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June 09, 2005

Comments

Any treaty that lowers trade barriers reasonably is a positive step for the United States and its trading partners, and I hope it gets passed.

Even if it opens up Canadian oil fields to the PRC?

Shorter Hufbauer and Grieco: The process we have chosen to refer to as "liberalization" benefits capital at the expense of labor and domestic agriculture.

Thanks for the epiphany guys. That certainly turns my view of macroeconomics upside down.</sarcasm>

I would have to see his data for his first calculation. The other three really have little to do with national income and may be irrelevant.

not being an economist, this is a dangerous field for me to tread in. but,

saying that a foreign country has a major pollution problem is pretty much like two guys in a canoe, with one guy telling the other that his end of the canoe is leaking.

if we are getting cheap goods as a result of foreign manufacturers successfully externalizing their pollution costs, then we are once again borrowing from the next generation. We get cheap goods; they get goods that (a) bear the true cost of manufacture and (b) bear the cost of rehabilitating the environment.

more broadly, what's fair? how fair is it to require that the poorest americans buy more expensive goods in order that far poorer foreigners have a fair wage and decent living conditions?

dunno.

Charles, you are correct. Now, the next step is to get Republicans to stop killing all of the things that are proposed to help the losers from free trade. Of course, they inevitably involve taxing and spending, so good luck with that.

Well put, Charles.

This one is easy. Who among the gainfully employed here are willing to be laid off right now (with no guarantee of a job anytime soon, and certainly no gurantee of a job paying as well or better) for the promise that their neighbors and the world at large will profit?

Whew! It's a good thing that Americans are the only people in the world that Matter! Otherwise, this Free Trade thing might come back and bite us on the ass!

Charles- Once in a while you manage to write something I agree with. Free trade is good. Too bad Republicans generally are intent on destroying the consensus for it.

Free trade is fine, if there's a social welfare net to assist and rehabilitate those who suffer from it.

I take it that Charles nods towards this at the end of his post, but the fact is that this country needs to do a hell of a lot more, and that the Party in Power has no interest in addressing that need.

(Exhibit A---get laid off, lose your health insurance. Whose great idea was THAT?)

I second Frank's comment. Free trade is a good thing, but we're going to lose out on that good thing if we can't do a better job of repairing the dislocations.

The benefits of free trade are inversely proportional to the strength of economic and political institutions and infrastructure that distinguish internal and external distinctions among the traders.

We rarely talk of trade and economic issues between Kansas and Iowa; more often between the USA and Canada; quite often between the US and China. The point at which "free trade" is of maximum benefit is the point at which the words become nonsense.

Is it truly free trade if labor is not allowed to move to where there are higher paying jobs? Corporations are freer to move across national borders to find cheap labor and looser environmental laws than workers are able to move to places with higher wages and greater safeguards for safety and the environment. How can these workers, especially ones living under politically repressive regimes, vote with for higher wages and better conditions? The market method of voting with their feet is not available and the political means do not exist.

Doesn't that create a situation where wealth will be in the hands of fewer and fewer worldwide?

Wouldn't looking at the median wealth increase per American be better than averaging the wealth generated by free trade per American? Which might also explain why there is political pressure against "free trade". Most Americans might not be experiencing the $10,000 gain in income but much less. The risk/reward for free trade might not be there then for the majority of Americans.

I'm a pretty strong free trader, but I do have some reservations about the $1 trillion figure. Aside from wondering about the data, like Tim H., I have to ask, "compared with what?" It makes no sense to say we've gained $1 trillion from policy X - trade liberalization in this case - unless you specify the alternative to which you compare X. Is it generally prohibitive tariffs, so we have no trade? In the one case where they provided an alternative, comparing the current situation to a Smoot-Hawley tariff, an extreme anti-trade policy - the gain is only 70% of their estimate.

As for the job losses, it is not clear to me whether these are net or gross losses. In other words is this simply the number of jobs lost, without taking into account gains elsewhere, or is it the net result? I'm guessing the former, in which case it doesn't tell us a lot about overall employment effects. In general, I believe these are small and not necessarily negative.

I agree with others that we need to take care of people who suffer job loss as a result of trade agreements, but I really don't see this as anything different from a broader social safety net. Dislocation due to trade is no different than dislocation due to other factors, and isolating trade-based problems is not easy. GM has anounced a cutback of 25,000 jobs. How many of these are due to foreign competition, how many to GM's incompetent management, how much to other factors? I doubt anyone can produce a sensible estimate, and if someone can so what? It would still be impossible, as a matter of simple logic, to identify individual workers who were laid off as a result of trade rather than other things.

It's useful to think of trade as a technology - a way to convert wheat and movies into cars and TV's. We would not consider restricting technology change to "save jobs," so it's not clear why we would restrict trade for that reason.

The analysis is a little bit oversimplified. Free trade has its benefits and burdens, and its naive to pretend that its always 100% good.

Should we allow our entire auto industry to be outsourced if free trade would make cars 5% cheaper?

Should we allow our entire steel industry to be outsourced if free trade would make steel 5% cheaper?

Should we allow our entire textiles and garment industries to be outsourced if free trade would make clothing 5% cheaper?

