Ireland symbolises benefits of free trade as protectionism rises

As a small, open economy, heavily dependent on exports for its prosperity, Ireland has embraced free trade since the late 1950s. However, the political tide elsewhere, particularly in Britain and the United States, seems to be moving towards greater protectionism.

Since the 1800s, Britain has strongly championed free trade. However, the Brexit vote marked a backlash against the EU free-trade model, and particularly against the free movement of labour.

In the US, Republican presidential candidate Donald Trump is running on an anti-free trade and anti-immigration platform. Bernie Sanders, a challenger for the Democrats' nomination, built his strong showing in the primaries around opposition to further freeing of trade. His challenge has pushed Democratic presidential candidate Hillary Clinton to a more negative position on future free-trade deals. Her ads mock how Trump's own-brand clothing line is sourced overseas.

Trade partnership

The proposed Transatlantic Trade and Investment Partnership between the EU and the US is facing growing public opposition, although, at government level, and in the European Commission, there remains a commitment to the benefits of eliminating remaining barriers to trade within the EU, and to widening trade deals with other regions of the world.

Driving this growing public disenchantment with free trade is the fact that, while trade growth has raised national incomes, the costs and benefits have been unevenly shared within individual countries, and between different social groups.

As manufacturing jobs gravitated to lower-cost countries, areas such as Britain’s northeast and the US rust belt have lost out. Jobs for skilled graduates have grown with rising prosperity, but low-skilled workers have experienced rising unemployment, particularly in former industrial heartlands.

The understandable populist response is to return to protectionism. The more challenging approach is to continue a commitment to growth-enhancing trade, but to emphasise measures to ensure that the benefits of free trade are shared, redistributing resources to those who stand to lose. In particular, governments need to take remedial action where the losses are geographically concentrated, and to address alternative opportunities for those with low skills.

Ireland stands out as an exceptional case, both on the scale to which it has benefited from free trade and in the extent to which those benefits have been shared.

When freer trade in the rest of Europe opened up after the second World War, Ireland stood aside, retaining massive tariff barriers in place until the 1960s. If you wanted to buy a car in Ireland, it had to be disassembled in the UK (or elsewhere) and then rebuilt in Ireland from the parts; if you wanted to buy a shoelace it had to be made in Ireland.

EEC accession

All of this massively raised costs for consumers and restricted choice. In turn, Ireland’s exports consisted largely of agricultural produce sold at a discount on foreign markets. As a result, Ireland failed to share in the rapid increase in European living standards in the 1950s. It was only with the freeing of trade over the course of the 1960s and entry into the EEC in 1973 that Ireland moved to share in the economic growth that the rest of Europe had experienced since 1950.

Freeing of trade and entry into the EEC involved significant closures of Irish domestic firms that could not compete. In particular, the car-assembly plants all closed by the end of the 1970s. However, in the immediate aftermath of EEC entry, most of those who lost their jobs found employment elsewhere, many in new factories built to supply the European market. For farmers, unfettered access to the European market was particularly beneficial, helping spread the geographical gains from trade.

A particular feature of Ireland’s experience of free trade has been the impact of foreign direct investment (FDI). Since the 1960s, FDI in Ireland has involved the opening of new factories or businesses, providing new jobs. While in the early 1970s there was some opposition to expanding FDI, that opposition evaporated as the new businesses brought increased employment.

However, in other parts of Europe the effects of FDI have been more complex. After the fall of the Berlin Wall, countries in eastern Europe found themselves with a totally uncompetitive industrial base. Their initial experiences of FDI involved the takeover of existing enterprises by foreign firms, resulting in major job losses to address productivity.

While ultimately this built more sustainable enterprises, this form of FDI was obviously very unpopular. However, over the subsequent 20 years FDI in newer EU members such as Poland and Slovakia resulted in a major expansion in activity and employment in profitable export-oriented enterprises, such as car manufacturing.