Prices, Trade and Why People Care

Ezra Klein follows up on Dani Rodrik and notes that while trade lowers prices for people who buy things (everyone), for those who make things it can be bad, because it raises the relative price of exports and make them less competitive:

Put broadly, opening ourselves up to trade is really good for people who buy things, and less good for people who make things. Now, a lot of folks both buy and make things, so the story is complicated. But one reason the elite classes are so hegemonically enamored with trade is that they don’t really make anything at all, and so experience none of the downsides of trade. As Dean Baker likes to point out, we’ve structured our trade deals such that unskilled manufacturers face a lot of international competition while reporters, say, face almost none. But if you think about how reporters deal with layoffs and cutbacks — policies pursued, like trade, because they save money and increase efficiencies — you can basically predict how they’d feel about trade if their profession was suddenly outsources to Indian reportage firms.

But while the “elite classes” don’t experience the downside of their exports becoming less competitive, Ezra is conflating what happens to the prices of what people consume (they go down for everyone) and what happens to the jobs and wages when trade is liberalized. There’s some pretty good evidence showing that since liberalized trade lowers prices of non durable consumer goods and since the poor spend a much larger proportion, they benefit disproportionally (”inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period.”) If you were Will Wilkinson, you could probably make a Rawlsian argument that liberalizing trade is morally required by the difference principle in light of this analysis. But let’s get back to Ezra’ argument.

The second point, on how people’s personal situations vis a vis trade and international competition affects their view of liberalization, there’s been some pretty good research on this question. Dani Rodrik wrote a paper arguing that, not surprisingly, the more one benefits from trade, or is already better off, the more likely they are to support liberalization:

Preferences over trade are also correlated with the trade exposure of the sector in which an individual is employed: individuals in nontraded sectors tend to be the most pro-trade, while individuals in sectors with a revealed comparative disadvantage are the most protectionist. Third, an individual’s relative economic status, measured in terms of either relative income within each country or self-expressed social status, has a very strong positive association with pro-trade attitudes. Finally, non-economic determinants, in the form of values, identities, and attachments, play an important role in explaining the variation in preferences over trade.

And why this analysis could very much apply to the journalists (and bloggers!), it most notably does not apply to the very economists whose work these advocates and analysts cite. Bryan Caplan points out that economists, despite having high job security, are incredibly open to foreign competition. To crib form him, Dani Rodrik is a Turkish born professor, and the academy is pretty open to foreigners, especially in social science as math-heavy as economics.

I don’t really know what the point of all this is, but it seems interesting and relevant nonetheless

Some Quick, Possibly Contradictory Thoughts on Obama and Trade

It’s quite unfortunate that so often, ones support for open, free trade is simply an accounting of what trade agreements that candidate supports. And while there is a correlation between supporting bilateral trade agreements and supporting more free trade generally, they are very much not the same. For one, bilateral FTAs often mimic the worst aspect of protectionist policies: they tend to reflect certain industries or preferences in the realm of things like IP protection, and because of their relatively small-bore nature, they are easy to manipulate (you think the sugar industry is taking a big hit with CAFTA? Dream on brother). Also, whether or not we sign an FTA with another small country is unimportant when it comes to the question of global trade liberalization. Tariffs are already pretty low on most of the stuff we buy from most of our major trading partners, and the big barrier to further integration is agricultural subsidies, which bilateral FTAs never reduce. So the question for free traders becomes two-fold: who can reinvigorate Doha, and who can reduce agricultural subsidies? (the questions are, of course, interrelated)

John McCain, I’m sorry to say, is way ahead on both of these fronts. He voted against the farm bill and keeps on saying what an avid free trader he is. But he doesn’t appear to be approaching the issue in a very sophisticated way. I was watching Bloomberg this morning with my dad, and McCain was talking about a free trade agreement between the EU and the US. This isn’t a particularly serious proposal, seeing as tariffs on manufactured goods are already low and that the major barrier to the Doha round isn’t tariffs (though the annual trade-flare up between the two blocs doesn’t help), but the high agricultural subsidies in both the EU and the US. And since the pressure for subsidy reduction comes from middle-sized states like Indonesia and Brazil, there’s no reason to think that the US and EU would agree to reduce their own subsidies in an agreement that they were the only parties to. McCain’s proposal for an EU-USA FTA is to free traderism as Mitt Romney’s “double Gitmo” statement was to conservative national security policy: something that signals support for a particular vision, but isn’t a serious policy option to be implemented.

