Reading the interview with Hillary Clinton in today’s FT took the edge off my morning (report here, transcript here).

FT: You have said that as president you would take “time out” on new trade deals. But the debate has mostly been focused on the smaller and more symbolic deals like Peru and Colombia. Would your principle extend to the stalled Doha round of world trade talks?

HC: Well what I have called for is a time-out which is really a review of existing trade agreements and where they are benefiting our workers and our economy and where the provision should be strengthened to benefit the rising standards of living across the world and I also want to have a more comprehensive and thoughtful trade policy for the 21st century. There is nothing protectionist about this. It is a responsible course. The alternative is simply to pick up where President Bush left off and that’s not an option. Now I’m trying to take the trade agreements that he has negotiated each one on its merits and I will support the Peru agreements because it has the kind of strong labour and environmental provisions that I’ve long called for. And it helps to level the playing field for American workers because as things stand most Peruvian goods already enter America tariff-free but the tariff that are attached to most American goods entering Peru make them less competitive. I have said I will oppose the agreement with South Korea because the auto provisions don’t go far enough and we have prior experience.

My husband’s administration tried to enforce a memorandum of agreement that they entered into with the south Koreans about opening up their market to American autos and it just didn’t happen. So it’s not that we’re starting on some totally different approach to trade it’s that we have to take stock of where we are today. And specifically with Doha and with these large global agreements, again we have to see what works and what doesn’t work. We have benefited through most of the 20th century from trade. It has helped to raise American standards of living, it has helped to create jobs. And I agree with Paul Samuelson, the very famous economist, who has recently spoken and written about how comparative advantage as it is classically understood may not be descriptive of the 21st century economy in which we find ourselves.

We know for sure that every other country wants access to our markets, because we have high levels of consumer spending since we don’t save anything in America and we have a very vigorous competitive market that is a real prize. On the other hand I want to see living standards improve around the world. I want to see environmental standards improve. And I am concerned by some of the provisions that would prevent countries from for example enforcing stronger environmental and worker safety rules under the WTO. I think we have to take a hard look at this and do it in the right way and that is what I am proposing to do.

It is sad to consider that the US might withdraw its leadership from the multilateral trade process–one of the few genuinely multilateral efforts (Democrats should note) where it has, over the years, been fully engaged, and where the results have been, on the whole, spectacularly good. And it pains me especially to see Paul Samuelson (who is no protectionist) invoked as giving his blessing to this new mood of disengagement.

I wrote a column last year for The Atlantic on the shifting political economy of trade, and it mentions Samuelson’s supposed change of heart on the matter.

Paul Samuelson, an undisputed titan of 20th-century economics, was once challenged by the mathematician Stanislaw Ulam to name a single proposition in all social science that was both true and nontrivial. It took a while, but Samuelson finally thought of a good answer: the principle of comparative advantage. This classical theory was true, Samuelson explained, as a matter of mathematical deduction, and its nontriviality was “attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.”

The doctrine in question, devised by David Ricardo in 1817, makes a strong claim about the gains that accrue from trade. It would be difficult to exaggerate the centrality of the idea in modern economics. For nearly 200 years, the principle of comparative advantage, and the ideas about economic policy that flowed from it, divided the world into two camps: those with basic economic literacy, and the rest. Understanding this idea, and advocating it to the world, was part of what it meant to be an economist—especially an American economist.

Lately things have changed. Some of America’s most eminent economists, including Samuelson himself, have edged away from that earlier consensus. Their support for liberal trade is far more tepid and tentative than before. The shift is both momentous and disturbing…

Why has this happened? What has changed? I wish I could tell you. No new theoretical insight has emerged to challenge the old pro-trade presumption. Samuelson’s 2004 article was mistaken for that in some quarters, but was actually a muddled combination of erroneous new theory on offshoring and uncontested old theory about monopoly power in global markets. The novel part was conclusively rubbished by Columbia’s Arvind Panagariya, who showed that Samuelson had got his offshoring model plain wrong. So far, anyway, nobody has explained why offshoring needs a new theory; it is just another kind of trade. The old part—the idea that the United States might see its income fall if trade drives down the prices of its exports—was already encompassed by the earlier consensus.

