The Nordics and Free Trade

Zack Beauchamp has a piece in Vox that greatly misunderstands the nature of free trade in the Nordic countries. Here is Beauchamp:

There's a solution for the damage trade has done to the American working class, one embraced by the Nordic countries that Sanders often cites as models for the United States.

These countries tend to be extremely open to free trade. But they also have expansive welfare states that take money from globalization's winners and use it to compensate the workers who lose out. Everyone in these countries benefits from cheaper goods, the domestic lower middle class doesn't suffer, and the global poor benefit from selling their goods to rich consumers.

Beauchamp's neat little story here obscures more than it reveals about free trade in the Nordic countries. In particular, there are three crucial points that he omits.

1. Positive Trade Balances

Trade is a two-way street. You export some things and you import some things. Over the long-run it's important that a country either have a positive trade balance, meaning they export more than they import, or a zero trade balance, meaning they export the same amount as they import. Countries that have persistently negative trade balances are necessarily on track to accumulate ever-increasing levels of household and government debt, which is not sustainable and drains the country of wealth.

The Nordic experience with free trade has been one of mostly positive trade balances.

Here's Sweden:

Here's Denmark (note that the vertical axis is using different currencies for each graph; point is just that the bars are going up, not down):

Here's Finland:

Notably, with Finland you see the last few years have seen mostly negative trade balances, which has been greeted as a sort of crisis in the country, necessitating action to correct.

Finally, here's Norway whose oil exports create huge positive trade balances as far as the eye can see:

The trade story is much different in the United States. See if you can spot how it's different by peering upon the US balance of trade graph. It's very slight, so look closely:

Unlike the Nordic countries, the United States has run massive and unending trade deficits. Based on Finland's reaction to its recent (relatively small) trade deficits, I think you can be quite confident that Nordic countries would identify this as an unimaginable economic crisis threatening the long-term well-being of their countries.

The Nordic experience with free trade has been exactly the opposite of the American experience with free trade. Trade has allowed them to be a net exporter and become much wealthier in the process. The most extreme case is Norway, which now owns $163,000 of foreign wealth for every one of its citizens. Most recently, they've even begun buying up tons of commercial buildings around the world with their trade surpluses. In the US, trade has simply meant endless trade deficits that run up debt in the country.

2. Protection Where Necessary

Because their experience with free trade has been so lucrative, Nordic countries have not had that much need to protect industries. But there are instances where they do protect where they think it is necessary.

Norway is the clearest example of this. Because of its oil boom and resulting export boom, Norway had a serious risk of running into Dutch Disease. Dutch Disease happens when a country has a huge influx of foreign currency, which causes their own currency to appreciate and, as a result, makes their exports uncompetitive. Dutch Disease can lead to serious long-term economic damage because it can cause local industry to die out, which becomes a problem when (in this case) the oil boom finally comes to an end. Once industries are gone, it can be very difficult to restart them as the local knowledge and production base can't be turned back on with a switch.

So what does Norway do to deal with this? Well, they protect some of their local industries against foreign competition through a number of policies. The reality of this protection became a bit of an oddball story of the week back in 2011 when it led to a dairy shortage. Matt Yglesias, then at Slate, told the tale:

The high volume of natural resource exports pushes up the value of the currency and makes it cheap to buy products from abroad. This, in turn, tends to put all domestic producers of other tradable goods out of business and leave your economy dangerously dependent on the fluctuations of the commodity markets.

In principle, economic orthodoxy would say not to sweat it. Just use the natural resources to generate government revenue, then engage in massive redistribution. To many, though, there’s something depressing about the idea of a whole nation living on the dole. What’s more, many Persian Gulf states who’ve de facto taken this approach have realized over time that it creates problems. Your country is rich, superficially, but it lacks the human capital and organizational skills typical of a modern developed country. When the oil runs out, what will you be left with? 

Protecting select product markets from international competition has, for this reason, played a major role in Norwegian economic strategy. The inefficiencies involved in blocking foreign butter are minor at most times, can be relaxed in an emergency, and preserve some kind of non-oil economic base for the future.

Blocking imports or subsidizing local industry is not exactly the same thing as tariffs, but it achieves the same basic end: boosting the price competitiveness of local industry in order to protect it from cheaper imports. In the case of the United States, you could imagine a similar scenario where the US tried to preserve the industrial base of rust belt cities in order to avoid the kind of economic catastrophe they have suffered, a catastrophe that goes well beyond a loss of some jobs. I am not saying that is or isn't a good policy (though throwing away entire built-up cities seems like a serious mistake). But the point is that there is nothing about the behavior of Nordic countries that suggest they are free trade die hards that would willingly suffer the kind of issues the US has.

3. Small Markets Looking To Expand Their Reach

Finally, it's important to note that the Nordic countries favor open trade as a strategy to expand their own reach, which is especially important given the size of the countries. This is underscored by the positive trade balances detailed above, but you can also find it in their own statements about the topic.

Here is Swedish PM Stefan Löfven in 2014:

The Nordic countries are small, open countries -- small and open economies. And we have welcomed globalization, for example. We have welcomed open trade and free trade. We do not see that as threats, but on the contrary as opportunities to achieve what we want in our society. But it's also important to say that our economies are so dependent on trade. The Swedish export is equal to 50% of our GDP. I think the same figure in the US may be 10-12%. So you see, we are very dependent on this open trade.

But that also means that we need an active state. The society needs to be very active supporting an active industry policy because we need to constantly renew and develop our industry. We need to focus on cooperation, research, and investment. And we work with an ongoing modernization of our economy, job creation, combined with economic support for the unemployed, so that he or she can have a safe path to a new job. And we also invest a lot in publicly funded education and training, lifelong education for everybody, especially for unemployed people. What is the use of that? If I get unemployed, I know two things. I get help to a new job: training or retraining, whatever I need. But I also have a safe financial situation for my family. I know that I do not have to leave my house or my apartment. I know that I can make a living through this difficult journey on my way to a new job.

There are two points worth teasing out here. First, as Löfven notes, the Nordics engage in active industrial policy, which is a form of protectionism, to ensure that it has jobs and a successful economic base. Second, the Nordic countries, on account of their size more than anything, have little option but to engage in free trade, if they want to have successful local industries. The domestic market is simply not big enough to sustain the kinds of big firms necessary for large-scale, efficient production. As Löfven notes, the upshot of this is that nearly half their GDP is owing to exports, while in the US the same figure is much lower.

As much as naysayers of the Nordic model like to say their small size makes it easier for them to do what they do, the reality is that their small size makes it a lot harder for them to do what they do. Having a small domestic market means that emerging firms and industries have to think about exporting to foreign countries with different languages and cultures almost immediately. A tech startup in the US can get big without ever worrying about how it is going to sell its product abroad. A tech startup in Stockholm doesn't have that luxury. And so, for them, open trade is an essential element of their own economy being able to succeed and innovate.

With its enormous domestic market, the US doesn't really face the same trade calculation that the Nordics do. For this reason, it could reach different conclusions about its utility.

Conclusions

Overall, then, the Nordic comparison here is just not very illuminating and in some cases outright deceptive. The Nordics tend to have positive trade balances while the US has endless negative trade balances that probably would be treated as a serious crisis in Nordic countries. The Nordics do protect industry, through active industrial policy among other things, to ensure that they have a successful economic base able to maintain high employment. And the Nordics have little choice when it comes to trade because of their small domestic markets.

Relative to the Nordics, the US trade/industrial policy can accurately be described as an incredible disaster and not only because the US is horrible at welfare.

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