Hey, why not have free trade in labor, and ship illegals here to work in our factories exempt from the usual US labor and environmental laws rather than outsourcing the industries?

Free trade has been destroying hundreds of thousands of US manufacturing jobs over the prior years, and contributed to the greater stratification of American economic classes as middle class manufacturing jobs disappear. In a perfect world, Americans migrate to other activities and the efficiencies balance out, but tell that to thousands of men and women in their 40s or 50s whose manufacturing livelihoods are now gone or whose pensions have been wiped out by the failure of their long-term employer.

The flip side is wasteful protection of inefficient industries, which is Yomtov's point to view trade in a vein similar to technology -- why preserve an inefficient technology/industry? But if only it were that simple.

Who among the gainfully employed here are willing to be laid off right now (with no guarantee of a job anytime soon, and certainly no gurantee of a job paying as well or better) for the promise that their neighbors and the world at large will profit?

Me. I'm kind of selfless like that and, anyways, I can *always* find a better job.

The other question to ask is, “What has free trade ever done for them?”

Charles Bird,

-“Any treaty that lowers trade barriers reasonably is a positive step for the United States and its trading partners, and I hope it gets passed.”

Indeed it is. But perhaps it is a negative step for the economic well-being of those countries who cannot compete with US businesses. This is the power factor that seems to be so absent from your analyses.

“If there are well-identified groups that suffer because of the agreement, the answer is to help those suffering, not kill something that vastly benefits everyone else.”

In light of the two quotes above, how does your support of “free trade” mesh with spreading democracy? Why the qualifier, “well-identified”? Who do you mean by “everyone else”? How has “free trade” benefited Mexican maquiladora workers or Jamaica’s domestic industry and agriculture? What if “to help those suffering” means raising trade barriers?

To follow on Edward’s comment, who is willing to trade their job (so they can feed their families, put their kids through school, etc) for “more freedom”? Should this be the choice presented by the effects of “free trade”?

In light of some of your remarks about AI, how do you support your citation of the Heritage Foundation?

There’s a good argument to be made that the hallmark of 20th century America has been the triumph of capital over labor. One sees the justification here.

Good call, Radish, Bob McManus, and kstrna.

Uruguay still has a strong welfare state and the Heritage people don't seem to realize that in Latin America state-ownership is rooted far more in nationalism than left-right political ideology.

Pinochet did not privatize CODELCO, Chile's state copper company and in fact, had 10% of the earnings directed to the military (which may explain his millions).Lagos wants to privatize CODELCO. Lula has beaten the US on cotton subsidies for farmers, but Petrobras has among the largest investments in Bolivia. The real world again shatters conventional thinking.

There’s a good argument to be made that the hallmark of 20th century America has been the triumph of capital over labor.

If so, maybe you could tell us what the argument is.

The analysis is a little bit oversimplified. Free trade has its benefits and burdens, and its naive to pretend that its always 100% good.

Should we allow our entire auto industry to be outsourced if free trade would make cars 5% cheaper?

Should we allow our entire steel industry to be outsourced if free trade would make steel 5% cheaper?

Should we allow our entire textiles and garment industries to be outsourced if free trade would make clothing 5% cheaper?

Probably, maybe and probably. My only reservation about steel is in the worry about tank creation if we need it later.

Change it to 10% and my answers are yes, maybe and absolutely.

But perhaps it is a negative step for the economic well-being of those countries who cannot compete with US businesses. This is the power factor that seems to be so absent from your analyses.

Open trade is a two-way street. Just look at Taiwan, Hong Kong, Singapore, South Korea and the other Asian nations. That's the beauty of it, it benefits both sides.

Uruguay still has a strong welfare state and the Heritage people don't seem to realize that in Latin America state-ownership is rooted far more in nationalism than left-right political ideology.

Randy, read what Heritage actually wrote. They get the favorable score despite hanging on to inefficient state monopolies.

Me. I'm kind of selfless like that and, anyways, I can *always* find a better job.

God Bless you, B Alexander...OK, that's, er, 1. Anyone else?

I don't think I'd call what we've been doing with the Asian nations open trade. Theyve made out pretty well precisely by having trade barriers to the U.S.

That's the beauty of it, it benefits both sides.

Unless of course you look at atomic rather than aggregate entities, in which case (as duly noted by Messrs. Hufbauer and Grieco as well as many others) it's actually a liability for both sides. At least in the modern context and in the time frames that have been observed.

It's been empirically clear for some time (long before this article) that in general, the benefits accrue to aggregate and multinational entities at the expense of local and individual entities. Knowing that, the remaining questions are a) is that more a consequence of implementation details of particular FTAs or of free trade in general, and b) whether that selective accrual is desirable or undesirable at that scale and in the context of other liabilities and benefits of free trade. You don't have to be an economist to grasp that -- just have a passing acquaintance with how science works and what good governance is all about.

This isn't my department, but it seems that historically, the answer to question (a) is that selective accrual is a characteristic of non-local trade in general, which is heightened or mitigated by other factors. "Globalization" is an issue because the risks and expenses associated with non-local trade have fallen so far from their historical levels. Those costs and risks were primary constraints, discouraging long-distance trade in goods of very low or very high value. Like daily wear clothing, or high-denomination currency.

