The End of Free Trade or the Beginning for a New America?

Authored By 
Max Krahe
Blog contributor 
Policy Fellow
June 1, 2016

One of the surprises of this election campaign is that free trade is under siege. Donald Trump and Bernie Sanders have a long history of opposing it; what is surprising here is their rise in popularity. Hillary Clinton has long supported it; what is surprising there is the speed and extent with which she has turned on the issue.

But their criticisms and proposals, riding the wave of anger that is washing over the land, are short sighted and partial. Instead of taking a reactionary – in the literal sense of the word – stance and presenting yesterday’s solutions to today’s problems, we should view the trade debate as an opportunity to imagine a new socio-economic settlement in America.

I propose that, taken to its logical conclusion, the issue of free trade is like the loose thread that unravels the entire sweater. More provocatively, re-thinking free trade could be a point of departure for a new and bold vision for the economic fundamentals of American society.

What is the problem with free trade? Why has it come under so much fire recently? The reason is that free trade produces two things: average gains, mostly through lower consumer prices for all; and rising inequality, through increasing income and employment opportunities for some, while reducing or eliminating them for others. More crudely, free trade means jobs go overseas, profits and inequality rise, but Walmart is ten per cent cheaper for us all.

Now, being against free trade because one wants to protect jobs, reduce inequality, and protect communities like Detroit or Scranton against the worst of their inevitable economic transformations is a worthy position, and it is no surprise that it is a popular one. But the deeper problem is: trade protection does not actually protect jobs. Instead, trade protection means that jobs become automated instead of offshored. This is because, by and large, the same jobs that are vulnerable to offshoring are also vulnerable to automation

This is where we have to zoom out and allow ourselves to think in a bolder, more visionary vocabulary. We have to realise that, in the context of the right overall set of policies, automating jobs can be a feature, not a bug, of protectionism. Simply put, if we want to push civilisation forwards, if we want dreary jobs to be a thing of the past and wide-spread automation to be our future, then the time has come to radically alter the exoskeleton that gives form to our free market economy.

A combination of stepping away from free trade; pushing up the costs of labour; drastically reducing barriers to innovation; and increasing government funding for automation could lead to a fundamental, and highly beneficial, transformation in the basic make up of our economy.

In order to avoid mass joblessness and the accompanying threat of poverty, such a program would have to be accompanied by a serious stimulus to aggregate demand. A policy that could provide such a stimulus and protect against poverty at the same time is an unconditional basic income, also known as a negative income tax.

Such a policy package would slaughter holy cows on both sides of the aisle. To allow for truly path-breaking innovation and widespread automation, trade unions, licencing requirements, labour protections, and product regulations would have to be rolled back (even further). This will surely incense the left. But to provide the micro-economic incentive for automation to proceed, a strong minimum wage would be required; and to ensure the macro-economic circumstances for the program to succeed, trade barriers and a strong aggregate demand stimulus are required, ideally in the form of a tax-financed unconditional basic income. This will surely incense the right.

Now, both sides of the aisle may decry this program as the worst form of ‘big government’, deplorable for its meddling with our liberty. But at its core, such a programme is not about size. Note that government spending is today at approximately 40 per cent of GDP or $20,000 per person per year (OECD 2015). A basic income of $10,000 per person per year is thus eminently affordable, if it were to replace existing government programs. With a ten per cent tax increase, this could be raised to $12,000, putting a single person just above the poverty line, and a couple or a family comfortably above it.

If not for affordability, people may decry a basic income for sapping our work ethic, and thereby undermining the functioning of the market system. But nothing could be further from the truth. Today, people at the lower end of the income distribution, particularly around the poverty line, already face effective marginal tax rates of around 50-70% because an increase in market income often leads to a very steep fall in government support. A basic income would require a slightly higher headline tax rate, no doubt. But effective tax rates—the amount by how much your total income actually increases for every extra $100 you earn in market income—could actually fall at the bottom.

Further, in a pilot program conducted in the Canadian town of Dauphin from 1974 to 1979, “For primary earners — those with full-time jobs — there was virtually no decline” in work […] “Nobody was quitting their jobs.” 

But this only touches the lower end of the labour market. What about those at the top? Arguable the incentives for hard work at the top of the income distribution have more to do with status (not money) competition, as well as (more positively) intrinsic joy in one’s work. Neither of these two would be affected by the new settlement here described.

Finally, far from undermining the market system, this new settlement would unleash the market through removing regulations (on labour especially) that were required to protect the structurally vulnerable against exploitation. With every family’s baseline needs unconditionally assured, these regulations could be dialled back. While they are sorely necessary in today’s economic settlement, they would be superseded by an unconditional basic income in the new settlement, making way for productivity-enhancing innovation and automation.

In brief, we should have the courage to follow the trade debate to its logical conclusions. Looking more closely at the reasons for protectionism’s recent popularity, as well as at its likely consequences, points us, if we muster the intellectual courage, to a new economic settlement in America: one where automation is celebrated, not regretted; where its gains are widely shared, not flowing to the one per cent; and where the government provides the exoskeleton to the market, rather than interfering with it.

Max Krahé is a doctoral student in Political Science and an ISPS Graduate Policy Fellow (2015-2016). 

Area of study 
Federal Government