Sunday, December 24, 2006

Here we go again: Misplaced angst over free trade

Free trade has been a favorite punching bag for populists since globalization began near the end of the 19th Century. You read correctly. With the invention of the telegraph and the steam engine, global trade soared to levels that were not surpassed until the late 20th century. Duing the first globalization, populists tried to erect walls to trade under the erroneous belief that it would salvage the American farmer, who was being pushed into obsolescence by technology, not foreign trade. As economist Paul Krugman has argued*, neo-populists have, with striking similarity to their predecessors, rallied against free trade in order to salvage the American industrial worker, whose job has largely been mechanized, not stolen by foreign countries. I had hoped the anti-globalization movement would deteriorate owing to its specious reasoning and dirth of empirical support, but as pundits like Lou Dobbs and a recent op-ed by two Democratic congressmen in the Washington Post demonstrate, that is simply not the case. As the old adage goes, there is nothing new under the sun, and the latest assailments against free trade are merely updated rehashings of their tired ancestors. Below, I dissect the op-ed by Democratic congressmen Byron Dorgan and Sherrod Brown, who allege that free trade is responsible for the "shrinking middle class, lost jobs and exploding trade deficits." I apologize, but this post becomes a bit redundant. There simply are not enough synonyms for "wrong" and "in reality..."

1) Shrinking middle class

As an empirical fact, income inequality is increasing, though not because the middle class is going away, but because the rich are getting richer while everyone else stagnates. The authors do not make a clear case for why free trade causes the rich to become richer, but reading between the lines, they seem to suggest that the "new mobility of capital and technology" makes it possible for rich capital owners to export middle income jobs to low-income countries. Given the fact that international trade with low-income countries accounts for roughly 10% of GDP today, that seems unlikely. Paul Krugman provides some real reasons, (though I disagree on some points), why income inequality is rising. The bottom line is that the return to capital has increased contemporaneously with increased international trade (though the relationship is not necessarily causative), but capital is not evenly distributed. Rather than using fallacious reasoning to oppose free trade, as the congressmen do, progressive think tanks have proposed inventive ways to increase the equality of capital ownership without losing the gains from trade.

2) Lost jobs

This is as empirically wrong as it is illogical. First of all, the unemployment rate is low and has been throughout the period of increased global trade. The discrepency between perception and reality is propogated by visible, large layoffs that get a lot of press and the obscurity of new hiring done a handful at a time by nascent, growing firms. As economists have shown over and over, free trade has a negligable effect on jobs.

3) Exploding Trade Deficit

Once again, as an empirical fact, the US has a large trade deficit, (though it has recently undergone a precipitous decline), but the congressmen misplace their blame. They claim that free trade agreements "enable countries to ship what their low-wage workers produce to the United States while blocking many U.S. products from entering their countries." While free trade agreements allow us to import cheap goods from other countries, they also allow us to export the high-tech goods in which America specializes. The unspecified claims that other countries block American imports seems unprobable. How would countries brokering free trade agreements with the US (e.g. Latin America, Jordan, Israel) be able to strong arm our negotiaters? If anything, free trade agreements should favor hegemons like the US which have immensely greater political clout. In actuality, the rising trade deficit is largely due to increasing price of oil, which based on my own estimates, constitutes roughly 35% of our trade deficit.

Although Dorgan and Sherrod's polemical against free trade focuses on labor issues, they sprinkle in unsubstaniated claims about a global "race to the bottom" on environmental standards. Detailed analysis does not uphold their claim. Exporting firms are not dirtier than firms that sell domestically, and are often cleaner. Anti-globalization types cite countries like China that have greatly increased their pollution in response to export-oriented economic growth. Of course, we have to ask the counterfactual. If an equal amount of growth had occurred in domestic industries, would pollution be less than it is now? I doubt it. It is hypocritical for rich countries that have profited from decades of pollution to hold back poor countries undergoing rapid development. Walls to free trade will not reduce pollution in countries like China without lowering their standard of living. Instead, the US government should work with countries like China to increase domestic environmental protection laws to meet the needs of its citizens. Indeed, this is already happening, albeit too slowly, and the US is poised to begin exporting green technology to many developing countries looking to reduce their pollution. The congressmen and other neo-populists need to (re)examine the facts and revise their shoddy reasoning. Once they do, it will come as no surprise that free trade is conducive with progressive policy, a stance that think tanks like the Center for American Progress, the Progressive Policy Institute, and the Brookings Institution have advocated for years.

As a rhetorical tactic, I have cited left-wing proponents of free trade, to disabuse people of the notion that trade policy can be readily seen in a simple left-right binary. Of course, conservatives and liberatarians also advocate free trade, but tend to be more bilateral than multilateral and dismissive of some potentially destabilizing effects of globalization. Republicains also have their own form of neo-populism in the form of protectionism (e.g. Bush II's steel tariffs) and anti-immigration. Increasingly, both parties have elected to misinterpret and abuse economics to the detriment of trade liberalization. Dorgan and Sherrod do a disservice to liberals, their country, and the world to take part in the anti-free trade movement, rather than focus their efforts on policies that will actually make progress on liberal goals.

* Search for article titled "The uncomfortable truth about NAFTA: It's foreign policy, stupid." Though he addresses NAFTA specifically, many of his arguments apply to current trade issues as well.

No comments: