Prof. David Dorn, University of Zurich. Free trade – an idea in decline? For decades, economists have taught David Ricardo’s Law of Comparative Advantage as if it is an absolute law. But the tide is turning, as some highly respected economists are now moving away from the doctrinaire position that all free trade is always good everywhere, and they begin to acknowledge that free trade and large trade deficits have inflicted substantial harm on the US economy.
From the mid-1970s on, growing trade has also meant the growing loss of good-paying jobs to competitor nations. Around the year 2000, the process accelerated. Globalization entered a new phase, which Harvard economist Dani Rodrik has labeled “hyperglobalization.” Three significant effects launched hyperglobalization: in 1993 the US signed onto NAFTA, in 1999 the European Union launched the euro, and in 2001 China joined the WTO. The NAFTA agreement effectively erased the border between the affluent US and low-wage Mexico. Creation of the euro tied together 19 economies with a single currency, effectively forcing 18 other economies to compete with Germany without the tool of an independent exchange rate. The admission of China to the WTO gave that nation a guarantee of long-term low tariffs that opened the US to Chinese imports and opened China to foreign investment by multinationals eager to produce in China.