Cracks in the edifice of free trade consensus

It's an old truism that economists can never agree on anything. But if you ask economists about this embarrassing fact, they will often point out that on one issue, the profession is in almost complete agreement.

That issue is free trade.

Surveys of economists show a very strong consensus that trade barriers reduce a country's overall well-being in the long run. The old pro-trade arguments of economists such as David Ricardo and Adam Smith are still mainstays of introductory economics courses, and are regularly trotted out in op-ed pieces. Interestingly, free trade is also one of the issues where economists most vehemently disagree with the public.

For example, a survey by Roger Gordon and Gordon Dahl of the University of California-San Diego found that while almost four out of five people thought the "Buy American" provisions of the 2009 fiscal stimulus would be good for US manufacturing employment, only about one out of 10 economists concurred. That is a staggering difference.

Given this disagreement, you might expect that the populace would eventually move in the direction of the expert consensus. Instead, there are a few signs that the opposite is happening.

Conservative-leaning economists, for example, have been complaining that liberal economists have not been sufficiently enthusiastic in their opposition to the renewal of the Export-Import Bank, which subsidises US exports. In an essay for Econ Journal Watch, a right-leaning publication, Veronique de Rugy, Ryan Daza and Daniel B. Klein ask why their ideological counterparts failed to join the free trade bandwagon: "Working from a list of the top 200 economics blogs, we examine the discourse on the Export-Import Bank. We find that classical liberal economists were very often highly vocal in opposition to the institution, but that left economists were mostly silent."

The post descends into uncharitable sniping, but the point it makes is an interesting one: If economists are as pro-free trade as many claim, why are only a few willing to stick their necks out and advocate liberalising trade policies?

Though Ms de Rugy et al single out left-leaning economists, the truth is that the vast bulk of the profession, most of which is not very ideological, was silent on the issue. That could be simply because Ex-Im is small potatoes, not worth spending political capital on.

But this isn't the only sign that the free trade consensus among economists might not be as emphatic as in previous decades.

For example, Jagdish Bhagwati, one of the most ardent defenders of free trade and globalisation, has made a distinction between free trade and international capital mobility. The free flow of financing across borders, he says, is a source of dangerous instability.

Nor is he the first economist to make this claim. But free trade and capital mobility go hand in hand - international investment drives the creation of global supply chains.

If we restrict international capital flows, we force financiers to restrict investment to their home countries, which will naturally have a damping effect on trade.

Economists are also questioning free trade from another angle. We've known since the time of David Ricardo that even if free trade makes a country richer overall, many within it can be left worse off. Until recently, this problem was usually waved away but, recently, economists have begun to take it more seriously.

A landmark 2013 study by David Autor, David Dorn and Gordon Hanson found that competition from China has destroyed jobs and lowered wages in many US industries, especially manufacturing. Instead of being reallocated to jobs in different sectors, workers displaced by Chinese competition often went on the government dole.

As for the Trans-Pacific Partnership - the most important trade deal in years - support from the economics profession has been muted. However, some of that might be because of the intellectual property protections in the treaty, which many consider a trade restriction rather than a liberalisation.

At any rate, for the first time in many decades, there are cracks in the edifice of the free trade consensus. The reason is easy to see - economic theory has been overtaken by macro events.

The full-fledged entry of China into the global trading system since 2000 has been hugely disruptive. The lost jobs and vanishing industries have become impossible to ignore. Meanwhile, boom-bust cycles in global financial markets - the Asian crisis of 1997, the global financial crisis of 2008, and others - have left economists bewildered.

The simple logic of free trade, so familiar from Economics 101, is either failing or ceasing to be relevant. Some astute economists are now claiming the old formulation was never watertight in the first place. These whispers

of dissent don't mean that free trade is dead, or even that the consensus is a thing of the past. But it isn't considered the no-brainer it once was.

Economists are beginning to question one of their most celebrated points of agreement. The future is a more uncertain profession and, perhaps, a more uncertain world.


A version of this article appeared in the print edition of The Straits Times on October 10, 2015, with the headline 'Cracks in the edifice of free trade consensus'. Print Edition | Subscribe