Free Trade Agreements: The Effects of Isolationism

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Free Trade Agreements:  The Effects of Isolationism

In recent years the U.S. has led the way in liberalizing international trade. With the North Atlantic Free Trade Agreement (NAFTA) and more recently the Transpacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) negotiations, the U.S. has attempted to shape international trade policy. With the election of Donald Trump who stood on an anti-free trade platform, this U.S-led free trade regime comes into question.

Trump’s label of NAFTA as a “disaster” and plans to impose tariffs as high as 45% on Chinese goods resonated with U.S. workers for the obvious reason that exposure to cheaper markets has undermined the competitiveness of U.S. firms in low-skilled manufacturing, leading to the large-scale outsourcing of jobs. If the Trump administration was to impose high tariffs it would put the brakes on outsourcing as it would no longer be economical to do so. This on paper would encourage U.S. firms to maintain their operations within the U.S, representing a victory for U.S. manufacturing workers.

Advantages and Disadvantages of Liberalized Trade

However, the advantages and disadvantages of liberalized trade are not so easily distinguished. A victory for manufacturing workers would also represent a blow to U.S. consumers and parts of the economy that rely on imports. More expensive imports for businesses and consumers would effectively decrease real incomes, thus reducing spending power.

Furthermore, it would disproportionately affect low-income Americans. A study reported in The Economist suggested that on average people on high incomes would lose 28% of their purchasing power if borders were closed to trade with the poorest 10% of consumers losing 63% of their spending power. The knock-off effects could have major repercussions for other parts of U.S. economy from agriculture to the service sector. As well as higher prices and reduced spending power, the imposition of trade barriers may lead to trade conflicts which end up harming U.S. exporters too.

Sanctions

Firstly, any sanctions may be met by counter sanctions which harm U.S. exporters and secondly, they would most likely contravene the WTO most-favored-nation principle. This could isolate the U.S. from the international trade regime harming U.S. businesses. Being the largest global importer of goods, any U.S. barriers to trade would have major global repercussions.

However, the complicated nature of trade means that the Trump administration will most likely move with caution. Just as the global liberalized trade regime of today took decades to build, it is just as likely that any barriers would be erected in a similarly long time frame. Although, there may not be the kind of pulling back from free trade, promoted by Trump in the election campaign; the brakes have been well and truly put on any deeper integration. Nationalistic trade agendas, not just in the U.S. are certainly in the ascendancy and will continue to be unless those in favor of liberalized trade can make the benefits of free trade clear.

Richard Cox

Richard Cox has a PHD in Macroeconomics and has taught the subject at the university level. He writes for several internet news outlets, including: CNBC, TheStreet.com, NASDAQ, and the Motley Fool.

Follow Richard on Twitter: @RCox_

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