There has been a great deal of sentiment among the U.S. denizens that free trade has given rise to the economic crisis du jour. I disagree with this assertion, for the reasons set out in my commentary, below.
The problem has been been described as a decrease in real wages that has caused the plight of the U.S. worker to get ever worse. It has been commonly asserted that this problem correlates with free trade because it was caused by free trade. I believe this correlation between free trade and decreasing real wages is coincidental, and that the real cause of the problem is not free trade at all but rather the artificial inherent demand for the reserve currency we aptly coined Greenback.
Where other countries’ currencies typically adjust to reflect a ratio of imports to exports (imports go up, currency goes down, and vise-versa), America’s dollar is ever-increasing in supply due to production of the U.S. dollar by the treasury. The U.S. can do this because of demand for the U.S. dollar as a reserve currency by all other countries; the U.S. dollar therefore has an inherent value in spite of a failing import-export ratio. In other words, there is demand for the U.S. dollar because it is perceived as a stable, liquid resource that can be used to support and define the value of other countries’ currencies and to facilitate international trade between countries. This is an important value to the U.S. and to the world, but it comes at a price.
There have been many consequences from having the Greenback, a fiat currency, back other currencies. One obvious consequence is the relatively higher cost of employing people in the United States. Wages are tied to the inflated value of the U.S. dollar, which has been inflating without negative feedback as the global reserve currency of the last forty years. That’s the way it has worked until now, but as the story goes, things are changing: the system will find an equilibrium, try as we might to stave it off. The present crisis is a symptom of a hyperbolic fiat currency supply; it has been noted by some to essentially be the result a decade of delaying the consequences of a U.S. federal insolvency.
The value of the U.S. dollar in the absence of demand as a reserve currency has been estimated to be as low as twenty cents for every U.S. dollar issued. I believe it’s possible, albeit rather unlikely, that the U.S. dollar could devalue to this ratio. For example, another reserve currency may come along to supplant the Greenback, or there may be a run on the U.S. dollar (the overissuing of currency increases volatility, one consequence of which is a run). The above ratio accords with the observations of the insolvency for other countries such as Russia, Argentina, Thailand, and others. The economic situation of an insolvent sovereign country is essentially set back by ten years, currency decreased to roughly quarter of its prior value relative to the basket of other world currencies. Since the U.S. has been effectively insolvent for ten years already, we’re looking at witnessing the U.S. potentially going back to 1987 levels of economics, which is incidentally just after real wages started their monotonic descent.
However, attempting to increase U.S. workers’ plight by throwing up barriers to free trade will never have that intended effect. It amounts to a form of capital control: the prevention of exporting the U.S. dollar in exchange for importing products and services. Trade barriers will not have the intended effect in the U.S. because rather than create jobs they are more likely to:
- reduce economies of scale (i.e. you can buy less stuff for your dollar);
- decrease the need for U.S. companies to be competitive (i.e. it will cost more to produce things in the U.S.);
- inhibit knowledge sharing and in particular the importing of innovations (i.e. the U.S. will miss valuable innovations);
- limit the marketplace available to the U.S., particularly if other countries respond in kind (i.e. the U.S. will not employ as many people who export things);
- incidentally harm the workers of many other countries (i.e. other countries will be unable to buy as many U.S. products); and
- create a xenophobic culture, mutual resentment and geopolitical instability (i.e. we revisit the insularism that gives rise to backwards activities ranging from the cold war to world war).
Protectionism is not the answer — protectionism is altogether folly. The criticisms of protectionism are founded upon on empirical observations, not the least of which was the exacerbation of the Great Depression. One of the purposes of GATT (the free trade treaty that was a precursor to the WTO) was to prevent the interwar economic conditions: high import tariffs. The consequences of protectionist trade barriers are not hard to picture. Imagine sales and travel taxes at the border between each of the states in the U.S. — it is the absence of these barriers that has produced one of the most prolific economic zones in the world. Indeed, it is a foundational principle of the U.S. constitution that gives life to interstate free trade, which principle hails back to a time when the functionality of state economic relationships was pondered with notable erudition.
Free trade’s benefits are well known, being the creation of: economies of scale; a higher calibre of competition; the opportunity for more concise and effective specialization; redistribution of wealth based on productivity and innovation; the sharing of useful knowledge; amiable interaction, co-dependance and mutual respect; the reduction of geopolitical anxiety; and hence: wealth.
American workers are faring worse since free trade came into vogue, but it does not appear to be free trade that caused this. The only evidence in favour of concluding that free trade caused this decrease in quality of life is a correlation in timing, but correlation does not imply causation. If the United States did not have what some have coined exorbitant privilege (i.e. printing the reserve currency to pay for imports with medium-term impunity), then the U.S. would have a significantly weaker dollar, which would make it far more competitive to employ people there. While the U.S. dollar retains inherent value as a reserve currency it will remain overpriced, to the detriment of the U.S. worker.
Free trade is a convenient scapegoat for the real problem: an overpriced currency that undermines the ability to competitively produce exports, and which has made imports unrealistically cheap. That free trade caused the U.S. workers’ plight is ignoratio elenchi; those who know better must diligently defend against self-serving propaganda peddling this falsehood.