Free Trade and Democracy: A Crisis of Faith

Over the past week, politicians in Brussels have suffered another bleak reminder of how difficult the business of free trade has become for the West’s democracies. After a year featuring Brexit, rising Euroscepticism, the protectionist rhetoric of Donald Trump, and the increasing likelihood of a stillborn TTIP, the decision of two regional Belgian assemblies to veto the EU’s free trade agreement with Canada (CETA) was a bruising rebuke of what—for decades—has passed for an international consensus on free trade. True, Belgium’s government has since reached a compromise allowing CETA to move forward, [i]  but with the voting public growing increasingly resentful of trade policies it sees as elitist impositions, many have worried that democracy and free trade may not be as compatible as they once were. Contrasting the current mood with that of the past eighty years, this is an understandable position.

Since the end of World War II, and even more so since the collapse of the Soviet Union, Western governments and academia have largely abided by the Smithian ideal of international trade unfettered by the onerous weight of governmental interference. Protectionist economic anachronisms such as Import-Substitution Industrialisation (ISI) have been consigned by policy-makers to the dustbin of history and —until recently—largely purged from modern discourse. In the 1990s, especially, the evangelization of the gospel of neoliberalism gave birth to a number of policy victories, with NAFTA, Europe’s single market, and most notably the WTO emerging to acclaim as harbingers of international prosperity.

There is reason for these structures’ architects to be proud. By most conventional measures, they have delivered on what they promised: economic growth and better prices for consumers. Despite this, though, anti-globalist movements are on the rise, and the ideals of free trade appear under assault. Gone are the halcyon days of the neoliberal consensus; today, many parties on the left and the right have begun to turn inward, rejecting trade in favour of economic nationalism.[ii] In Germany—one of the world’s greatest beneficiaries of lowered trade barriers—support for TTIP has dropped dramatically in recent years, plummeting from 55%  in 2014  to 17% in April of this year.[iii] In the United States, too, faith in trade has hit rock bottom, with a July 2016 poll showing that only 19% of voters believing that trade creates jobs.[iv] Globally, the trend is clear: in 2014, only 45% of respondents in 44 countries were convinced that trade raised wages, and only 26% believed that it lowered prices.[v]

In response to these beliefs, there is a tendency among some proponents of free trade to frame the concerns of their opponents as the effect of poor economic literacy.[vi] According to this line of thought, anti-trade sentiment over the loss of domestic industries exists largely because the gains of trade are spread so widely, and gradually that they are difficult to perceive. Consequentially, if the pubic were informed of these, opponents would return to flock as devout economic liberals. In other words, this reasoning goes, the problem with free trade to-date has been one of marketing, not policy.

This argument is not without evidence. The effects of globalization and outsourcing on manufacturers in Europe and North America receive far more attention than the affordability of consumer goods and the increased demand for the high-skill manufactures that the West still produces (or, for that matter, the boost in services employment). Similarly, those arguments criticising trade’s effect on employment and wages, buoyed as they are by rising nationalism and anti-globalist sentiment, receive far more attention than those discussing automation’s far more prominent role.[vii] Finally, the polls showing the public’s loss of faith in trade also betray popular beliefs that run counter to the mountains of economic data accrued over the past century. In contrast to what many believe, trade does indeed drive down the price of goods, workers employed in export-oriented industries earn more than those focused on domestic markets, and research has shown that only a fraction of manufacturing job losses can be attributed to trade.[viii][ix][x] Trade makes economies more efficient, and creates wealth. Looking at these facts, one might come to the conclusion that if voters were informed of them, opposition to free trade would all but disappear.

