Jack Rasmus

In response to my recent post on ‘Brexit as a rebellion against free trade’, a commentator to the piece raised an important, reasoned question, my response to which I’d like to share more visibly with readers of this blog. The question(s) have to do with the relative effects on wages and jobs between countries jointly involved in a free trade agreement. The question the commentator raised addresses the typical apologists of free trade argument that while some workers wages in some countries may fall due to free trade, workers’ wages in other countries rise. The net effect, according to the apologists’ argument, is that wages overall rise–i.e. wage benefits from free trade in the one region or sector rising more than it falls in the other country or region. This apology is a corollary of the general free trade theory argument that ‘all parties to free trade’ benefit from it. Here is my reply to that important question. First, is an excerpt from the commentator’s question (whose full response can be read at the end of my previous post on ‘Brexit as Working Class Rebellion to Free Trade’). That is followed by my own further comments on free trade and a critique of the apologists who argue free trade always benefits all parties at all times, and wages on net rise from it–declining in one or some country, but rising more in others so that the net effect is positive wage gains throughout the free trade zone.

Commentator’s Statement (excerpt)

“You sum up by saying: “Who benefits in terms of class incomes and interests? As the history of the EU and UK since 1992 shows, bankers and big corporate exporters benefit. Workers from the poor areas get to migrate to the wealthier (US and UK) and thus benefit. But the indigent workers in the former wealthier areas suffer a decline, a leveling.” Can you further give us your thoughts on “workers” or the indigent in the global south? Do you believe that free trade has basically immiserated everyone but the rich (with the exception of ‘poverty alleviation’ in China, which, as is often noted, does not necessarily have to do with free trade as such) in the south? Or would you say that part of its ‘distributional effect’ has been to partly redistribute some of the North’s previously greater working class prosperity to the South. I ask because your post otherwise seems to be saying something that left commentary seems generally to avoid wanting to say: that within the North, at least in part, working class animosity to free trade is legitimately rooted in the fact that “immigrants are taking our jobs.” .

My Response to the Commentator:

First, I’m going to assume his remarks re. ‘north’ and ‘south’ refer to two countries who are participants in a free trade treaty. My response does not assume it is just a question of north-south trade in general, where a free trade treaty is not in effect. Here’s my comment to the question.

“As I noted, free trade is not just about goods and services flows, but money capital flows as well. Read the NAFTA agreement and it’s clear US elite’s emphasized the right to invest directly in Mexico (foreign direct investment rights) and repatriate profits with minimal interference from Mexico’s legal system. As FDI and money flows from the north to the ‘south’, in this case, multinational companies that expand their operations in the ‘south’ often do pay higher wages and some benefits compared to the domestic businesses compensation packages. So wages in this select group of relocated companies (or expanded companies) do rise, but it is a relatively small proportion of the total work force. The booming economies (initially) in the south (say, Central AMerica, as example) from the massive money capital inflows also results in some additional rise in wages. But the wage gains are not significant in terms of longer term; they eventually dissipate and disappear when the business cycle turns down again. This is now evident in central america, again for example, as the money flows into the region reverse and return to the US as capital flight out of the emerging markets. So, yes, there is some wage gain in the south from free trade, but it is not significant as part of the total work force and tends to be temporary and reverses with the next cycle. Yes, defenders of free trade often cite this effect, but don’t provide data that shows how much free trade boosts ‘south’ wages. They typically assume all the change in wages is due to free trade, which of course is nonsense; and they always cherry pick the point in time when the wage increases rise the most and ignore the subsequent wage retreat that also occurs under free trade. Their argument is not an economic but a false moral one: free trade is good overall for workers everywhere because it rises for some in the south. Their data also does not compare the relative gains in the south to the losses in the north (which must include adjustments for price systems to be accurate). That free trade results in wage compression in the north is evident in what is called the ‘export-import wage differential’. THis has been compressing over time due to free trade. It means jobs and wages lost to free trade imports in the US exceed jobs and wages gained from an increase in US exports. The net result is a combined wage (and job) decline in the US. The US decline tends to be permanent, while the south gain tends to be temporary. Is this net US decline greater than the net south gain–in the longer run? is the key question. But I’ve seen no analyses by apologists for free trade to add up the data and evidence. In short, they make an assumption with little or no evidence, or evidence that is selective. That’s not economics, that’s economic ideology, which is what free trade is essentially about.”