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World Trade Week
May 28, 2008
I learned from this piece by Philip Levy in the American (via Real Clear Politics) that May 18-24 was “World Trade Week”—“in case you missed it,” he says. I had, as a matter of fact. The celebrations, let us say, never looked like getting out of hand. In an excellent short column, Levy laments the failure of politicians to talk plainly about the benefits of liberal trade and the wavering commitment of the country’s best economists to a cause they once resolutely defended. Good for him.
…the very academic stars who might help to clear up uncertainties about trade imbalances are themselves stoking the skepticism. They have found it useful to dabble in xenophobia to support a cause. Paul Krugman identified this tendency over a decade ago when he warned that it was dangerous to reach the right policy conclusion for the wrong reasons. But lately he has succumbed to it, along with economists such as Larry Summers, Alan Blinder, and even the great Paul Samuelson.
Trade is not all it is cracked up to be, they write. It can have alarming side effects. Therefore, we must…coordinate our taxes with foreign countries! Boost education spending! Pretty much do anything except embrace protectionism, which they all piously reject. However, anti-trade passions can be difficult to control, once unleashed.
Quite right (although I would not include “coordinate our taxes with foreign countries” in my list of “right policy conclusions”).
The piece mentions recent and much-cited research by University of Chicago economists Christian Broda and John Romalis, suggesting that trade has disproportionately lowered the prices of goods that are important to poor Americans. If true, that is an interesting thing to know—but I am a little uncomfortable about the eagerness with which this (not very surprising) finding has been taken up by the remaining enthusiasts for free trade. The Broda-Romalis result does not need to be true, after all, for the orthodox case for liberal trade to hold. And politically I’m not sure it’s much help either. The trade-sceptic response to it is very straightforward, the same as the response to the related, familiar and (so far as I know) uncontested fact that Wal-Mart lowers prices disproportionately for the less well-off: what is the point of saving a couple of dollars on your Chinese imports if you’ve no job?
The best way to defend liberal trade to sceptics, I think, is always to emphasise the close parallel with technological progress. That too can have some harmful side-effects on the pattern of employment and on income distribution, while raising incomes overall. Yet who thinks to oppose it? When the likes of Larry Summers, Alan Blinder and Paul Samuelson express as much anxiety about the perils of advancing technology as about the downside of trade, I will at least concede that they are being consistent. Meanwhile, the case for progressive taxation, educational reform and—above all—universal health care can and should be made on the merits.
As with so many economic issues, people conflate community and individual interests.
Free trade everywhere and always is better for a nation on average.
But that does not mean it is better for each individual.
In fact, it is a certainty that the “on average” will include winners and losers in both countries involved.
This basic fact always leaves open the possibility for politicians to exploit individual grievances, ignoring the “on average” benefits.
I doubt we can ever avoid this problem.
Posted by: JOHN CHUCKMAN, TORONTO | May 28th, 2008 at 4:59 pm | Report this commentFirst of all I would like to thank Mr. Crook for his comment on free trade. I think that his argument about the best way to defend liberal trade to sceptics is very relevant and should be definitely used more often in the free trade debate.
Posted by: Antonio | May 29th, 2008 at 1:14 am | Report this commentI think that one additional good aspect of this comparison between free trade and technological progress is to reveal the close parallel between free trade sceptics and the Luddites. Among the recent converted sceptics, the most emblematic case is that of Paul Krugman. He wrote in the most recent version of his well-known study book, International Economics (2006 edition), that “although trade between advanced countries (e.g. U.S) and newly industrializing countries (e.g. China) has grown rapidly, it still constitutes only a small percentage of total spending in the advanced nations. This suggests that these trade flows cannot have had a very large impact on income distribution.” Krugman asks then the ‘puzzled’ reader the ‘one million dollar’ question: “What, then, is responsible for the growing gap between skilled and unskilled workers in the United States?”. Unexpectedly, he answers to it by this very simple and thoughtful statement: “The view of the majority is that the villain is not trade but technology, which has devalued less-skilled work. The view that trade is in fact the main explanation still has a number of adherents, however.” This last sentence is surprisingly prophetic since Krugman recently affirmed that “It’s no longer safe to assert that trade’s impact on the income distribution in wealthy countries is fairly minor. There’s a good case that it is big and getting bigger.” As reported in the Economist (http://www.economist.com/finance/displaystory.cfm?story_id=11050137 ), he began the recent presentation of his new study of trade and wages (http://www.princeton.edu/~pkrugman/pk-bpea-draft.pdf ) at the Brookings Institution with those not less emblematic words: “This paper is the manifestation of a guilty conscience.”
