The Democratic Party has well-established and well-deserved ugly credentials as a hotbed of populist protectionism. Occasionally, we find a pearl among the Democratic swine. Bill Clinton, who never wavered in his support for free trade, even when it was electorally costly, is an example. Unfortunately, this wisdom and courage has not rubbed off on his wife, Senator Hillary Clinton, who is running hard and scared for President of the USA. The other Democratic candidates are, if anything, even more lamentably protectionist than Senator Clinton. The Republicans aren’t much better, but they don’t matter this election, because George W. Bush has made certain that the next president of the USA will be a a Democrat.
When educated persons are deeply ashamed of what they are about to say, they tend to either invoke God or spray the name of a Nobel Laureate around, as a form of mental smokescreen. Senator Clinton goes the Nobel route. Quoting:
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.”
This statement is complete codswallop. Granted, Senator Clinton, who doesn’t understand the first thing about economics (as demonstrated by her disastrous attempt at health care reform in the first (Bill) Clinton administration), may not understand precisely why she is talking rubbish. But the benighted adviser who fed her this bit of misinformation can be presumed to be aware that they are feeding their candidate a bill of goods.
One of the great things about intellectual property rights is that you cannot plagiarise yourself. I will therefore shamelessly reproduce a chunk of a comment I posted on July 1, 2007, on the FT Economists’ Forum in response to a careless piece of writing by Larry Summers which, come to think of it, ran along the same lines as the quote from Senator Clinton. Here it is:
In support of his claim that "If globalization is taken to mean a combination of more openness and growth of developing countries it is not even altogether clear that it benefits America in aggregate", Larry invokes Paul Samuelson’s elegant paper on the welfare effects on a nation of growth abroad. The appeal to Samuelson’s (correct) analysis should, however, be taken with a pinch of salt.
Samuelson’s paper deals with the effect of growth abroad on home country welfare in a world with two countries (or regions) that have fully integrated (free, competitive) trade in goods and services throughout (both before and after growth abroad takes place). There is no capital mobility or labour mobility. Samuelson’s analysis is intuitive: if growth abroad (whether through total factor productivity growth or the hard way) is concentrated in sectors where the home country used to have a comparative advantage, the terms of trade may turn so badly against the home country that everyone in the home country is worse off. A nation of candle-makers and candle-exporters who don’t have many productive alternative uses for their labour and capital resources may well be worse off when the rest of the world starts producing cheap gas lamps.
However, despite getting clobbered by this technological change abroad, the candle-makers’ nation can do no better for itself than imposing the optimal tariff and trading away. This was true also before the rest of the world invented and produced the gas lamp. Even with the optimal tariff, the candle-makers’ nation can be worse off than before. ‘Shutting off’ globalisation does not mean reducing openness in the sense of reducing trade. The only way to restore the status quo ante is to stop the rest of the world from producing gas lamps.
Back in the real world, the analogue would be to stop India from producing software, operating call centres and providing back office functions to the world at large. It would mean to stop China from acquiring or re-inventing and then using modern technological and managerial know-how to create a mighty manufacturing machine. You would have to stop both technology transfer and internal R&D and other knowledge creation in the Chindias of this world. This, fortunately, is as impossible as it would be immoral. The genie is out of the bottle.
Given that China, India, the other BRICS and ultimately most other emerging markets and developing countries will acquire modern technology, management techniques and governance institutions, the best response of the old industrial countries (the OECD countries, say) is to trade freely, with just the optimal tariff separating them from truly free trade. Even if the old industrial countries were to be worse off as a result of the growth of the emerging markets and developing countries (a theoretical but not a practical possibility for most countries, although individual groups of workers and owners of capital could well be worse off), they would minimize the extent of the welfare loss by optimal tariff-qualified free trade. Going self-sufficient would mean that the candlemakers would have to eat their own candles.
The optimal tariffs are optimal only from the perspective of the countries setting them. Globally they are welfare-reducing. Intelligent bargaining-with-side- payments at the level of the WTO should ensure that the optimal response of the old industrial countries to the rise of the new giants is unqualified free trade.
Whatever happens, the candle-makers can never get their export markets back. Living with it and trading despite it, is the only efficient policy. Using domestic distributional instruments to meet domestic distributional objectives is the other blade of the policy scissors.
So, no Senator Clinton, you are quite wrong about comparative advantage. Paul Samuelson is, not surprisingly, absolutely right. Despite outsourcing and off-shoring, despite alleged Chinese currency manipulation and the threat of Sovereign Wealth Funds from the Gulf and the far East owning most of Main Street before long, comparative advantage continues to provide the valid foundations for pursuing free trade, preferably multilaterally, but if necessary unilaterally. The exercise of national market power is the only reason to depart from this, if you are confident that there will be no retaliation.
There is more to international economic policy than trade policy of course, and I encourage Senator Clinton to develop new initiatives in the fields of intellectual property rights, multilateral surveillance by the IMF, migration policy, global regulation of internationally mobile financial institutions and instruments, co-operation in tax policy, including tax administration and a co-ordinated crackdown on tax havens and "regulators of convenience".