists are now claiming that the old formulation was never watertight in the first place. These whispers of dissent don’t mean that free trade is dead, or even that consensus is a thing of the past. But it isn’t considered the nobrainer it once was. Economists are beginning to question one of their most celebrated points of agreement. The future is a more uncertain profession, and perhaps, a more uncertain world. – Bloomberg

Some economists are claiming that the old formulation was never watertight… These whispers of dissent don’t mean that free trade is dead…