Once the champion of free trade, the US is now taking a protectionist stance

There is growing dissatisfaction with free trade policies in the US; Increasingly, the country’s politicians seem to be taking a protectionist bent

The US was once a champion of global free trade. However, in recent years support for such legislation has been dwindling among US citizens 
Author: Tom Bailey
July 21, 2016

For the past half century, the US has been the world champion of free trade. There has been a prevailing consensus among the big wigs of both major US political parties that free trade is broadly beneficial, with trade barriers an obstacle that must be removed. This prevailing convention, however, now seems shaky at best. The two leading nominees for the US presidency, Hillary Clinton and Donald Trump, both openly oppose the Trans-Pacific Partnership (TPP). Such unified, cross-party opposition to a piece of free trade legalisation is representative of a growing dissatisfaction among US citizens with the free trade consensus in general.

The 2016 campaign trail has made it apparent that vast swaths of US citizens have not been convinced by the case for free trade. Now more than ever, the voices of those uneasy about free trade are being heard. And this sentiment has made its way to the main contenders for the highest office in the US. The free trade consensus in US politics appears to be dead.

The end of this consensus has potentially huge implications not just for the US, but for the world economy as a whole. If the US were to abandon its role as the world leader on free trade, it would have ramifications for more or less every other country on the planet. Future efforts to liberalise trade may become either paralysed or abandoned, threatening global prosperity as a whole.

It was in the 1990s that global trade – and its facilitation through free trade – picked up the most steam

Liberal leadership
Since the end of the Second World War, the US has taken the lead on advocating for free trade across borders. Seeing the damage done by protectionism in the 1930s, the freer movement of goods across economies to be the correct course of action. According to Iwan Morgan, Professor of US Studies and Head of US Programmes at University College London’s Institute of the Americas, the US had seen the “depressing effects on global trade set off by the US Smoot-Hawley tariff of 1930, and other nations’ protectionist response to this”.

At the same time, the need to assist in post-war reconstruction and ward off the growing threat of communist ideology forced the US’ hand. As Alan Wooldridge of The Economist told World Finance: “Support for free trade was part of a wider support for global institutions such as the United Nations and NATO, and global strategies such as the Marshall Plan.”

While there had long been recognition that the free flow of goods and services across borders was broadly a good thing, it was in the 1990s that global trade – and its facilitation through free trade – picked up the most steam. Most of the communist world had collapsed, Eurasia replaced its closed economies with economic liberalism, while China – though still under Communist Party rule – was increasingly open to the world.

Many of the vestiges of protectionism that had remained in the non-communist world were also washed away, and social democrats and socialists steadily embraced a new consensus of open markets. Free trade was the order of the day. It was in this decade, with not insignificant opposition, that President Bill Clinton came to sign the North American Free Trade Agreement (NAFTA), breaking down trade barriers between the US and, most importantly, Mexico.

While mainstream politicians of both left and right came to embrace free trade with vigour, the US electorate was less enthusiastic. This opposition translated into significant electoral gains for anti-trade politicians. Ross Perot, noted Morgan, “won 19 percent of the popular vote running as an independent in the 1992 presidential election, and was the most public voice of opposition to NAFTA ratification”. What’s more, the Democratic Party has not been entirely in support of free trade, as much of its supporter base consisted of unionised workers. With their jobs threatened by international competition, such workers drove a strong protectionist wing within the party. “The Democrats have traditionally had a protectionist wing closely allied to the AFL-CIO [the US’ largest trade union federation]”, Morgan noted. Congressman Dick Gephardt, unsuccessful candidate for the presidential nomination in 1988 and 2004, was a key opponent of free trade agreements within the party.

Trade 1At the same time, certain figures on the right also rallied against the free trade consensus, based primarily on concerns over national interest. As Wooldridge noted: “Patrick Buchanan ran a campaign against George HW Bush on a protectionist ticket, and achieved a famous victory in New Hampshire.”

Despite this opposition, however, free trade did indeed prevail. In 2001, China was admitted to the World Trade Organisation, while other countries around the world increasingly opened up their borders to US goods, and the US did the same in kind. Often, noise was made over the unfair nature of China’s export strategy and the impact it was having on jobs, with US politicians from both sides alleging the country was unfairly undervaluing its currency.

Whether or not China was manipulating currency unfairly is open to debate. However, the concern reflected a widening anxiety about US jobs being lost due to competition from manufacturers abroad, unburdened by trade barriers. In spite of these concerns, the consensus went unchallenged – save some targeted anti-dumping tariffs on steel. When running for presidential office, Barack Obama said he hoped to renegotiate the US’ position in NAFTA, although that amounted to nothing upon his assuming the presidency. While in office, Obama continued with the consensus on trade, most notably through his efforts to complete the TPP deal. While it has been sold to voters as a key piece of trade legislation for US prosperity and an effort to combat China’s growing dominance, it has still raised anxieties over the potentially destructive impact free trade is having on domestic industries. As Morgan noted, among many the “fear is that it will open the door to even greater imports from China, with whom the US currently operates by far its largest bilateral trade deficit”.

Consensus cut
In 2016, however, the consensus on the wisdom of ever-freer trade seems to have finally broken. While US citizens’ dissatisfaction with free trade is nothing new, the 2016 presidential nomination process has brought it to the forefront. On the Democratic side, outsider candidate Bernie Sanders was able to present a serious challenge to Hillary Clinton in the race for the democratic nomination. By singling out the US’ trade agreements as a core reason for low wages and job insecurity, Sanders was able to tap into a deep resentment felt among workers in the US, pushing Clinton on the defensive. In response, reversing her previous support for TPP, Clinton has come to oppose it – at least in certain regards. Speaking of this reversal, Wooldridge told World Finance: “Her views have changed because Bernie Sanders has proved to be such a powerful candidate. Her initial plan was simply to recycle the Clinton playbook and the Clinton machine; she is now being forced to recalibrate her positions to deal with the growing revolt against the Washington consensus.”

On the right, there has also been a drift away from the free trade consensus. The Republican nominee Donald Trump has openly embraced protectionism, and railed against facing unfair competition from Chinese and other foreign manufacturers. This has brought him a lot of support from working-class Republicans, particularly in Rust Belt states, concerned over low wages and job insecurity.

The US withdrawing from the world economy – even partially – under a reinvigorated protectionist movement would be immensely harmful

Trump has effectively been tapping into a growing anti-free trade sentiment in the Republican Party. According to Wooldridge, the party “has been moving in a protectionist direction in recent years”. The reason behind this is that the party “has brought in a new cohort of working-class voters who haven’t done particularly well out of free trade”. As a result there is “now a civil war within the party between its business wing, which supports free trade, and its populist wing, which opposes it, but the populist wing is winning”.

At both ends of the political spectrum, at the heart of this protectionist revolt are working-class concerns. “Working-class voters are the core of the protectionist turn”, Wooldridge said. “This is because their wages have remained stagnant during the era of the Washington consensus.” The free trade regime has lowered consumer prices for US citizens, but at the same time it has resulted in the stagnation of earnings. Free trade is often a trade-off between lower prices and secure, well-paying jobs.

While workers have never been happy with that trade-off, in the wake of the 2008 financial crisis, lower prices for some goods have come to be seen as less important than countering increasing job insecurity and shrivelling pay packets. Resentment has intensified, reinvigorating anti-trade activists in both parties and forcing the elites to pay attention.

As Morgan noted: “It is certainly the case that both parties are having to pay heed to the anxieties of blue-collar America in the wake of the Great Recession. Aggregate recovery may have taken place, but the sense of insecurity among ordinary Americans is very evident – as is the longstanding stagnation of average household income.”

“The political elite is finally being forced to reflect public anger”, said Wooldridge. “Many people understand intellectually that it is good for the overall economy. But a striking number of politically engaged people are opposed to free trade: trade unionists regard it as a threat to their jobs; liberal activists regard it as a race to the bottom; Republican populists regard it as a threat to national interests. These angry and engaged activists are now setting the agenda in both parties. There is no voice for the silent majority of free traders.”

At the same time, even key defenders of free trade appear to be in retreat. The economist Paul Krugman has been one of the most effective free trade champions of the 21st century. As an economist with a knack for clear and concise communication, his books and widely read opinion columns have often provided lucid and informed defences of why opening up the US economy to trade with the rest of the world has been the correct decision.

Yet now, even this stalwart defender seems to be having his doubts, recently writing in The New York Times: “Much of the elite defence of globalisation is basically dishonest: false claims of inevitability, scare tactics (protectionism causes depressions!), vastly exaggerated claims for the benefits of trade liberalisation and the costs of protection, hand-waving away the large distributional effects that are what standard models actually predict.”

Treade 2“The free trade consensus in America is collapsing”, said Wooldridge. “Those who believe in it are muted, those who oppose it are emboldened. America is reverting to its pre-Second World War protectionist instincts.”

Peak globalisation
The US’ potential pivot from free trade comes at a time when the global tide in general is moving in the same direction. World trade growth in 2013 stood at 2.4 percent, down from the 6.8 percent recorded in 2011. At the same time, world trade growth rates following the 2007 crisis are on average below the rate of world GDP growth. Much of this slowdown is cyclical, stemming from remaining headwinds in the global economy from the financial crisis and later emerging market slowdown. However, this has provoked speculation that the era of free trade has plateaued – that we have reached peak globalisation. Whether or not this has been the case is open to debate, but the US abandoning its role as the driving force of free trade will certainly strengthen that feeling.

For the world’s largest economy, a move to a more protectionist bent is likely to have a profound impact on the global economy. The US has been at the forefront of breaking down barriers that impede trade over the past few decades. While it has often done so in a slower manner than it has allowed other economies, it has pushed for the reduction of fetters to trade while opening itself up to outside competition. According to Uri Dadush, writing in Foreign Affairs: “International trade has doubled as a share of world GDP over the last 50 years. Without it, the global economy would grind to a halt. The highways of trade are much freer today than they were decades ago.”

The US withdrawing from the world economy – even partially – under a reinvigorated protectionist movement would be immensely harmful. A large pool of US citizens have lost out from free trade – and those citizens’ concerns over job security and pay are valid and have to be addressed. But, at the same time, free trade has also bought unprecedented prosperity to the world. “[Trade] liberalisation has opened the way to the rise of emerging markets, and the huge reduction in global poverty. We are now witnessing the end of that era”, said Wooldridge. If the US does go down a protectionist path, the prospects do not look good. “At best, we will see paralysis, with no forward movement” in pushing for greater economic openness, “but no backward movement either”, said Wooldridge. While “at worst, we will see the world divided into regional trading blocks”. As Morgan underlined: “If the US abandons leadership of global free trade, the global economy could be in for a very rough ride.”