I just finished reading John Michael Greer’s post “The Free Trade Fallacy” from last November, and it got me intrigued.
As a libertarian, I usually face the charges Greer puts forth: if goods and capital can flow freely through borders, some countries will be much better at the expense of their populace and of other countries. Hardly, though, with such clarity as Greer’s. So much that I think merits at least a response (even if mine is not very brilliant).
A couple caveats before we get into the argument itself:
- I think nations should, in fact, enter voluntarily into free trade agreements, and never if they perceive this is bad for their interests. I am completely against an “Open Door Empire” that violently imposes unilateral “trade agreements” on its in fact subject nations.
- I am specifically countering JMG’s assertion that free trade, per se, without further intervention policies from the State, is cause of working-class poverty, wealth concentration and economic crises. I will argue solely that no, free trade alone does not cause those things – and I’ll leave open the reasons why such things happened when there were “free trade waves” (if reading is of interest, my main source here is Kevin Carson, his books cover most of the historical arguments I’d make).
The flesh of Greer’s argument is here:
When there are no trade barriers, the nation that can produce a given good or service at the lowest price will end up with the lion’s share of the market for that good or service. Since labor costs make up so large a portion of the cost of producing goods, those nations with low wages will outbid those with high wages, resulting in high unemployment and decreasing wages in the formerly high-wage countries. The result is a race to the bottom in which wages everywhere decline toward those of the worst-paid labor force in the free trade zone.
Well, certainly, those suppliers that offer the smallest price (and keep the biggest profit) will get the lion’s share of their market. They will most assuredly look for the lowest labor costs possible – given all other factors – and will choose the bundle of factors of production that yield the smallest price at the biggest profit.
Now, if a nation has high-wages, it will (sometimes) lose companies and thus jobs to nations with lower wages. But it will get cheaper products. This means that, even if nominal wages fall, real wages (purchase power) will either remain the same or even increase (because cheaper imports).
Also, if a nation chooses to keep their nominal wages, it will mean unemployment. But otherwise, if they lower their nominal wages, unemployment won’t be an issue, unless it is a nation that can produce nothing at all, which is clearly absurd.
As capital moves to these configurations that yield smallest prices and biggest profits, and wages adjust accordingly, it is probable much more material wealth is produced and distributed widely. Little by little, amongst nation there evolves a specialization of labor, similar to the one that happen inside those nations, among individuals.
The mismatch between purchase power and capital investment that Greer identifies will only happen if real wages are lowered. And that demands something more than plain free trade.