What is the future of free trade? Part 2

What is the future of free trade? Part 2

In a three part series, our correspondents report on a thorny political problem

In this three part essay, our correspondents from around the world explore the debates about free trade. Yesterday we wrote about America and Mexico. Today we turn to Europe, before looking tomorrow at what is happening in Asia.THE rise of Donald Trump has been a body-blow to all those who believe that free trade is a good thing. Mr Trump wants to turn America protectionist. Not for many years has free trade been such a hot political topic. But how is the political debate about free trade playing out in other big economies?


Free trade is popular and has benefited America. But politicians are increasingly mercantilist. THERE is something approaching a folk story surrounding American attitudes to trade. It goes like this: in the 1990s, economists thought that free trade was good for everyone. America’s markets were opened up, first to Mexico, through the North American Free Trade Agreement (NAFTA), and then to China, through its permanent accession to the World Trade Organisation. As a result, manufacturing jobs left the country. Then, in the 2010s, economists began to realise that trade had damaged the lives of displaced workers and vulnerable communities, just as politics took a protectionist turn through the rise of Donald Trump and Bernie Sanders. That story misses several important points. First, economic theory always predicted that free trade would harm some workers.

Second, economists were not blind to the falling economic prospects of unskilled American workers. Rather, they just attributed the rising inequality between skilled and unskilled workers primarily to technological progress.

Third, this view that technological progress, rather than global trade, has had the bigger impact on workers is still reasonable. It is true that economists have become more convinced of trade’s concentrated costs for displaced manufacturing workers, roughly a third of whom experienced unusually severe wage losses. But there have not been enough so called “losers” to drive the huge changes in the labour market that have taken place. Finally, the most recent trend is that Americans have become more sympathetic to trade, not less.


With the exception of Chile, Mexico has free trade deals with more countries than any other state IS ANTI-TRADE sentiment made in America? It certainly seemed so when Donald Trump’s tirades against his country’s North American Free Trade Agreement with Canada and Mexico shattered a seeming consensus in favour of free trade. NAFTA, Mr Trump says, is the “worst trade deal ever made”, the fault of stupid politicians who gave away a fantastic deal to Mexicans, who cannot believe their luck. Many Americans believe that the benefits of NAFTA have mostly flowed southwards, to America’s cost; Mexicans tend to think the opposite. Citizens of both countries share the view that renegotiating NAFTA would be a good thing.

Why are some Mexicans dissatisfied with NAFTA? The pact was sold to the Mexican public as a deal that would bring the country’s standard of living closer to that of the United States.

But the salary gap between the countries has widened, not closed, since NAFTA arrived. Many of the jobs NAFTA has created are in maquiladora factories along the border. That is good for Mexico’s border states, but the benefits have not flowed through the rest of the economy. Compare Chiapas, an impoverished southern state, and Aguascalientes, a state to the north where investment has poured in. In the two decades after 1993, GDP per head doubled in Aguascalientes but barely grew in Chiapas.

And yet when Mr Trump threatens to tear up NAFTA, most Mexicans fret about the economic consequences. Mexico depends much more on trade with America than viceversa. In the campaign for presidential elections, due on July 1st, candidates have spoken at length about domestic issues like crime and corruption, but little about trade or Trumpism. Even Andrés Manuel López Obrador, an old-school populist who is the overwhelming favourite to win, seems unlikely to jeopardise the country’s trading relationship with the United States. Despite a history of anti-trade positions, he says he wants to improve the deal, not scrap it.

The country has maintained its predisposition towards openness. Most Mexicans appreciate the value of an open world where people, goods and ideas can travel freely across borders, whether it is the upper class studying in American universities, the middle class seeking factory jobs or the lower class receiving remittances from abroad. With the exception of Chile, Mexico has free-trade deals with more countries than any other state. Previously closed sectors of the economy, such as the oil industry, are now open to foreign investment. But Mr Trump’s antipathy towards Mexico has exposed the pitfalls of relying too much on a single trading partner. Mexico ships 80% of all exports to the United States. It is now trying to diversify, looking to South America to buy its beef and soyabeans, successfully expanding its trade pact with the European Union and looking to join the Trans-Pacific Partnership with ten other countries. How fruitful these moves are remains to be seen. Agustín Carstens, until recently the head of the central bank, says that Mexican businesses have long succumbed to the “magnetic force that the US [economy] exercises on us”.

The notion of a country trying to look beyond its main trading partner and closest neighbour may sound familiar to readers in Britain. A staff member at the British embassy in Mexico recently quipped that Britain’s post-Brexit message to the world, of unshackling itself from an old relationship and heading out into the world to forge new ties, was being well received in Mexico. “If I said these things in Germany they would laugh at me,” the official jokes. Countries like Britain will always find a receptive audience in Mexico, which has shown that it can be a good partner when the other side is dealing in good faith.