Obama’s proposals to renegotiate NAFTA are similar: a totally radical, silly suggestion that will never come to fruition. But the signaling effect is still worrying, but it’s still only a signal. HIs rhetoric could be much, much worse. Considering that most economists say that NAFTA was essentially a wash (marginally positive, but nothing too special), tinkering with it won’t be the end of the world. There’s also much more protectionist rhetoric out there that Obama could be using. For example, he could be supporting something along the line of a 27.5% tariff on Chinese goods. Even having a presidential candidate talk about such a bad policy could very well be a disaster, and there are many people in the Democratic coalition who want Obama to make movies like that.

Also, trade skepticism is, ironically, the post partisan issue. One can look at how Lou Dobbs is popular among both liberals and conservatives, that the most sucessful third party candidate since Teddy Roosevelt ran on a protectionist platform, or that 60% of Republicans say that trade has been bad for the US and support restrictions on foreign imports (Dan Drezner has done good scholarly work on this question). In short, if Obama is the voice of trade populism in a time where foreign trade’s public and scholarly reputation has never been lower, that could be reason for some sort of optimism.

Obama seems to be caught up in his own web of spin, pandering and honest convictions. Centrist, trade oriented elites in the media and think tank world won’t forgive him for his NAFTA rhetoric, while the Sirotas and labor-types don’t think he’s gone far enough. I think it’s very possible that Obama doesn’t really know what he thinks about trade, or at least what the most politically palatable messaging for his vision is.

So when Roger Lowenstein says that Obama will have to walk back his protectionist rhetoric because our low-dollar induced surge in exports, it’s unclear what exactly Lowenstein thinks will happen in an Obama administration. Brad Delong put it best, “Whether we get export-led growth depends 100% on the value of the dollar and 0% on whether we conclude new trade agreements.”

It could be very well that I’m desperately searching for ways to give Obama a pass on rhetoric and policies I find highly objectionable, but I also think there’s considerable nuance that, when ignored, does not serve free traders very well.

Selective Protectionism…Does It Help Poor People?

Ezra Klein notes that many “free traders” are perfectly happy to see free trade and mobility in inexpensive goods and in the jobs of those in the working class, but when it comes to expanding trade to include those middle class and professional jobs, we see some “selective protectionism”:

Dean Baker has long argued that there’s no such thing as free trade in this country. Rather, what we have is a trade regime that pushes the prices of manufactured goods down by encouraging competition for downscale jobs but keeps the prices of professionalized services high by protecting skilled industries. It’s essentially what you’d expect if you were Karl Marx and you were trying to figure out what a trade policy created by the economic elite would look like.

But today Dean Baker has a nice term for these folks that I’ve not heard before: What we’ve got, he says, are not “free traders,” but “selective protectionists.” And it’s true. Low wage jobs? Trade em, and stop being so sentimental. Law jobs? Protect ‘em. Software patents? Protect! Drug patents? Protect! Hell, you can’t even be president if you’re born outside this country. But just think how little a Chinese president would work for! And he’d probably put in longer hours, too.

First off, there are some problems with this analysis. We are starting to see professional jobs - software engineering, x-ray reading - that are already ending up in India. Rememeber Alan Blinder’s concern that 40 million jobs could be offshored? He notoriously started to raise concerns about offshoring and the like when he realized that middle class jobs could be departing for overseas. Or look at Dianne Feinstein, a bona fide free trader, who constantly pushes for letting more foreign high-tech workers come into the US.

But generally, Klein and Baker are right: we’re substantially more likely to increase labor, employment and financial mobility in those cases where professionals aren’t immediately worse off. What’s odd, however, is that where we have embraced trade full heartedly, it has greatly reduced the costs of consumption for poor people. It is generally the rich, or at least middle and upper middle class, who consume the products of those sectors that we haven’t liberalized as much. I would, of course, like to see full-spectrum liberalization
of all types of labor and less restrictive IP regulation, but it’s certainly possible that what trade liberalization we have seen, despite Klein describing it as the type of policy one would expect “if you were Karl Marx” could disproportionally be delivering gains to the poor…

Bilateral Trade Agreements Are Not Part of a Internationalist Agenda

David Frum, in an essay critiquing Matt Yglesias’ book, argues that the Bush administration has actually made steps towards strengthening an international, rules and institutions based order:

George W. Bush, the supposed unilateralist, has thus far signed Free Trade Agreements with Australia, Bahrain, Chile, Colombia, Korea, Morocco, Oman, and Singapore.