Democracy is not technocracy, however, and getting the West’s democracies to back trade is not as simple as telling voters that it will benefit them. Trust in traditional authorities such as government, academia, and the media are all in decline,[xi] and trust in the doctrine of free trade has fallen alongside it. In an era when anti-establishment parties continue to ride the wave of nationalist discontent over immigration, cultural change, and an economic recovery which has left many Westerners behind, it is understandably difficult to convince someone whose job has been shipped overseas that their country is better for their loss. In contrast, it seems almost natural to tie trade into a political narrative of globalist elites over-reaching their bounds and damaging society in their pursuit of lofty ideological goals and cynical economic interests. This poses a problem for democracies such as the United States and the EU, where even a small minority can derail trade agreements years in the making, and efforts to counter misinformation must be undertaken if free trade is to survive. It is not the only problem, though; the actual policy implications of free trade pose an equal threat.

Opposition to trade cannot be entirely written off as the result of misleading populism; there are serious problems with trade that have largely gone unaddressed in wealthier countries. When a manufacturing worker without a college degree loses their job to foreign competition, their chances of finding a new job are much smaller than someone facing run-of-the-mill job loss. Financially vulnerable and often residents of areas devoid of diverse economic opportunities, people displaced by imports tend to either move into other similarly vulnerable manufacturing jobs, or cease working entirely. Lacking college education and far from the major cities where trade’s employment benefits are concentrated,  these men and women make up a semi-permanent class of workers who—through no fault of their own—are left worse-off and often dependent on government aid. [xii] Smaller towns and cities in Europe and North America have been hit especially hard by this trend. Isolated from growth in regional metropoles, communities which forty years ago were the picture of prosperity are today mired in poverty. Working to counteract these negative externalities of trade would undermine much of the false narrative around it, but thus-far, the West’s political establishment has often fallen short in its response.

Largely based in cities that have benefitted from trade and isolated from these realities, policy-makers have been slow to react to this concentrated hardship. The resultant resentment by the public at large has led to a situation where professional consensus runs increasingly counter to the popular will. In response to this, many free-traders have experienced their own crises of faith, despairing of the future of liberalism, or, as some did in the aftermath of the Brexit referendum, losing their trust in democracy itself.[xiii] They are not wrong to worry; if left unabated, current trends will surely damage the structures that have brought liberalism so much success over the past seventy-odd years. They are wrong to lose hope, though. The employment problems inherent in free trade are mitigatable. The responsivity of the West’s governmental structures is anything but fast and the aspect of liberal democracies that allows them to function so well is that, eventually, they do shape policy to meet the demands of voters. With the near-miss of CETA, the increasingly likelihood of TTIP’s failure and an even cloudier outlook for the TPP, politicians are wisely taking note of the public’s mood; their jobs depend on it.

Ryan O’Regan
International Trade Associate


[i] https://www.theguardian.com/world/2016/oct/27/belgium-reaches-deal-with-wallonia-over-eu-canada-trade-agreement

[ii] https://www.ft.com/content/2dd0ecc4-3768-11e6-a780-b48ed7b6126f

[iii] http://www.reuters.com/article/us-europe-usa-trade-idUSKCN0XI0AT

[iv] http://mobile.nytimes.com/2016/07/15/us/politics/hillary-clinton-donald-trump-poll.html

[v] http://www.pewglobal.org/2014/09/16/faith-and-skepticism-about-trade-foreign-investment/

[vi] http://www.wsj.com/articles/the-misinformation-of-the-free-trade-opposition-1437683003

[vii] http://www.epi.org/publication/manufacturing-job-loss-trade-not-productivity-is-the-culprit/

[viii] http://www.igmchicago.org/igm-economic-experts-panel/poll-results?SurveyID=SV_0dfr9yjnDcLh17m

[ix] https://www.usitc.gov/publications/332/ec201504a.pdf

[x] http://conexus.cberdata.org/files/MfgReality.pdf

[xi] http://www.eupan.eu/files/repository/20160202135959_2016-01-21_-_Public_integrity_and_trust_in_Europe_-_final.pdf

[xii] http://www.economist.com/news/united-states/21695855-americas-economy-benefits-hugely-trade-its-costs-have-been-amplified-policy

[xiii] http://www.theatlantic.com/international/archive/2016/06/brexit-vote-referendum-democracy/488654/