It is ironic that during the times when free trade and open markets are most needed, politicians have a natural tendency to promote protectionism.  Nevertheless, when jobs begin to disappear during an economic downturn, people often look for something to blame. Free trade has often served as a scapegoat in these times; however history has shown that we scapegoat free trade at our own peril.

The most common criticism of free trade is that it subjects first-world countries with restrictive labor laws and high wage demands to unfair competition from poorer countries with low wages.  As such, American (or German, Australian, Japanese, etc.) workers can't compete because they are unable to produce the same goods for a similarly low price.  Companies from these rich countries lay off their expensive workers and move operations overseas.  Thus, under this theory, protecting domestic firms would be beneficial during a recession as it would keep more jobs at home.

There is a kernel of truth in this.  However, this view's failing is that it only looks at one part of what is happening.  For a more complete view of the effects of free trade, one must have a basic understanding of the principle of comparative advantage.  Essentially, if each country puts its resources towards what it is best at producing, the efficiency that results benefits every country involved because more goods will be produced at lower prices.  Free trade encourages countries, and more specifically the companies within those countries, to assign their resources more efficiently, thereby benefiting consumer everywhere.  As mentioned previously, many poorer countries have cheap labor, and thus their comparative advantage lies in producing labor-intensive goods, such as in manufacturing.  The US, then, is bound to lose jobs in those sectors.  But, what then occurs is the important part.  The US has a comparative advantage in service sector, technology-intensive and education-intensive production.  When we put our resources in those sectors, we are able to more than replace those jobs lost to labor-intensive disadvantages, and put our resources into sectors with long-term viability.

A great example of the benefits of opening ourselves to trade and efficiency is in the city of Pittsburgh.  Formerly a center of heavy industry, about a quarter century ago it became clear that Pittsburgh could no longer compete with industry in other parts of the country and around the world.  Instead of stubbornly praying for government intervention, the city cleaned up its formerly filthy rivers and waterfront, poured money into its universities, and held itself out to financial services, real estate, bio-science and other white collar firms.  Today Pittsburgh is defined not by the grittiness of the steel mills, but indeed has improved itself by embracing the market and becoming an upper middle class city.

Contrast Pittsburgh's success against a city such as Detroit, which has stuck to the failing auto industry as a cultural value, and as a result has suffered from a shrinking population, urban decay and economic malaise.  There are many more examples of cities and countries benefiting from opening themselves to trade.  On a larger scale, one need only look to China and Southern and Eastern Europe to see the how trade has helped fuel economic miracles.

This then brings us back to the politicians making a scapegoat of free trade.  Many of those today who are promoting protectionism are the same people who have compared today's economic crisis to the Great Depression.  It is ironic that they seem to forget the Great Depression's own disastrous experiment with protectionism, known as the Smoot-Hawley Tariff Act.  Passed in 1930 over the strenuous objections of economists (over 1,000 signed a petition warning of its likely effects), it raised the effective tariff rate of foreign imports from 13.5% in 1929 to 19.8% in 1933.  Although this might not sound like that significant of an increase, the effect of this act of protectionism was for countries all over the world to retaliate with tariffs of their own against American goods.  These retaliatory tariffs caused more than a 60% drop in American exports, effectively killing American industries who sold goods overseas, and thereby contributing to further losses of American jobs.  While there were multiple causes to the Great Depression, Smoot-Hawley certainly did not protect American workers.  When the bill was passed in 1930, unemployment was 7.8%; by 1933, it reached 25.1%.  If there were any doubt as to whether such a debilitating trade war could happen again, Europeans quashed that doubt when they threatened retaliation to the proposed "Buy American" clauses contained in the current Stimulus Bill.

What the US and other countries affected by the global downturn will actually do is as of yet uncertain.  The signals from President Obama have been decidedly mixed.  In his campaign, he often railed against free trade agreements such as NAFTA, and voted against bilateral trade agreements with two important US allies, Columbia and South Korea.  His tone has softened some since then, although he will be under intense pressure from Democrats, especially those in Midwestern states and industrial and manufacturing hubs, to stick to his campaign rhetoric.  Interestingly, Obama did recently recognize the importance of comparative advantage in a speech to an audience in the Midwestern city of Elkhart, Indiana:

But the most important question in whether employers will locate in Elkhart and cities like it and around the country is, what are we doing about education?  The quality of the work force is probably what companies are going to pay the most attention to over time.  American workers will never be able to compete with the low price of labor in developing countries such as Bangladesh.  But an American work force that has high-tech job skills and knowledge can ensure that good-paying jobs remain in this country.

This is the kind of direct and honest talk that should come from those in power.  Hopefully Obama's actions will reflect this understanding and he will stand up to the powerful currents demanding that he resurrect Smoot.

As seen on PULSE Review, http://pulsereview.com/.