Friday, June 10, 2005


Maxspeak is linking to me...better write something about trade...

Maxspeak's post--which only points out there exist alternative views on the role of trade--is sparking a backlash in the otherwise-liberal blogoshpere (DeLong, Yglesias). It utterly behooves as to why. That Max is not even attacking the free trade orthodoxy and yet it evokes such visceral responses indicates just how deeply the free-trade pathology is rooted.

To reiterate my own viewpoints, I am neither here nor there on trade. In principle I am agnostic about "trade," though in practice I think there is a lot people should be worrying about.

I am with Max when he says, "For some reason, markets that straddle national borders are sacrosanct, while those that do not are fair game for modest regulation, such as the minimum wage, child labor, etc." There should be no question that specialization and division of labor are productivity and welfare enhancing--individuals are better off specializing in producing one thing and then using the product of their work to trade for other things that they need. But it is not clear to me why we expect welfare gains to be different if, for example, an individual in California chooses to trade with someone in Alabama than someone in, say, Korea.

As I have mentioned to Brad before:

Economists who wax eloquent on the thousands-of-years-old tradition of globalisation ("Globalisation means we share jobs as well as goods" August 27) often overlook the fact that powerful nations used cannons and bayonets to set the conditions of global exchange in their favour. The question now is not whether countries should integrate their economies, but under what rules.

In the past, raw force established the rules of trade and investment. Today, they are made behind closed doors at the World Trade Organisation, the International Monetary Fund, the World Bank, and other multilateral institutions far removed from democratic accountability, transparency, and participation by people whose lives are impacted, where asymmetric power ensures the rules are similarly skewed.

It is entirely reasonable to believe both that trade is valuable and that the rules and the process for making rules inadequately serve the goal of widely shared prosperity…

I’ve spilled much ink in the past about the role of power and politics in so-called free trade (here, here, here, and more). If we ignore for a moment how we got into what Marx called, "the realm of Bentham," the standard model of trade on which Brad (and perhaps unwittingly Matthew) are basing there arguments is all welll and good, but it only holds up under extremely restrictive (and often unrealistic) assumptions about how the world works.

* they assume full employment at all times everywhere--both of people and of capital (i.e. full capacity utilization).
* they assume that capital is immobile between countries
* they assume no economies of scale
* they assume every country has access to the same technology
* they assume trade is always balanced (this must be the case when capital is immobile because there can be no international borrowing and lending to finance trade deficits)
* they assume perfectly competitive input (implied by the first assumption) and output markets

What this model tells us is there can be static gains from trading, meaning a one time change in overall welfare from reducing barriers to trade. In other words trading should not change the long-run growth rate, only the level of output: it increases the size of the pie. (Of course it is possible to increase growth rates from importing technology, but this is not allowed in the assumptions of the model outlined above, so I am getting a little ahead of myself). Protectionism then, improves the lot of a sector or sectors at the expense of the whole. While not really part of the model, those who observe that trading entails more competition in the market argue that trading yields dynamic gains as well, inducing producers to up productivity. But here is the evidence is unclear which way causation runs: does trading cause firms to be more productive or is it that more productive firms tend to trade?

What Matthew Yglesias doesn't know is that these are the assumptions underlying the study he points to on the benefits of trade. Part of the reason economists make these assumptions is that it makes the math much easier to do in the models that predict how great trade is for everyone. As Peter Dorman illustrates, what comes out of the magicians hat is determined by what the magician puts in the hat in the first place.

When we start relaxing the assumptions outlined above, as we can clearly see they do not reflect the reality of our world, and start introducing other realities such as highly volatile exchange rates or the fact that most trade occurs within the related subsidiaries of multinational corporations, things get a little stickier. It is no longer clear that free trading always does grow the pie. Accounting for the “polluting politics” that DeLong decries, clearly someone is winning from “free” trade, but when the assumptions are relaxed we again can find that a sector or sectors are benefiting while the whole is losing.

Just about everyone these days will admit that trade produces winners and losers, usually while muttering some postscript about the need to improve our system for compensating the losers and helping them adjust to life as a loser. Lip service does not exonerate the mutterers, but in fact we live in a society where the losers compensate the winners—just pick up any Krugman column on the budget or Social Security to see this point. Ponder this: the Stolper-Samuelson theorem of trade predicts that trade in the US will increase the wages of skilled workers (the relatively abundant factor) and decrease the wages of unskilled workers (the relatively scarce factor). If we take common conventions and define unskilled workers as those without four-year college degrees, this means that some 75 percent of the American workforce stands to have their wages decreased by trade.

Economists don’t really have very good ways to measure the direct effects of trading on peoples’ living standards, and when they try to do it they results suggest that, low and behold, trading doesn’t have all that big an effect. For example, the World Bank forecast of gains from the pending Doha Round of trade liberalization predicts income gains of 1.5% for Sierra Leone. In other words, by 2015 Sierra Leone’s per captia income will be $583 without Doha and $592 with Doha. Woohoo! (Note that this is based on a similar type of model that Yglesias cites and that Dorman debunks).

On the US side, economists estimate that trade accounts for anywhere from roughly 10-50 percent of the total of roughly 30 percent decline in real wages since the mid-1970s. The rest of the decline in wages goes pretty much unexplained, but someone came up with a catchy name for this residual effect: “skill-biased technological change.” (Yes, soon to be embossed on little yellow rubber wrist bands and sold for a dollar a pop at Wal-Mart checkout counters). Despite not really being able to measure the effects of technological change, it soon became mantra that this thing which no one could explain must be due to the technological change that we can’t measure.

But there are other things we can’t measure that may also be related to free trade. I’m talking about threats. When capital is freely mobile to locate investment/production anywhere of its choosing, communities will bid against each other in terms of wages and tax breaks in order to attract investment and jobs. This can result in eroded wages and social safety nets even if no trade or movement of production/jobs takes place. Even though this decline in living standards may be due to globalization, because no trade or foreign direct investment occurs, economists have a hard time measuring its effects. This phenomenon can drive down wages in North-South competition as well as in South-South competition.

Over the past decade or so, countries comprising roughly half the world’s population have decided to rejoin the world community: China, India, the former Soviet Bloc, etc. All things being equal, this is a good thing: good for the people of those countries, good for the world community. But it also introduces vast swathes of really poor people into the pool of global labor supply from which globally mobile capital can draw. That’s one hell of a “Reserve Army” effect—a lot more people to through into the bargaining.

Implicit in the DeLong/Yglesias/et. al. argument for trade is that these people are ignorant to their best interests—GASP! they are not acting as rational utility maximizers! They are too ignorant to know what is good for them, and that’s why it is so critical that unions and other democratic civil society groups need to be shut out of the decision making process in which international trade and investment policies are created.

Not only is this view insultingly arrogant, but I think it is plain wrong. I prefer to give people more credit. They know full well (or at least strongly suspect) what trade means to their living standards and livelihoods and are acting rationally to oppose it (or, in the case of bourgeois liberals like Yglesias, to support it).

I am utterly baffled as to how DeLong, Yglesias, Krugman, and many, many other smart and progressive people can see and work to illuminate the royal screw job embodied in almost every economic policy pursued by the Bush administration, but when it comes to trade they put it in a “lock box” (sorry Al) and defend it at all costs. Is it so difficult to take that last step?


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