Jagdish Bhagwati, a preeminent trade scholar, also of Columbia, helped to theorize this danger in the 1950s. As he explained, “immiserizing” trade can arise only under quite unusual circumstances. The principal benefit to a country from openness to trade is cheaper imports. In the ordinary case, additional imports may put some domestic producers out of business, but the displaced capital and labor get applied to more efficient new uses, so the economy as a whole still gains. Suppose, however, that the country had previously been collecting some monopoly profits on its exports. If new trade drives up its production of those goods, their price might fall—and in theory, they could fall by enough to outweigh the gains from cheaper imports. In practical terms, this is an unimportant exception. Bhagwati himself remains a trenchant defender of liberal trade.

You can read the whole column here (subscription required). And if you want even more, here are two pieces I did for the FT on the subject. (This clipping is from the first.)

[Bill] Clinton campaigned against the odds to secure passage of the North American Free Trade Agreement. Today the party is against such deals. Mr Clinton worked hard to get China into the World Trade Organisation. Hillary Clinton and Barack Obama are Senate co-sponsors of a new China- bashing law. And the move to the populist left is not confined to trade. All the Democratic contenders are turning up the volume on stagnating middle-class wages, soaring profits, swindling bosses, dwindling union membership (Mrs Clinton and Mr Obama back the abolition of secret ballots on union representation), tax loopholes for the super-rich, oil company gouging, insurance company gouging, drug company gouging and every other kind of gouging.

On the face of it, this is surprising. It is not as though Mr Clinton is unpopular with Democratic supporters, or in the country at large. Whatever one may think of other aspects of his presidency, his economic record was excellent. His optimistic centrism on economic policy worked and was seen to work. Why then abandon it? Is it that the Republicans have moved to the centre, crowding the Democrats out of that space? Hardly - although the theory is not quite as absurd as you might think. George W. Bush’s "big-government conservatism " has not been shy about throwing public money at disaffected sections of the electorate (consider the vast new outlays on Medicare, for instance). Even so, measures such as big tax cuts tilted very strongly in favour of the rich, combined with lack of action on pressing issues such as access to healthcare, leave plenty of room, or so you might think, for a centrist economic platform that emulates Mr Clinton’s bold economic vision rather than disowning it.

Part of the answer, no doubt, is that the candidates are currently battling for the nomination, which obliges them to tack to the left. Once the general election starts, there will be some reversion to the centre - although it is hard to imagine a lurch that would recover the distance already travelled. Also, after seven years of Mr Bush, the country itself may have tacked to the left. So far, economic populism appears to be going down well, and not just with committed Democrats. Outspoken critics of "unfair trade " and the Bush administration’s supposed capitulation to corporate America did especially well in last year’s elections.

Another factor is that the past several years of disappointing growth in median earnings have weakened elite enthusiasm for globalisation and open markets. Politically, this matters more than you might suppose. Mr Clinton’s conviction that globalisation was good for America owed a lot to the experts - including economists of the highest professional standing - who surrounded him. Recently, eminent economists such as Alan Blinder, Paul Krugman, Larry Summers (who served as Mr Clinton’s Treasury secretary) and Brad DeLong have all expressed new doubts about the benefits of globalisation for the US. It is all more complicated than we thought, they say. It was hard enough for Mr Clinton to fight for freer trade when every highly regarded economist in the country said it was good for the US. Now that their message has changed to "We might have been wrong about this. We’ll get back to you ", the prospects for liberal trade have dimmed.   

I wonder what Samuelson makes of being cited as an intellectual authority for Democratic Party disenchantment with liberal trade. It is one thing to say that it’s all very complicated, and that economists should guard against simplistic accounts of the trade issue. It is quite another if, while pondering the complexities, the US turns its back on the liberal trading order. That too would be, as it were, a simplistic outcome–and an extraordinarily damaging one for the US and (more especially) for the developing countries. 

December 3rd, 2007 in Uncategorised | Permalink