An Historical Look at Modern “Free Trade”

by Laura Ehrenberg-Chesler on January 30, 2017

in free trade,Geopolitical,manufacturing,politics

From Ed Yardeni today:

For the US, this free trade system started to cause problems and to raise protectionist pressures during the 1980s as the US trade deficit swelled (Fig. 1 and Fig. 2). Imported autos made in Japan and Germany gained significant market share in the US (Fig. 3). Many books were written about the “deindustrialization” of America during the decade. Starting in 1981, the Reagan administration responded by forcing Japan to accept “voluntary export restraint” agreements imposing quotas on Japanese car imports. They weren’t removed until 1994. The Japanese responded by building “transplant” production facilities in the US, particularly in the South, where right-to-work laws exist, as opposed to the Rust Belt states with established labor unions.

As a result, manufacturing capacity in the auto industry, as well as overall industrial capacity, continued to expand to record highs during the 1980s and 1990s, belying the “deindustrialization” scare (Fig. 4 and Fig. 5). Arguably, Reagan’s push for fair trade kept the free trade system alive.

Following the end of WWII, the next major events that led to more Globalization were the end of the Cold War in 1989 and the North American Free Trade Agreement (NAFTA) of 1994. Then China joined the WTO during December 2001. The US trade deficit widened dramatically, especially with China, but also with Mexico and the European Union (Fig. 6). Ever since China joined the WTO, industrial capacity has stopped growing in the US in a host of industries. (See our Manufacturing Production & Capacity by Major Industries.)

So here we are with a new president who seems inclined to revive Hull’s bilateral approach to trade deals rather than maintain the multilateral system that evolved after WWII. It is a radical change, but it could work, and it might actually save Globalization if it helps to calm populist discontent with free trade. Trump’s approach can succeed if it convinces its detractors that a bilateral approach allows for more national control to make sure that bilateral free trade deals remain fair to both sides. Reagan succeeded in doing so during the 1980s.”

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