NZ Initiative's free trade fairytale

A new op-ed by director Oliver Hartwich lays bare the ideology at the heart of the corporate think tank's "evidence based" economic positions

Photo by LSE Library on Unsplash

Another week, another round of op-eds from our friends at the NZ Initiative. This time it’s another one from director Oliver Hartwich. Hartwich has been one of the foremost defenders of the NZI and the Mont Pelerin Society against the criticisms by Dame Anne Salmond that were published in the wake of the consultation period for the Regulatory Standards Bill discussion paper over the holiday. I cover her pieces and the NZI’s reaction to them here, here, and here.

This week, Hartwich finds himself among a much more sympathetic audience, as his latest op-ed “How 100 Days of Tariffs Turned the Left into Free Traders” appears in the rightwing paper The Australian. The piece is paywalled, but NZI have reprinted it in full on their website.

Hartwich uses the piece to argue that Trump’s chaotic tariff approach in his first 100 days has had a surprising effect: It has made liberals come out in favor of free trade and conservatives come out against it.

One hundred days into Donald Trump’s second presidency, his economic nationalism has produced an unexpected consequence. The man who campaigned on ‘America First’ and delivered sweeping tariffs within weeks of retaking office has become an unlikely champion of free trade – by forcing his opponents to defend it.

Hartwich argues that “the political left, previously suspicious of free trade, has suddenly discovered its virtues” and that “this extraordinary reversal represents perhaps the most astonishing ideological about-face I have witnessed.”

Before dissecting this ideological reversal further, he first needs to convince us of the virtues of free trade. He tells a personal story about being a student in 1989 when the Berlin Wall fell and experiencing the miracles of free trade

Where previously there had been a dangerous military confrontation, trade and exchange now blossomed. Economic activity replaced armed standoff.

Fair enough. I imagine it would have been unthinkable for the Berlin Wall to come down and being there to participate in these events would have been quite extraordinary.

Hartwich then uses his own life trajectory globetrotting around the world as an example of the impacts of globalisation

I went from Germany to Australia for doctoral studies, then worked in London, moved to Sydney and eventually ended up in New Zealand. This country-hopping felt entirely natural in an increasingly borderless world. To me, the freedom to study, work and live across multiple continents was globalisation on a personal level. Not just goods and services crossing borders, but people and ideas too.

So far I have no issues with Hartwich’s piece. It is factually correct and tells his personal story of experiencing the impacts of globalisation. But the op-ed begins to take a turn into more suspect territory in the next section.

Hartwich discusses his own time as a student of economics in the 1990s and early 2000s, where he was exposed to full-throated defenses of globalisation and free trade. For him, “The intellectual consensus around globalisation appeared unassailable.”

And so he was very surprised and

found it so puzzling when left-wing students at my university railed against trade liberalisation. These critics – outside the economics department, of course – denounced free trade as corporate exploitation and a race to the bottom.

Meanwhile, church groups insisted that only ‘fair trade’ could deliver justice, dismissing the overwhelming evidence that open markets were lifting millions from poverty faster than any development programme ever devised.

The intellectual leaders of this movement – Naomi Klein, Joseph Stiglitz, Noam Chomsky, the ATTAC organisation – gained traction. Their arguments culminated in the famous ‘Battle of Seattle’ in 1999, when protesters shut down the World Trade Organisation conference, and violent demonstrations at subsequent G7 summits.

This is all very perplexing for Hartwich because he, as a dyed in the wool free-market economist, lives by the dogma that free trade stands on “a principle whose intellectual foundation had been firmly established more than two centuries earlier.”

From Adam Smith to David Ricardo, from Frédéric Bastiat to Richard Cobden, the case for free trade rests on rock-solid economic logic. When two parties trade, whether across a street or across an ocean, they do so because both benefit. Each values what they receive more highly than what they give in exchange. This mutual advantage underpins the entire theory of the division of labour. Trade rewards specialisation. That fuels productivity. It is the foundation of our prosperity. For an economist, to argue against free trade is like arguing that the world is flat or that the sun orbits the earth.

