Financial bubbles form when deficit countries are overwhelmed by hot money inflows. Perpetual trade deficits leave one country deep in hock to another, threatening its sovereignty. For example: In times of slack global demand, countries grab more than their fair share of the available work by boosting exports and limiting imports. Portuguese who lose their jobs making cloth will readily find new ones making wine. Even if Portugal is slightly better at producing cloth than England is, it should focus on what it’s best at, winemaking. England trades its cloth for Portugal’s wine.
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The theory of comparative advantage that’s taught to college freshmen is impossibly clean: It’s all about specialization.
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Ignoring this damage-or pretending that it’s being cured through “redistribution” of gains-undermines the credibility of free traders and makes it harder to win trade liberalization deals. New research confirms what a lot of ordinary people have been saying all along, which is that free trade, while good overall, harms workers who are exposed to low-wage competition from abroad. Trump and Sanders may be clumsy and overly dramatic, and their solutions may be misbegotten, but they’re on to something real. If you’re a typical pro-trade business executive, you’re tempted to ask: Were these people throwing Frisbees on the quad during Econ 101? A recent article in the National Review expressed disdain by blaming a swath of America for its own problems, attributing Trump’s success to a “white American underclass” that’s “in thrall to a vicious, selfish culture whose main products are misery and used heroin needles.”
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Hillary Clinton, Ted Cruz, and John Kasich are awkwardly leaning in the same direction.
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Bernie Sanders won’t stop shouting about greedy multinational corporations. Donald Trump keeps yelling about China, Mexico, and Japan. It’s easy to scoff at the anti-free-trade rhetoric emanating from the U.S.