That's no longer the case, but we don't know what happens now. The historical precedents for container ships and wire transfers took place at a scale that was so much smaller than present time that they're impossible to apply with any confidence. Real globalization would mean "local" economic structures operating at a transnational scale, and we haven't got a clue what would happen, because we are building something that looks like a mouse but is the size of an elephant. For those of you who aren't biologists, this doesn't work -- a mouse's normal skeletal and circulation systems would break down completely past about small cat size. At best we wind up with something that might look a bit like a mouse but is very different functionally (i.e. something that has to live in water because its skeleton can't support its own weight and it can't dissipate heat fast enough otherwise).

So rave all you want about free trade, but know that at the end of the day, the global economy isn't really a village economy at a larger scale. Yes, the basics are the same. But expecting the balance of benefits and liabilities at the larger scale to be the same as the smaller scale is like expecting GDP to serve as an accurate measure of the health of an economy.

Radish,

I confess that I really don't understand your 1:55 comment. Could you lay out your argument a bit more precisely. It might help if you offered some support for your assertion that

"It's been empirically clear for some time (long before this article) that in general, the benefits accrue to aggregate and multinational entities at the expense of local and individual entities."

Jamaica?

Charles,

I read what they wrote. I also know that Uruguay just elected another leftist leader who is seeking to move away from the Washington Consensus and is seeking a stronger role in Mercosur. Heritage didn't mention that, in fact the president's name is not mentioned in the article at all.

Bernard, sorry, I see that that was kind of incoherent, and my previous reply disappeared when my browser crashed while trying to find cites for corporate income. Trying to rebuild:

1) The main point was the mouse business. Advocates of "free trade agreements" tend to view undesirable consequences as manageable side effects rather than inherent attributes. That may or may not be correct for any given consequence (the devil is in the details) but in biology and in complex systems in general, assuming that a particular variable will scale linearly is usually a mistake.

2) Re selective accrual, I think Bradford, Hufbauer and Grieco make a pretty persuasive case all by themselves, and I couldn't find a better cite before I crashed. I should have said "income" where I said "benefits," and "empirically" was definitely a bad choice. I'd like to retract that if I may, because I don't want to chase cites, though I'm pretty sure that I've seen them...

That said, the money quote (pun intended):

...a gain in annual income of about $10,000 per household.

Hm. That ain't chicken feed. So the economy is about $1T larger than it would be without the free trade arrangements they examined. Give or take, and depending on which methodology you look at. Unfortunately, that $10k per household is an average with no distribution curve, so we have to speculate. We can be pretty sure that it wasn't anything like flat because an extra $10k per household across the board between 1947 and 2003 would be clearly visible in the income equality curves for the US.

Normal US income distribution is pretty much a fluctuating ell, so a null hypothesis about how free trade income is distributed gives us the same curve and implicitly supports my point.* Any other hypothesis has to stipulate that the distribution of free trade income affects the collective income distribution curve in some way. Since NAFTA is pretty much the granddaddy of FTAs and it doesn't seem to have mitigated the ell any (as you would expect, in the event that income from FTAs is distributed along a different curve), I think I'll stick with the null hypo for now...

* At least if you accept a) that increases in corporate revenue accrue selectively to individuals who already receive a higher income from the corporation, and b) that the parties engaging in trade are more likely to be corporations than individuals. I'm not real impressed with "better telephones" as a substitute for cold hard cash, because the "better telephone" distribution curve is flat, whereas income is not...

I also know that Uruguay just elected another leftist leader who is seeking to move away from the Washington Consensus and is seeking a stronger role in Mercosur. Heritage didn't mention that, in fact the president's name is not mentioned in the article at all.

They call it the 2005 Index but they released it on January 4th" of this year, so the report wouldn't have picked up the March election. We'll see what they have to say in the 2006 edition.

Fair enough.

Radish,

A few comments:

While a global economy may not be a village economy writ large, neither is a national economy a village economy writ large. The major shift in scale here, from the point of view of the US, is village to national, not national to global. Total US trade, the sum of exports and imports, is less than 30% of GDP. That's mouse to bigger mouse.

I do not know how gains, from NAFTA or other agreements, are distributed. This seems like quite a difficult problem to solve, because of the many confounding factors. However, if I understand your comment about telephones, it is quite wrong. A reduction in the price of goods is an increase in real wages. It is just the same as hard cash.

Reduction in price of goods == increase in real wages for most goods beyond doubt, and for some goods that even benefits individuals selectively. But on the whole that is not a selective process. When phones get cheaper your real wages go up independently of where you work or how much money you make (assuming that you buy phones of course). That is a flat distribution. Does an increase in quality of goods == increase in real wages? Not a fruitful question IMHO, because of the need to quantify quality. That's one of those places I'd rather not go.

I agree wholeheartedly that "this seems like quite a difficult problem to solve, because of the many confounding factors," but I think that approximate solutions -- of the level of reliability of the paper discussed here -- exist, and I think the case for an ell-like distribution is pretty strong by default.

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