Does he mean by “guilty conscience” that he succumbed to the ‘Luddite fallacy’ look-like argument against free trade or that he submitted his research to the power of opinion polls (i.e. sin of populism)?
Also, I would like to say that ‘bargaining’ the case for free trade with the case for progressive taxation, educational reform and universal health care for example, is not the most appropriate strategy to do for the democrats in order to “promote healthy globalisation”. At the end, it might just be counterproductive or even dangerous.
Finally, I would like to see Mr. Crook elaborating his argument better in the debate opened by Martin Wolf (“Preserving the open economy at times of stress”) in the Economist’s Forum of the FT.
Spot on. Free trade is desirable in and of itself, as are healthcare reform, a proper safety net for workers who lose their jobs, etc. Tying the two together is bad economics and even worse politics, just as the conservative argument that globalisation requires low taxes to maintain international competitiveness is.
Posted by: Philippe Legrain | May 29th, 2008 at 10:04 am | Report this commentWhat has always struck me as fascinating in this debate is the extreme paucity of evidence which mainstream economists have required in order to be convinced that free trade is uniformly desirable: a simple, mathematical model of 2 countries, each producing 2 goods, and with the mathematics involved being merely high-school linear algebra. That such an inadequate foundation should convince so many otherwise intelligent people (such as Mr Legrain) for so long against all economic historical evidence and the evidence of their own eyes, says something for the power of peer-group pressures and other sociological factors in the education of economists.
Posted by: Peter | May 31st, 2008 at 10:26 am | Report this commentit is the combination of tecnology and globalization that has impacted less skilled, often unionized labor so negatively in the u.s. the techno-global revolution has proven a great leveler of global wages. unfortunately for many u.s. laborers they no longer enjoy the benefits of producing for a wealthy nation-state economy. the days of mostly closed national economies is fading and being replaced by global companies with fungible labor options. digitization allows work to be replicated with near exact quality and specs at any number of sites on the globe. this development is a direct threat to the highest wage earners in any industry. oddly even well educated “professionals” will see increasing threats on the horizon. the reality of a global economy powered by technology is that it will squeeze production costs to gain competitive advantage or to hold the line on costs in an inflationary environment. labor was often considered a contractual,fixed cost but in today’s corporate structure it is increasingly a variable cost. reality also means that the nature of employment has changed. lifetime employment with benefits to match is fast becoming the past. the corporation will become an agent of change or it will enjoy a shorter lifespan. workers are now brands unto themselves, honing skills that will carry them through waves of creative destruction in the market place. the world is becoming more entrepreneural out of necessity. Autos, airlines,energy, banking and the quintisential multi-national general electric are showing us how powerful change occurs and impacts business models and the social/ regulatory structures that support capital accumulation and distribution. protectionism is the equivalent of playing global ostrich. we cannot stop nor hide from change or technological advancement. but we can prepare for the inevitable consequences.lifelong education and skill development will become the responsibility of the individual and the central government.a reallocation of financial resources away from imperialistic enteprises and toward retooling our workforce and education system must be a priority if we wish to flourish in the techno-global revolution. one last word on taxation. currency exchange rates are pivotal to global trade and are impacted by fiscal and monetary policies. guns, butter and pork combined with irresponsible tax policies will threaten foriegn confidence in the dollar and push borrowing costs and import inflation higher. the american consumer has done the heavy lifting for global exporters. balance sheets reflect the enormous credit overload that role has required.as wages level out around the globe consumption will shift eastward on the glob. none of these shifts in resources will happen over night. planning and sound policies may soften the blows of the techno-global revolution but where there is change there will be pain. it will be the job of our leaders to lead and citizens to take greater control of their own destinies.
Posted by: gym-bob | June 2nd, 2008 at 4:04 am | Report this comment