Alright, we’ve got to break this down a bit because here’s where Hartwich really starts to lose it. As I’ve said before, it’s hard for me to tell whether he and his colleagues really believe this stuff, or if they are just making as strong an intellectual case as they can to satisfy the needs of their business members and donors. And as I’ve shown before as well, NZI is very good at framing economic arguments in terms of easily understood and supposedly universal principles, but don’t often delve into the real impacts of the policies they advocate for or account for the historical context in which they emerged.

And so here we have Hartwich’s simplistic explanation of trade. People and countries trade because they both benefit when they do so. And of course, we just shouldn’t question whether it’s correct to assume that all economic activity results from individuals striving to maximise their own personal benefit. That’s a given. But somehow, the same as with all economic models, a whole bunch of people striving to maximise their own personal gain will magically result in the best aggregate outcome for society (not that society exists according to these models, only individuals). For Hartwich, the division of labour, specialization of labour, productivity, and prosperity can all be tied to this simple idea of trade.

For those unfamiliar with the more technical economic explanations of free trade, this may seem like a bit of a fairytale. It is. Yet this is the story that economists have been telling about free trade for 100 years, despite mounting evidence that this simplistic explanation does not hold up when it comes to how trade works in the modern world. For people like Hartwich, who are upholding the neoliberal status quo, the fairytale is preferable to reality.

The chain of events, from trade to specialization of labour to increased productivity to prosperity for all, is inferred from a foundational assumption of free trade theory, the “Law of Comparative Advantage”, which is credited to economist David Ricardo. Economist Jeff Ferry explains it like this

The principle of comparative advantage says that if two nations begin to trade, both will achieve higher national incomes because each will specialize in production of the goods where it has a cost advantage. According to the principle, each nation abandons the industries where it is less efficient and moves workers and capital into the industries where it is more efficient. Trade would therefore be win-win.

This is what Hartwich means when he says that trade rewards specialization and fuels productivity. The idea is that countries can import goods for which they have lower productivity and focus their efforts on higher-productivity industries. In this way, opening up free trade will be beneficial to both nations.

There’s only one problem. It doesn’t work like that. As it turns out, the Law of Comparative Advantage worked pretty well during Ricardo’s time because all workers across Europe were paid very close to subsistence wages across industries and so could move relatively easily from one job to another. But wages and worker productivity in the modern economy are much more dynamic, and vary considerably from industry to industry.

On a technical level, this is catastrophic for economic theories of free trade because they assume that wages across industries remain relatively constant or increase. The beneficial aspects of free trade in economic models require that all workers who lose their jobs in one industry be moved to equally or more productive jobs in another industry. Without this stable or increasing productivity, the mutual benefit of free trade evaporates. In fact, without this assumption, the models simply don’t work.

Well, while economists have been hard at work on their technical models that assume the Law of Comparative Advantage is a reality, in the real world these foundational assumptions of free trade theory have been continuously violated for the past 100 years. Many studies have shown that when jobs are lost as a result of free trade, particularly in high-wage paying countries like the US, workers most often move to lower paying jobs, not higher. These data indicate that the technical assumptions—on which the model predictions of mutual economic benefit that result from free trade are made—are not true in the real world.

For Hartwich though, these free trade principles are on a rock-solid intellectual and economic foundation, data be damned. Having convinced us thoroughly of this unassailable fact, he moves on to discussing the ideological shift which is the focus of his piece. The figure he discusses from the Polarization Research Lab is shown below

A recent study by the Polarisation Research Lab provides evidence of this ideological flip. It shows that, until 2024, US liberals and conservatives had similar levels of support for free trade. After Trump’s victory and tariff announcements, the picture changed dramatically. Support among liberals doubled to over 40 per cent, while conservative support plummeted to just 13 per cent.

While the main point is correct, I will take issue with his characterisation of the conservative support as “plummeting” as it really only decreased a hair from its average over the past two years. But I’m quibbling there. There has definitely been an increase in polarisation on the position of free trade, although this has predominantly been driven by more support of free trade by liberals, not less by conservatives.

Amongst this tumult of opinions, we are so fortunate to have Hartwich and his ilk as the beacon of free markets who can see clearly through all of this political fog to the guiding economic beacon of free trade

Meanwhile, throughout this strange reversal, classical liberals and free-market economists like me have maintained consistent positions. We defended free trade when the left attacked it in the 1990s. We defend it still as the right abandons it in the 2020s.