I totally agree with Frum that trade liberalization and the strengthening of cooperative, rules-based instituions like the WTO is a key part of any liberal internationalist agenda, but signing a bunch of one-off trade agreements hardly advances any internationalist agenda.

That’s because the internationalist trade agenda is one based on binding rules that all states - big and small - must abide by. That’s why, according to most economists, it’s only Doha or other WTO rounds that establish across the board reductions in trade distortions like agricultural subsidies that matter. And the Bush administration has pointedly refused to expend much political capital on bringing our policies more in-line with a more liberalized trading order. In fact, one of their first acts was a bruising example of trade unilateralism, their imposition of steel tariffs.

In fact, it could well be true that a series of bilateral trade agreements could set up the cause of international, binding trade rules. Jagdhish Bhagwati, a cheerleader for free trade if there ever was one, has argued that bilateral trade deals don’t advance “liberalization” so much as the imposition of American interests on small states who aren’t in much of a position to negotiate on even ground with the United States. In many cases, bilateral trade deals have allowed the US to bully smaller states into adopting US intellectual property or capital control restrictions, as well as splintering coalitions of smaller states who defect to get preferential trade deals with the US, thus forfeiting their power to advocate for more even-handed negotiations at the WTO.

There is more to bilateral trade deals, of course, than whether or not they advance trade liberalization. At this point, the US may have no damaged the global trading fabric with their pursuit of bilateral FTAs and Doha could very well have gone into the realm of impossibility that pulling up the ladder before Colombia doesn’t make sense. But that still doesn’t mean Bush gets credit for advancing trade liberalization - because he hasn’t.

Who’s The Belligerent Unilateralist Now!

Nick Kristof makes the best possible liberal case for the Columbia Free Trade Agreement, noting that it would secure permanent duty free access to American markets for Colombians, thus increasing the wealth of poor Colombians working in export oriented industries. All of this is well and good, while the agreement would probably do little to either economies, on balance, trade liberalization and a steady regulatory environment are good things.

Where Kristof goes a bit off base, however, is when he talks about the agreement’s broader implications for our place in the world as a cooperative member of the international system. Kristof says that “If the Colombia free-trade pact is rejected and the U.S. backs away from its commitment to expanding trade, that may be the Democrats’ equivalent of Kyoto, signaling a retreat from internationalism.” Kristof is right to say that pursuing trade agreements and liberalization is just as much a part of “internationalism” as arms control or any other multilateral international agreements, but C-FTA isn’t comparable to Kyoto, or even other trade agreements. That’s because the Bush administration has managed to push plenty of FTAs - Singapore, Jordan, CAFTA - and yet didn’t get any points for being trade internationalists. That’s because these trade agreements are negotiated on a bilateral basis in which the US doesn’t have to make many concessions and mostly gets to impose their intellectual property standards onto poor countries desperate to trade with the US. A key part of internationalism is making meaningful concessions to other members of the international community, which the administration is not particularly urgent to do – in any arena.

The trade liberalization that Kristof is talking about is one that the Bush administration has pointedly refused to pursue. That would the reduction of agricultural subsidies as part of pursuing some sort of treaty or agreement coming out of the Doha round. Bush has not done this. He hasn’t tried to reduce subsidies or approach Doha with anything resembling urgency. Instead, we’ve been signing these one-off trade agreements that don’t do much to eliminate the few remaining structural barriers to total trade liberalization. Compared to our progress on Doha, or the lack thereof, whether or not the Democrats torpedo C-FTA is really small potatoes*

* It’s worth nothing, however, that if Clinton or Obama were to follow up on campaign rhetoric and unilaterally demand renegotiation of NAFTA, that would be the type of bad global citizenship that Kristof would be right to criticize.

Hard Truths

It’s really unfortunate in American politics that Democrats can’t say things like “when people perceive their economic situation as good, they are less likely to resent foreigners, turn in on outsiders, turn to religion, see economics and politics as a zero-sum game, and, in general, they become more liberal, and that’s a good thing.” The truth is, for all people say that they truly believe that immigration is bad, that the Chinese are destroying our economy, that they really believe in Christ, it’s just true that when people see themselves as doing well, they are more liberal and cosmopolitan. But, of course, we live in America, where Democratic politicians can’t say such things because it’s “elitist” and “out of touch.” And because Republicans have set the tenor of the national debate so, the fact that Obama said these things in San Francisco will make it all the worse.

