Washington DC, April 1, 2008 --  

Americans' honeymoon with globalization is over. Hopefully its marriage with free trade can still be saved.

The Rust Belt battle between Hillary Clinton and Barak Obama over who is more opposed to the North Atlantic Free Trade Agreement shows just how much the world has changed since the apex of the free trade movement in the 1990s. A decade and a half ago, both American political parties supported the NAFTA agreement. In the heady years after the collapse of communism, free trade, free markets and democracy were on the march, leading analysts such as Francis Fukuyama to envision the "End of History."

What a difference 15 years makes. Today, much of the world is backsliding from democracy, oil dictatorships are ascendant, and new free trade agreements are largely stalled. Last June, the World Trade Organization's Doha round of negotiations collapsed over rich countries' refusal to give up protectionist farm subsidies.¹ In Argentina today, farmers are blockading roads to protest the government's plan to levy high taxes on grain exports.²

Clearly, the free market consensus of the 1990s is dead. Rather than ushering in the "end of history," the era was a brief and unique period of optimism that in retrospect could never be sustained. Much of today's market and political turmoil can be traced back to trends set in motion during that period.

Consider the rise of China. While NAFTA got all the attention, the real action was happening on ships crossing the Pacific, not trucks crossing America's southern border. China's focus on building an export-driven manufacturing economy displaced higher-cost manufacturers in America, Japan, and even Mexico. This led to drops in prices of manufactured consumer goods during the 1990s and early 2000s.

Wal-Mart popularized this trend with television commercials highlighting its falling prices. Despite grumbling from retail employees and their lefty sympathizers about poor working conditions, American consumers, as a whole, spent the last 15 years intoxicated by the presence of ever-cheaper consumer goods. Under such conditions, who wouldn't love free trade?

This trend, however, was unsustainable. Easy low-wage manufacturing opportunities in China were gradually exhausted. Incomes in China have been rising, causing inflation and higher production costs. Simpler manufacturing has been shifting to lower cost countries like Vietnam, although these opportunities will eventually run out worldwide. When they do, people everywhere will have to start paying more for manufactured goods, just as they currently are for more limited commodities like food and fuel.

High fuel prices, too, are partially a consequence of market liberalizations in the 1990s. China's oil consumption almost quadrupled over the past 20 years as its manufacturing base has grown,³ providing upward pressure on oil prices. For a while, China's growing energy appetite was offset by the drop in energy consumption from the shutdown of decrepit industrial economies in the former Soviet block. But the economy of these countries eventually bottomed out, while East Asia's economy never stopped growing. The end result: oil at $110 per barrel.

Today, many of globalization's quick returns have already been exploited, and several of its painful side effects are hitting home. It therefore should be no surprise that popular and political support for free trade has, for the moment, run out of steam.

However understandable, the anti-trade rhetoric of Barak Obama and Hillary Clinton cannot be justified. Among serious economists, there is no real debate -- free trade is unquestionably beneficial to America and the world as a whole, and the candidates know this all too well. When pandering to an electorate of uncompetitive losers in the Rust Belt, the Democratic candidates are effectively threatening to sell the rest of us down the river for the sake of a few votes.

Given politicians' tendency to say one thing and do another, this is only limited cause for concern. But to the extent that political rhetoric is a reflection of the times, future free trade agreements may face a tough road ahead.

Related web columns:

The Frontline of Free Trade, November 30, 1999

Protectionism Out of Prosperity, March 23, 1999

Notes:

1. New York Times, Once Again, Trade Effort Stumbles on Subsidies, June 22, 2007

2. Bloomberg News, Argentina's Fernandez Criticizes Striking Farmers, March 25, 2008

3. U.S. Dept of Energy, Energy Information Adminstration, Country Analysis Briefs: China , August 2006