Our arguments have not changed because economic principles do not bow to political fashion. Free trade remains the greatest poverty-reduction mechanism ever devised, a force for peace between nations and an essential element of human freedom and dignity.

Laying it on a bit thick here, aren’t you Oliver? You can see here how the ideology is shining through. These sentiments could have been lifted directly from the words and writings of libertarian/neoliberal godfathers Friedrich Hayek or Milton Friedman, who both argued strongly (while on the payroll of American business) that free markets were synonymous with personal and political freedom (well, actually Friedman claimed that free markets were more important than political freedom and backed up his claims by supporting and offering advice to dictators, but I digress).

It’s easy to hold these strong ideological positions when you aren’t concerned with either the technical issues with your economic arguments, when you massage or selectively cite data to support your position, or simply deny the historical realities of the economic policies you champion. Hartwich tut-tuts those silly leftists when he was in school for protesting and claiming that free trade amounted to corporate exploitation or was a race to the bottom. Those leftist intellectual leaders he cites, Klein, Stiglitz, and Chomsky, among others, however, have literally written books and articles and spoken widely on why free markets and free trade are not the economic panacea Hartwich claims, and cause devastating harms in the lives of people the world over. The largest cause of this is that corporations have been able to outsource labour and production to the Global South, where they pay a fraction of the wages they pay to workers in Western countries. This has caused massive job loss, wage decreases, and an explosion of inequality in Western countries as corporate profits have soared, due in large part to exploitation of workers (often women and children) in the Global South and suppression of wages in the Global North.

Photo by LSE Library on Unsplash

Then there’s the issue of protectionism vs free trade. If prosperity and free trade are unchanging economic principles, can Hartwich please explain why Western nations implemented strict protectionism and high tariffs in their crucial early decades of industrialization and development (the US had between 35 and 50% tariffs between 1820 and 1920)? Oh that’s right, it’s because that was required for them to protect their own industries and build up their own economic strength. You’d think that given the fact that they needed to take these measures to grow their own industry and development, they’d recognize the need for other developing countries to do the same and be supportive.

You’d be wrong however.

With the advent of the World Trade Organization, the World Bank, and the International Monetary Fund, the US and other Global North countries now deny the developing nations of the Global South the ability to implement the protectionism they took advantage of themselves, prying their markets open by imposing “structural adjustments”—a term that means opening up markets unreservedly to US corporations and allowing them to privatise public assets—as a requirement of any loans. Any countries that resist the hegemony of US capital can expect to be blockaded, have sanctions imposed on them, have their leaders assassinated and governments overthrown, and be taken over by custodial client regimes favourable to US corporate interests.

Is this the peace and prosperity that Hartwich is talking about? WTF Oliver.

Perhaps this moment offers an opportunity to build a broader, more durable support base for free trade. Maybe we can engage those on the left who have rediscovered these principles, while hoping the right eventually returns to economic reason.

Ah yes. Perhaps this will be the catalyst that will get us all to come back to our economic senses. After all the last 50 years of free trade have led to an unparalleled period of prosperity for all. Missing from this hope is any acknowledgment that the resentment that has fueled the working-class alignment with Trump comes in large part due to the disastrous economic results of free trade in the past 50 years. For Hartwich though, this couldn’t have anything to do with any of the political turmoil in the US because free trade has always led to peace and prosperity. This is a verified fact after all because he can point to, what, I really don’t know: Gross economic measures of income or some other aggregate measure of productivity that is abstracted from any actual lived reality? I simply don’t understand how Hartwich and the NZ Initiative can claim with a straight face that things have been so prosperous in the face of reams and reams of data showing growing wealth inequality, precarity, and economic hardship. This is certainly the case here in Aotearoa.

It’s almost as if they don’t care about the data and have strong reasons for preferring to live inside a fairytale. Many fairytales are quite beautiful places, as are many economic models. But, while both capture elements of our world, they aren’t real. We would do well to remember that. We all have to grow up and leave our fairytales behind eventually. It seems unlikely that Hartwich and company will ever abandon their economic and ideological fairytales for a clear look at reality. Hopefully at least the rest of us can see the fairytale for what it is before it turns into a nightmare from which we can’t wake up.