But, while I defend Obama, it’s also true that he has succumbed to these same illiberal instincts in some of his rhetoric on trade. When he called Clinton a “Democrat’ from Punjab,” how was that different than Republicans who call their presidential nominee “Juan McCain”? Marc Ambinder asks, “If working class Americans are against free trade because of the irrational transfer of their resentments, what’s Obama’s excuse?” I, for one, do not know.

Reengaging with the World

I hate to say it, but Glenn Reynolds is 100% right when he says that Obama or Clinton’s claims to reengage with the world are rendered slightly suspect when they are so revanchist on trade.  Especially because the renegotiation of something like NAFTA would be incredibly offensive to both Canada and Mexico, not to mention totally pointless.

As John Judis points out in his excellent article on the entire issue, NAFTA has had no signifigant effect on jobs or wages in the United States.  Compared to other sources of new foreign trade since it was signed as well as technological changes that have occured in the last decade, NAFTA is a drop in the bucket - not to mention other free trade agreements like SKFTA (south korea), CAFTA or the one we’re negotiating with Columbia.  Another thing that’s rarely mentioned in the fact-free, open demogogery zone that is most debate about trade agreements is that on the one thing that Obama and Clinton claim to want to do - renegotiate labor and environmental standards to make them stricter - is actually a pointless provocation of Canada and Mexico:

It’s hard to see how this would provide a big boost to American workers. Mexico’s–and Canada’s–labor laws are actually more progressive than U.S. laws. Mexico, for instance, has ratified 78 of the International Labor Organization’s core labor standards, while the United States has ratified only 14. Besides which, in an interview with Kevin Hall from the McClatchy newspapers, representatives from neither the Clinton nor the Obama campaign could name a single dispute in which tougher labor or environmental regulations would have benefited American workers and manufacturers.

If workers and jobs were actually streaming to Canada, Mexico, Costa Rica, South Korea, Jordan or any country we’ve recently signed a trade agreement with, than maybe trying to punish Mexico by importing first world labor standards would make sense, but that’s just not happening, nor should it particularly. I can only hope that all this anti-trade bluster is just primary season pandering, and at best, we just won’t have any massive rollback on trade.  Remember how angry we were when Bush pulled out of the ABM treaty or when he completely disregard for Kyoto and the NPT?  I see no reason that, as far as increasing our soft power and international influence, trade agreements are any different.

Obama + Rahm = Awesome

The one part of Barack Obama’s speech that worried me a little was his insistent that all races could be unified against the threat of evil CEOs outsourcing jobs.  Never mind the irony in saying that the best way to heal over divisions is to collectively scapegoat foreigners - not to mention that outsourcing and trade are only a small part of job loss - it seemed as if Obama’s political imagination was limited to the possibility that a ethnically homogeneous society could only unite around another foreign other.

Well, in comes Rahm Emanuel with a WSJ op-ed arguing for a “new social contract with America’s workers” that would put to rest anxiety about trade.  This is the language that I’d like to hear Obama use.  For many on the left-wing of the party, as well as for rust belt Democrats, trade is said to play a disproportionate role in the economic evils afflicting the middle class.  This is despite the middle class squeeze - the cost of health care and education rising while median incomes stagnate and shrink - accelerating during the Bush administration, with no huge break through trade agreements or large increases in foreign trade.  It’s just economic nonsense to say that free trade agreements have played a proximate, or even a noticeable role - especially compared to other factors - in the economic malaise that many Americans find themselves in.

Another bad thing about focusing on trade is that it drains political energy for actually thinking about real policy solutions to alleviate inequality and stagnating middle class incomes.  If you’re obsessed with NAFTA, that’s less energy spent on health care, education, universal savings, green jobs or any policy that will actually help improve the prospects of the middle class. Not to mention the fact that trade benefits everyone and also has salutary geopolitcal effects.

The problem is that many free trade advocates are Republicans who don’t really care for large scale programs to improve  economic security and oppurtunity.  But there are plenty of Democrats out there who really want to make the comprehensive free trade case.  What’s nice about Emanuel’s piece is that it puts the cooled trade rhetoric and “new social contract” rhetoric literally side-by-side.  It’s this type of synthesis, where we don’t blame trade or foreigners for our problems and instead collaborate on policy solutions that Obama (and Clinton for that matter) ought to be using.

A Good Book

I’ve written about Robert Bryce’ broadsides against “energy independence” before, and I was always juiced to see someone taking down an idea that seems so innocuous, but is just so breathtakingly dumb.  Well, he’s written an entire book, appropriately titled Gusher of Lies.  I probably won’t read it, but still, everyone else should.  While I probably disagree with his pessimism about alternative energy sources, he’s certainly write to say that there’s really nothing wrong with getting our oil from abroad, if we’re going to have an economy run on oil, that is.  The arguments against doing so are just absurd: we have no problem getting other commodities from abroad and it would be just about impossible to actualy withdraw from the global energy market.  The argument that oil = terrorism is just silly - AQ was at its operational high point in the 90s with record-low oil prices.

But while Bryce savages greens for thinking that alternative energy sources are going to save use, there’s some clear common ground that greens can take with him.  Namely that the preferred political alternatives to oil - liquefied coal and  ethanol - are even worse.  Ethanol drives up food prices, wastes our money, is too expensive and is a net positive on emissions.  Liquefied coal is also an expensive boondoggle that is awful for the environment.  Bryce also points out antoher reason ethanol is bad:

Detroit loves ethanol because it can use it to inflate fuel-efficiency ratings on their cars artificially. The mammoth Chevy Suburban, produced as a flex-fuel vehicle capable of burning both ethanol and gasoline, magically boosted its fuel efficiency to 29 miles per gallon from 15, since under federal rules only a vehicle’s gasoline consumption need be factored into the equation. Ethanol, in other words, has allowed American car manufacturers to produce more gas guzzlers and contribute to increased imports of foreign oil.

Basically, if an American car company is supporting a type of alternative fuel, we should all be very wary of it, and ethanol is now exception.  Reading the Times review, it turns out that Bryce isn’t really as hostile to alternative energy sources as he puts on. He thinks that solar could “play a bigger role in meeting energy needs, especially with new technology that transforms infrared light into electricity. Algae look promising as a source of biodiesel”  He also is down with nuclear. And since those are my favorite types of alternative energy (nuclear, algae, solar in that order), it looks like me and Bryce agree on just about everything.

So, yeah, buy the book.

Who Cares About NAFTA?

I’ve said it before and I’ll say it again - I always feel slightly ill when I see Clinton and Obama competing to say who thought NAFTA was worse first.  There’s all sorts of reasons for this reaction.  For one, Clinton is either being mendacious or stupid by claiming that she a. opposed NAFTA consistently and b. takes credit for all the accomplishments of the Clinton administration..except NAFTA.  Not to mention that she had defended all of Bill’s recond, including NAFTA in the past.  With Obama, the feeling is more one of disappointment.  His “opposition” to NAFTA is weird.  As David Leonhardt points out in his excellent column on the issue, neither Clinton nor Obama supports overturning NAFTA, instead they want to tinker with the buerecratic architecture of the bill.  What’s even more annoying (but also reassuring) is that Obama is closer to the center than Clinton on trade. If you put aside NAFTA, Clinton was originally the one pounding Obama on trade.  It’s just that her breathtaking two-timing on what she thought about NAFTA when has given Obama an opening to criticize her from her left in a very anti-trade state.

Call me naive, but this anti-trader ain’t the real Obama.  In the Audacity of Hope, he makes the social democratic argument for trade very convincingly (more trade, more social insurance).  In the Senate, he’s supported the Peru Trade Deal, which has pissed off true-blue anti-traders (Matt Stoller et al). What we’re seeing here is just some true-blue pandering.  He knows that people in Ohio have seen their median incomes fall (but not in the 90s, immediately after NAFTA was passed), he knows that manufacutring jobs are leaving (not to Mexico, but to technological advancement and China) and he knows that many Democrats see NAFTA as the height of Clintonian caving to Robert Rubin and his gang of free market Dems.  So yes, it’s disappointing that he’s giving credence to such uninformed, reactionary rhetoric, but seeing as he has literally zero policy substance that matches up with the tone of his words, I’m not too worried.  And it’s not like Bush or McCain is really going to get us to complete the Doha round anyway.

Robert Lawrence Says Smart Things About Trade and Inequality That I Agree With

One of my hobby horses as someone who is both an avowed liberal and an enthusiastic free trader is trying to convince people that a narrow focus on increased foreign trade or trade agreements as the source of stagnant wages, income inequality or any of the other afflictions on our economy is not only misguided, but probably counter-productive as well.  Well, nicely enough, Robert Lawrence, a former member of Clinton’s Council of Economic Advisors and a professor at Harvard, has released a book, Blue Collar Blues, that makes the exact argument.  He has a pdf of chapter introductions on the Peterson Institute website that’s well worth looking at as well as a two page summary of his arguments. More below the fold

Obama’s Secret Free Traderism

I was reading David Sirota and got real worried when he started praising Barack Obama’s rhetoric on the economy. He pointed to the portion of Obama’s speech in which he said that NAFTA and the president’s approach to trade was not focused on workers.

“It’s a game where trade deals, like NAFTA, ship jobs overseas and force parents to compete with their teenagers to work for minimum wages at the local fast-food joint or at Wal-Mart. It’s what happens when the American worker doesn’t have a voice at the negotiating table, when leaders change their positions on trade with the politics of the moment, and that is why we need a president who will listen not just to Wall Street, but to Main Street, a president who will stand with workers not just when it’s easy, but when it’s hard, and that’s the kind of president I intend to be when I’m president of the United States of America.”

This is enough to freak out  any dedicated free trader, and since I’m pro free-trade, the rhetoric worried me.  But then I realized, this was mainly rhetoric.  Obama voted for the Peru trade deal, and as minipundit pointed out, Obama is not a fan of protectionism.  Instead, he embraces the “social democratic” case for free trade — that protectionism is unfeasible because our economy is globalized and tariffs often do little more than raise the prices of goods for business and consumers.  But, while there are definite gains from trades, there are losers.  Not only is there an issue of fairness for what to do for these losers, there’s also a political case.  As people lose jobs due mostly to technological change or efficiency increases, there’s a tendency to blame foreign trade.  So, to assuage these anxieties, its best to give trade adjustment assistance, wage insurance, extend unemployment benefits and make health care available to all.  Basically, the social democracy system isn’t opposed to free trade, it bolsters free trade.  And Obama gets this.  And with a committed liberal who is also committed to free trade and globalization, we can finally avoid this horrible binary we have on trade.

With the Bush approach to trade, we have tepid moves towards small, bilateral deals that, while good ideas in theory, often entrench American IP laws and do little to try and use America’s leverage to create a fairer trading environment or impose some sort of minimum standards on labor or the environment.  At the same time, however, David Sirota, labor groups and assorted trade-o-phobes pretend that passing an FTA with Peru will mean devastation to Peruvian farmers and will endanger the livelihood of Americans.  These claims are driven more by fear, ignorance and pandering than by an honest evaluation of how trade goes down.  And while I don’t think Barack Obama will be able to get David Sirota on board with a new round of WTO negotiations or a Free Trade Area of the Americas, I think he will be able to get conservatives and centrists who support free trade to recognize that increasing trade on its own is simply not politically feasible.

Dangers of Trade Integration

There are few in the blogosphere more enthusiastic for market integration than I, so I should probably take it as my responsibility to highlight when market integration goes wrong. As usual, the problem isn’t that trade is too free, but rather that sometimes absurd policy manages to expand its scope due to trade agreements.  The most recent example of this is the attempted exporting of our crazy sugar policy.  Because of the powerful sugar lobby, we have a tariff on imported sugar that drives the domestic price to three times the market price and devastates industries that use sugar like candy confectioners as well as hurting consumers.  One would think that with NAFTA, imposing such tariffs and restrictions on Mexican sugar imports would be untenable, but the sugar lobby doesn’t see free trade as a barrier:

However, as of this month sugar imports can now enter the U.S. from Mexico, and so the sugar lobby is once again calling on Congress to fix prices and gouge consumers. Both the House and Senate farm bills contain provisions that Mexican sugar imports be purchased by the U.S. Department of Agriculture and then sold to ethanol producers while taxpayers eat the difference.

“We’re going to be buying it at 21 cents [per pound] and probably selling it at six cents,” acting Agriculture Secretary Chuck Conner told Dow Jones Newswires last week. “And that will be a direct cost to taxpayers to subsidize this creation of ethanol all for the purpose of trying to ensure that we don’t have competition in the sugar market in this country.” The USDA says this scheme could cost taxpayers some $140 million a year,

So there you have it — there are proposals for the government to buy up sugar, and then sell it at a loss.  Who gains? American consumers certainly don’t.  They’re paying a lot more than they ought to for a simple commodity.  The attempts of the sugar lobby to leverage the NAFTA infrastructure to enshrine their special protections in an ever larger market is almost a textbook example of why free trade agreements can be counter-productive.

We all know how special interests can game domestic law, so there’s no reason to think that they can’t game international legal frameworks as well.  I guess that the essential un-democratic nature of trade agreement legal deliberation could be the saving grace — if it isn’t legislators making and enforcing the trade rules, than powerful domestic lobbies lose their most powerful leverage to change the rules.  Also, one could hope that special interests in Mexico or Canada could counteract the sugar lobby, for instance, within a NAFTA framework, Mexican sugar exporters would have an interest in not instituting a multinational sugar cartel.

History shows that the institutions created by trade agreements often have to deal with powerful domestic interests, but eventually gain enough momentum and credibility to become more authoritative and insulated from domestic political pressures.  I hope this happens for NAFTA.

The Necessity of Steven Landsburg

In an New York Times op-ed piece, Steven Landsburg makes the argument that when the United States drops protectionist policies which advantage a few but raises prices and lower productivity for all, there’s no compelling moral reason to compensat those who are hurt by the new poliices. His contention, at first blush, is compelling. After all, we don’t compensate workers who are misplaced due to technological change.

Let’s say, for example, that there was a huge machine in Hawaii in which we put corn, and out came cars. Everyone would acknolwedge how great it was, after all, we get cheap cars just for our corn! Sure, some autoworkers are displaced and local economies adjust, but hey, that’s the price of progress. After all, if we always thought that way, we’d be stuck with the horse and buggy! But then, one day, a man sneaks into this massive machine, and he finds that there is no magical device that turns corn into efficient, cheap, well designed automobiles, instead, there is a large dock with boats heading towards Japan, exporting corn and importing cars. All of the sudden, outrage sweeps the nation, auto workers protest outside the magical “machine”, John Dingell calls for tariffs, Mitt Romney promises to gather the nation’s labor, political and corporate leaders to dismantle the machine and rescue the American auto industry* And so there’s an argument for why dislocation caused by trade is really no different than dislocation caused by technological change

Landsburg has a compelling point, and he’s clearly correct if you view all political choices with the assumptions that unfettered markets are always best, political forces don’t and ought not to shape markets and that Kaldor-Hicks is the only efficiency measure in town. In my view, however, there are two main arguments against Landsburg, one philosophical and the other pragmatic.

The philosophical one is that political economy doesn’t work with a vision of a prelapsarian “free market” whereby all cooperation is voluntary, all contracts are recognized and the government has only the barest, watchman like presence. Instead, as a democracy, we make collective decisions about our economy and markets. And in the past, these choices have been to protect certain industries and workers from foreign competition. Although I think it’s true that in most cases, trade liberalization is basically a good thing, it’s impossible to ignore that when we change our trade policies, and our political economy more generally, we are changing the rules in the middle of the game. It’s not unreasonable to say that we are obligated to compensate those who, in the short term, we are disadvantaging, even if the policy decision is a net-positive one. Now, I don’t think that all cases of trade liberalization have this brutal, almost zero-sum dynamic, instead I think trade has proven over and over again to be a positive sum practice, but that doesn’t always make it Pareto efficient or perfect.

The second argument against Landsburg is simply that trade adjustment assistance and other forms of compensation for the “losers” of trade are a political necessity if we want to continue trade liberalization and an open economy. Landsburg knows that popular opinion against trade is reaching its peak, and while he might just want to call trade skeptics thieves, murderers and scoundrels, he won’t be helping the cause of freer trade. Markets are hard to understand, and anti-foreign and make-work bias pervade the voting population, making trade and globalization an easy target for blame in a world of increasing inequality and economic insecurity. Moreover, there’s evidence that the benefits from trade are distributed less than equally across the income distribution, meaning that inequality anxiety and trade-o-noia can feed into each other, making the case for trade harder and harder. So the least we can do is to throw some bones to the displaced and try to shore up the safety net so people don’t’ feel so tied to their current jobs and afraid of change.

But it’s not Steven Landsburg job to make these arguments. He’s a economics professor, not a policy wonk or a politician. While people like me can propose politically feasibly trade policies that have a chance of getting enacted, Landsburg and Bryan Caplan need to be walking the streets, looked down upon by their fellow Israelites for being so extreme, so righteous, so confident that they are speaking the word of the Lord. To mix biblical metaphors, Landsburg and Caplan can show us the promised land, but someone else must shepherd the people there.

* This example is not an original way of explaining the phenomena, I remember reading it somewhere, but I can’t recall the exact site.

Going Up The Value Added Chain

When trade skeptics bemoan our large current account and trade deficit, they oftentimes scoff at the notion that as lower-wage countries that can make things like t-shirts more cheaply, the United States can still manufacture more expensive things and export those.  Well, it looks like that is actually happening, and as the dollar falls, we’re having something of a high-value-added export boom:

 Some forecasters predict that the export boom will allow the United States to cut its huge trade deficit.

