In a recent interview with the New York Daily News, the presidential candidate Bernie Sanders claimed that he would renegotiate every trade deal made by the United States, which would be based on a new criteria for trading. Bernie Sanders claims that the US can do this “by establishing principles that says that what fair trade is about is you are going to take into consideration the wages being paid to workers in other countries. And the environmental standards that exist.”
It may seem meritable for Sanders to advocate for more equal standards between the United States and its trading partners, but in practice such an idea is devoid of any understanding of how trade actually works. Developing countries go through cycles of industrialization, which mean that labor costs have to be low in the short term and environmental standards are inevitably going to be streamlined, which is due to the lack of investments in long term sources of macroeconomic stability.
This is the very essence of the Kuznets curve, because these investments can only occur when developing economies promote the export driven growth necessary to transition to a consumer driven economy, which comes with a middle class that can have the bargaining power to demand higher wages, while investing in physical and human capital. The major developing OECD countries including China, India, Brazil, and many others are facing the challenge to commit to these kinds of structural reforms and it is why the US would be doing a disservice to the global economy if we followed Sanders’s advice.
The Economist Magazine explained on April 2nd 2016 that the US middle class “ would lose 29% of their purchasing power if America was closed to trade, but that the poorest would forfeit as much as 62%.” The reason is because free trade is a necessity for countries to compete in a global economic environment that is conducive to competition. This increases productivity and lowers prices to allow consumers greater overall buying power.
A meta analysis by Tomas Havranek of the Czech National Bank of 60 economic studies concurred with this idea, because it found that structural reforms promoting trade liberalization have a positive causal relationship to economic growth. So, what can explain the current plight of the middle class in the face of a competitive economic environment? The answer is the lack of adequate safety nets, investments, and provisions that discourage fair competition within existing free trade regimes.
Safety nets in the United States are relatively weak compared to other developed welfare states. The United States spends much less money as a percentage of its GDP on active labor policies, which are meant to upgrade the skills of workers presently unemployed. As the Kansas City Federal Reserve noted in a recent publication that a 1% increase in spending on active labor policies is associated with a .11% drop in unemployment.
The United States must make similar investments and reforms to infrastructure, education, healthcare, as well as research and development, which have been shown experientially to benefit the living standards of the blue collar class of America that have been alienated by economic volatility. Now granted, it is true that existing trade networks are flawed, but the answer is not to cut off trade with the developing world. This kind of economic isolationism is exactly what plunged the world into the Great Depression during the 1930s.
The Columbia University Economist Joseph Stiglitz asserted in an October 2nd 2015 article that the prime problems with free trade agreements are the existence of stringent intellectual property provisions, Investor State Dispute Settlements, and preferential treatment of multinational industry including but not limited to subsidies and deregulations of existing financial law within domestic economies. Another key problem within the developing world is the issue of governance that can allow for institutions to develop and lift the living standards of the poor.
A couple solutions to this problem are techniques of development assistance (which positively affects economic growth based on a meta analysis by the United Nations University) that can support initiatives like anti corruption agencies and the use of multilateral forums like ASEAN that can improve environmental standards through international agreements on climate change. So, while it is easy for Senator Sanders to advocate for the maxim of fair trade, it is a completely different matter to understand its nuanced wisdom.
It is crucial that policymakers understand that wisdom because as Richard Hauss of the Council on Foreign Relations wrote, “foreign policy begins at home.” Our reformation will determine our standing in a now multipolar world and free trade is an issue that the United States must get right in order to guarantee a bright future for our posterity.
A so called “political revolution” must have direction. However, when it comes to free trade, the Sanders campaign is only preaching hidebound and desultory velleities.