By James Moynan
Editor, Undergraduate Economics Student
As the world adjusts to the news that the US electorate has voted for a man who seems more concerned about the public perception of the size of his hands than human rights violations, discussion turns to what exactly caused an outcome that seemed unlikely a week ago to become reality.
The narrative and outcome on the other side of the atlantic mirrored events in Britain just four months earlier following the European referendum, and both results solidify the global trend of “anti-establishment” policies and parties. While the policies have yet to materialise into a coherent unified political philosophy, they both seem to share the same economic consensus favoring a rejection of free trade agreements.
In America, Trump has continually labelled the North American Free Trade Agreement (commonly referred to as NAFTA) as the worst deal in history, albeit that accolade has had to be shared with the trans-atlantic trade and investment partnership and the Iranian Nuclear deal. The agreement first came under scrutiny when “the Donald” announced that much like his beloved China he fancied himself a wall, with the financing coming from tariffs on Mexican goods. In the UK, the picture is murkier, but as Britain pursues a hard Brexit a similar outcome of isolation looks likely. So why are two of the most traditionally market orientated parties turning on this economic ideal? And why are citizens, the supposed key beneficiaries, so willing to vote against such agreements? To fully understand we must understand the economics behind such agreements as well as a historical perspective on international trade.
Like most of modern economic theory the early arguments for free trade can be traced back to Adam Smith, who alongside Daniel Ricardo formulated the premise for mutually beneficial trading of goods between nations. Smith and Ricardo extended the ideas of a classical free market economy and the consequent division of labour to a global context. In this worldview, an ideal global economy would be made up of specialising countries who would produce and export goods they have a comparative advantage in, while importing goods from other nations they had a comparative disadvantage in. In this global economy more goods would be produced at a lower cost, leading to growth, lower prices and employment for the nations involved. This principal and approach was adopted into more complex economic models, but the central conclusion that free trade brings prosperity still held.
It is ironic today that 250 years ago in the US another dynamic figure was strongly opposing this worldview, and an international trade agreement that went alongside it. In 1790 Alexander Hamilton, fresh from founding the United States, published his Report on Manufactures, in which he argued for trade protectionism from English goods, a principle which today is known as the infant industry argument. Hamilton’s argument was that it was unfair for American industries to be in competition with English manufacturers due to the foreign competition having established significantly larger economies of scale than their American equivalents. Thus there was a need to be protected by tariffs and quotas until they can attain similar economies of scale.
Hamilton’s policy had a long lasting impact on the American economy and from 1816 through to 1945, tariffs in the USA were among the highest in the world, while the economy simultaneously became the largest in the world. But the events and consequences of WW2 forced the US out of a policy of isolation as the spread of communism became a real threat to Europe, and under the Marshall plan the US pumped billions into the European economy with the understanding that European nations remove their tariffs on US goods.
At the same time, international institutions such as the IMF and World bank were founded in Washington whose unofficial motive was to promote prosperity and stability through capitalism. The organisations promoted a philosophy of macroeconomic stabilization as well as opening economies to both trade and investment, commonly known as the “Washington consensus”. This trade liberalisation can be seen on both sides of the atlantic through NAFTA and the EU as well as the general reductions of tariffs enforced by the WTO (World Trade Organisation formed by the UN). Consequently since WW2 international trade has flourished with the share of world exports in world GDP rising from 5.5 percent in 1950 to 17.8 percent in 1997.
Such a change in the global economy has consequentially disfigured the economies on both sides of the Atlantic beyond all recognition from the relative isolation they adopted prior to WW2. A sectorial shift has thus moved workers out of the manufacturing sector, the very sector that once formed the backbone of each nations economic power. This sectorial shift however has not been seamless, and to fully understand the backlash against such agreements you have to travel far away from the polished offices of Brussels and Washington to the abandoned factories of Sunderland and Detroit. Despite being over 3,000 miles apart the two cities both held similar historical industrial significance and then consequent decline as well as both voting in favour of the anti-establishment mantra of Trump and Farage.
The city of Detroit is perhaps the most well known case of post-industrial ruin. The city that once housed 296,000 manufacturing jobs in 1950 has fewer than 27,000 in 2011. Similarly in Sunderland, a city previously dominated by coal mining and shipbuilding, the shipbuilding industries which alone employed 32,800 workers in 1973 has completely vanished. But the impact on a city of offshoring extends further than a job, in Detroit and Sunderland the signing of such deals destroyed an identity and community of people who for generations prided themselves on the work they undertook, a reality and cost which isn’t incorporated into economic modeling of trade deals.
So as the dust begins to settle on the two votes, two fundamentals will begin to ring out. First, a historical fundamental will become apparent as a sizeable proportion of the blame will fall at the feet of the previous political powers. The Clintons, Blair, and the like who demonstrated at best indifference and at worst outright neglect to the working class base who voted them into power will be held further in contempt. On both sides of the Atlantic the traditional parties of the workers evolved into something else; tuition fees rose simultaneously as on the job training shrank and infrastructure investment centralised to existing prosperous cores. Instead of adopting a proactive investment mantra, the parties could be seen to adopt a policy of guilt: workers became stigmatized as lazier than foreign alternatives and workers were racist for opposition to cheap foreign labour. All of this accumulated in an attitude that workers were necessary sacrifices for the greater good of the global economy. It is not surprising that when you take from the many and give to the few that a consequential backlash will eventually occur.
Second, and most pressing is the realisation that the populistic rhetoric of Trump and Farage will fail to meet with reality. The return to a rose tinted isolationist utopia that probably didn’t exist then, certainly doesn’t exist now, will fail. National economies have evolved to become interwound with one another to the upmost degree and the specialisation that Smith envisioned has taken hold to create a truly global economy. A vote to leave or the ripping up of an established agreement causes a self inflicted wound on a nation as the economy undergoes utterly unnecessary restructuring to reach the new equilibrium.
As politicians chase the ideal of what is their perception of a perfect economy, presumably “where we make stuff again”, inflation, unemployment and recession will follow. In the 21st century, true economic power isn’t derived from the factory lines of General Motors and Ford, but from the offices of Apple and Google, it’s a world where intellectual capital has replaced tangible product. The votes then don’t signal a rejection of the establishment but rather a rejection of reality.
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