British politicians are naïve about the politics of trade

FREE trade is being discussed in Britain more passionately than at any time in living memory. Brexit has encouraged politicians in both the Leave and Remain camps to articulate to the British people why free trade matters. Yet contradictions lie at the heart of all this discussion.

Many of those in favour of Brexit argue that the project will be good for the economy. The argument goes that, freed from the European Union’s common external trade policy, Britain can strike direct trade deals with countries across the world, including America and Australia. Brexiteers, including Liam Fox, the international - trade secretary, promote the notion of “global Britain”, which some have interpreted as harking back to the days of empire.

The Remain camp is just as keen on free trade, but makes a different argument. Remainers say, rightly, that the damage caused by Brexit will vastly outweigh any potential gains from

future trade deals with other countries. Many MPs in both Labour and the Conservative Party wish Britain to remain a member of the European single market, or at least the customs union, which would allow goods to be traded more easily.

Yet is it right for both parties to assume that Britons want free trade? The evidence suggests perhaps not. Roughly 50% of Brexit voters think that Britain should limit imports to protect the British economy, according to data from NatCen Social Research, which gauges public opinion. China is not the economic bogeyman that it is in America—not yet, at least. But there is plenty of evidence to suggest that Chinese imports have destroyed jobs in poorer parts of the country.

Reaching a trade deal with a country like America could trigger an unexpected political backlash. Last summer a row blew up over the question of chicken imported from America that is doused in chlorine. Left-leaning types also worry about American firms competing for contracts to supply the National Health Service. “Better trade opportunities with the wider world” was chosen by only 9% of Leave voters as the main reason for voting for Brexit, far behind legal independence and cutting immigration, according to ICM, a pollster.And there is a contradiction in the rhetoric. Ministers take a gung-ho approach to free trade, but constantly fret about the effect of immigration, even though import competition might threaten British jobs and wages in much the same way. If the government really is keen on a global Britain, then it needs a liberal immigration regime, too.


Macron: a pragmatist in a hostile environment

SHORTLY after Emmanuel Macron was elected president in May 2017, his new government nationalised a French shipyard in order to thwart an Italian takeover.To those who had imagined that Mr Macron was a liberal free marketeer and staunch advocate of globalisation, it was a sobering moment. In the end, French state ownership proved temporary, and a Franco-Italian deal was swiftly renegotiated. But the affair was an early reminder that, even under an English-speaking globalist president, France has its own approach when it comes to foreign trade and investment.

Mr Macron approaches the subject with a mix of old-style Colbertism, which has traditionally shaped French thinking on markets, and pragmatism. Although a broad defender of globalisation, he argues that political leaders ignore those who lose from free trade at their peril. Polls suggest that the French are among the most hostile in Europe to free markets, considerably more so than Germans, Americans and Britons. Prospective free-trade deals, such as that between the European Union and Mercosur, tend to be deeply unpopular in France. “Capital in the Twenty-First Century” by Thomas Piketty, a French economist, became a bestseller abroad before it made a real splash at home, partly because his observations about inequality in advanced capitalist economies were part of consensus thinking in France. Moreover, Mr Macron knows first-hand that the political consequences of neglecting globalisation’s losers are real. Two-fifths of French voters in 2017 backed either the far-right’s Marine Le Pen or the far left’s Jean-Luc Mélenchon for president, each of whom promised to put up barriers in order to block cheap imports and stop factories closing. Mr Macron, by contrast, argued that France, which has more Fortune 500 companies than Germany, benefits from its openness to trade. During the campaign he stood out, for example, for backing the EU’s unpopular trade deal with Canada.

Mr Macron does argue, however, that the balance between markets and regulation needs to be recalibrated, and that those who lose out from free trade must be reassured that their concerns are being taken seriously. This is why his mantra is a “Europe that protects”. In order to keep Europe open, Mr Macron argues, people therefore need to feel that they are also being protected.

By this he means that trading partners have to accept reciprocity, that European consumers need to be protected from food they judge unsafe, that Europe should be able to screen Chinese investment in strategic sectors, or that American tech giants should be taxed properly. Hence his call for the creation of a European “trade prosecutor” to supervise “fair trade”. In a landmark speech to the Sorbonne last year, Mr Macron declared that “an open world is only worth it if the competition that takes place there is fair”. The purists might say he only pays lip service to the idea of free trade; he would probably accuse them of being politically naïve.