Free trade is not a magic bullet for national prosperity.

There may be a silver lining to the Trump presidency. Having vetoed American involvement in the Trans Pacific Partnership he is now hammering away at Nafta, which is the trade agreement between the United States, Canada and Mexico.

He is doing what he told his supporters he would do. He is attempting to put the United States first. He is attempting to bring manufacturing jobs back to the United States. Or so he says.

Read more: Peter Lyons: The party was great - now for the hangover from hell
Peter Lyons: Why our most profitable industries pay miserable wages


He is unlikely to succeed. Most economic studies suggest manufacturing jobs have been lost more to technological progress rather than cheap overseas labour.

Ironically, despite Trump's rhetoric, American corporate interests have largely shaped the international economic environment since WWII.

But Trump's efforts highlight an interesting deficiency in the democratic process in New Zealand and many Western democracies. When was it exactly that New Zealand citizens voted for unmitigated free trade as a bedrock feature of our economy?

We have never debated the pros and cons of free trade during an election campaign. Our embrace of free trade was a product of the 1984 Labour Government which omitted to inform voters that it intended to implement textbook free market policies upon its election. Since then, free trade has become embedded in our economic framework as a bipartisan policy. It just slide in.

New Zealand has become an international champion of free trade. We are the Zsa Zsa Gabor of free trade agreements, willing to sign a union with anyone. This is based on the belief we have little to lose.

We have few remaining trade barriers and little negotiating power so any agreement gives our exporters access to more overseas consumers. Free trade allows us to specialise in what we are good at producing and gives us more consumers to sell to.

We can then buy cellphones, SUVs wide-screen TVs, clothes, computers and other stuff we are not so good at making. The theory sounds obvious but the reality is a little more murky. Here's several reasons why.

After more than 30 years of free trade, New Zealand is still largely reliant on commodity exports and, more recently, tourism. Commodity exports such as milk powder and meat are notorious for large price fluctuations at the whim of overseas markets. Tourism is generally a low-income industry. Commodity producers are generally price takers rather than price makers on world markets. We need more A2 milks and fewer Fonterras if we are to become a high-wage economy.

Commodity production also suffers from diminishing returns. A country is ultimately limited in agricultural output by its natural resources. Eventually it runs out of fertile land. It hits peak cow.

Rich countries tend to specialise in products that experience increasing returns such as computer software, film-making, pharmaceuticals. The more that is produced and sold, the lower the average cost of output.

These industries generally offer higher wages and a higher standard of living. Free trade is very beneficial to such industries because it increases the size of the market.
This is why American firms are so hot on protecting their patents and copyrights in international markets. This is also why Kim Dotcom is in such trouble.

No country in history has become rich from a policy of free trade. Britain, the United States and now China developed their economies using protectionist policies. They only adopt free trade after their key industries become dominant in world markets. Hypocrisy has always been a core feature of the free trade debate.

Peter Lyons
Peter Lyons

In theory, free trade should increase a country's overall prosperity because it allows a country to specialise in what it is best at producing. But this says little about how this prosperity will be shared.

In recent decades, the benefits of free trade and globalisation have gone mainly to the owners of capital, particularly in developed economies. Firms are able to relocate to employ cheaper labour abroad or replace labour with technology.

Free trade is not a magic bullet for national prosperity. It is far more nuanced. It can magnify inequality of income in a society. It can also lock a country into producing commodities that suffer from diminishing returns and lower wages. Think peak cow.

Trump's political success is largely a manifestation of the anger of those left behind by free trade and globalisation in recent decades. We may not like him, but he may have a point. Maybe it's time we had that debate we never had.

Peter Lyons teaches economics at Saint Peter's College in Epsom and has written several economics textbooks