Dividing the spoils

Support for free trade has been ebbing for some time now, and with Donald Trump ensconced in the White House, things are only going to get worse for the dwindling band of true believers.  The problem isn't that free trade doesn't bring benefits; the principle of comparative advantage is one of the most robust and demonstrably true in all of economics.  Rather, the problem lies in how the benefits get divided up.

In principle a free-trade deal between two countries raises their aggregate income by shifting production to its optimal location.  This means that some people have to stop what they were doing before and do something else for which they may receive less compensation, while others shift in the opposite direction.  That's to say, there are winners and losers.  Notionally, because the overall pie is bigger, the winners can compensate the losers, making everyone better off.  The problem is, that never happens. The winners win,  the losers lose.

I have a simple illustration of this from my recent travel experience with Air Canada, to the Caribbean and back.  I like to travel in business class, because I'm tall, and as I don't travel very frequently any more, it's an affordable indulgence.  Until a couple of years ago, the business class fare could buy you a fully reclining seat and a choice of meals.  Further back on the plane, everyone was served a meal and a beverage at no extra charge, and there was an entertainment system.

Now, supposedly in response to competition, Air Canada offers its "Rouge" service on these routes.  The "business class" seats look as if they were repurposed from Soviet-era Aeroflot, with minimal recline and almost no extra legroom.  There's no entertainment system, although they will lend you an iPad loaded up with movies that also mostly date back to Iron Curtain days.  The choice of meals has shrunk dramatically.  And for this I pay exactly the same fare I paid for much better service a couple of years ago.

Further back on the plane it's even worse.  The seats are crammed in tight; there's no food or drink unless you pay for it, and if you want to use an iPad, that's ten bucks.  Remarkably enough, the low-cost carriers that Air Canada says it needs to compete with still find a way to give passengers a snack and a drink at no extra cost.

And that's not all.  Toronto to, say, Barbados is just under six hours each way.  In the old days, the cabin crew flew one way, overnighted on the island and crewed the next day's flight back.  Now, they get to serve the flight south, stand at the cabin door while the passengers disembark and the returning passengers board, and then fly right back home.  These guys and gals are working up to a fifteen hour shift -- and getting a lower salary and fewer benefits than their counterparts did in the recent past.

Who are the winners and losers here?  It's not the passengers, getting less while paying the same as before.  It's not the crew, working harder and earning less.  The only winner here is the airline.

International free trade deals are more complicated than this, but the opposition to free trade articulated (if that's the word) by Donald Trump reflects a sense that the benefits are not being properly shared.  In Trump's worldview, Mexico is gaining while the US loses out.  That's not really true in itself; rather,  well-paid US workers are losing their jobs to lower paid Mexicans so that the auto makers can continue to sell the same cars at the same prices as before and reap considerably higher profits.  For car buyers, it's pretty much a wash.

As we noted at the outset, the winners in free trade deals -- in this case, the auto makers -- can notionally compensate the losers -- mostly, UAW members.  Try telling that to the people of Flint, MI and the many other rust belt communities that have been abandoned to their fate.

Reality is much more subtle than this, of course, but the sense that the spoils of free trade have been unfairly divvied up is surely a major reason why Trump won the election -- even if he is wrongly asserting that it's the Mexicans (and Chinese and others) who are the big winners.  It remains to be seen whether he can actually do anything about it.  The auto manufacturers, who think in much longer terms than politicians, will be reluctant in the extreme to change their plans in response to Trump's threats.  If he responds with his "big border tax" and thereby pushes the domestic auto makers back into financial peril, his economic platform, such as it is, will quickly collapse.  Free trade may not have delivered what was promised, but unravelling it will be complicated and perilous.