An expanding foreign appetite for capital goods such as tractors, medical equipment and electrical machinery is driving much of the boom. Much of that growth is in China, the fourth-largest export market for U.S. goods, where U.S. sales are growing 17 percent this year, according to federal officials. In the first nine months of this year, sales of U.S. aircraft to China are up 30 percent and plastics are up 37 percent.

There also is increased international demand for complex niche products for which “made in the U.S.A.” remains shorthand for reliability. “These are the kinds of things for which the U.S. continues to hold a lead in know-how,” said Erin Ennis, vice president of the U.S.-China Business Council.

The article later says that exports are up 12.7% from 2005 to 2007.  Even if that can mostly be explained by the declining dollar,  the increase in exports would constitute a reason why the dollar decline isn’t something to get so worried about.  The move from making low value-added products to high value-added ones is inevitable even if you advocate a Sherrod Brown slow-down in trade agreements, it’s largely driven by productivity gains, not necessarily manufacturing jobs fleeing to China.  Even so, it’s a dynamic that is highly predictable ad is oftentimes not talked about when people bemoan the loss of “good jobs.”

The WTO Is Great: Constraining Unilateralism Edition

Dani Rodrik makes a very important point about the WTO — it is the only international organization that can meaningfully constrain and direct US unilateral action.  This Financial Times reports that “The US must do more to eliminate billions of dollars in illegal subsidies to its cotton farmers, a World Trade Organization.”  And usually when the WTO says the US must do something, after much heeing and hawing, the US ultimately complies.

Since Woodrow Wilson, liberals and progressives have been searching for meaningful international organizations that can institutionalize cooperation among nations in a positive sum way.  So far, the UN has not been able to restrict or constrain US unilateralism largely because the US can afford to ignore UN dictates or simply use their security council veto to prevent the possibility of conflict with UN dictates.  The WTO, on the other hand, can use “sticks” of punitive tariffs and restrictions to force the US to comply with its dictates.  It’s the liberal internationalist in me who thinks that the world and individual nations benefit both from collective security and collective trade.  So why so often are those who criticize US unilateralism in other spheres the most WTO-phobic?

Shoe Tax? Really?

This Chicago Tribune article on the “shoe tax” provides yet another piece of evidence that all tariffs should require a very strong positive justifcation, and barring that, should be summarily eliminated. How absurd is the shoe tariff? Well, first of all, it can run up to 67.5 percent. This makes shoes more expensive and, like all flat consumption taxes, is regressive because the poor spend a greater portion of their incomes on consumer goods like shoes. But of course there must be some sort of justification for such a wacko tariff, we have to protect the American shoe industry from overseas competition! Well, no, it turns out that 99% of footwear is imported anyway. The good news is that there’s a bill working its way through Congress to get rid of the tariff, but because of the relative obscurity of the issue, it’s unclear if or when it will pass.

The shoe tariff is an illustrative example of why short term restrictions on trade to protect specific industries are generally bad ideas. Even if there’s a justification for a tariff or a quota beyond government favoritism, eventually the justification will dissapear. But there’s rarely any constituency for eliminating a tariff, and if there is one, it’s usually a dispersed group of consumers and retailers who are effected in a small way and so don’t really have the incentive to organize and exert pressure on the government. The protected industry, on the other hand, has a huge incentive to keep the tariff or quota in place, and will fight tooth and nail to do so, even though said trade restriction is a net loss for the general public. Not to mention the simple inertia of the political system, even if there is no constituency for a quota or tariff, it will remain in place just because it’s in place. This basic dilemma, I feel, calls into question those like Dani Rodrik and his gang of “second best” economists who think that specific industrial and trade interventions can work. Sure, if Rodrik himself were doing the interventions and they had strict sunset provisions, then maybe some sort of import substitution or industrial policy could work, but the American political system provides so much evidence to the contrary, that we should probably just default to free trade in goods.

Via.

Will Protectionism Save the Democrats?

The emerging conventional wisdom is that illegal immigration will be the hot-button issue in 2008, perhaps even as a wedge to get voters anxious about their economic security to abandon Democrats because they fear immigrants taking their jobs. You get ten points for realizing that this is the exact same line used for encouraging Democrats to go on the offensive against new trade agreements. In fact, that is exactly Matt Stoller’s plan for countering the anti-immigrant push:

With the most recent election returns, it’s clear that immigration isn’t a Democratic killer. Both Progressive States new memo and Harold Meyerson point out that it’s the economic anxiety caused by free trade agreements that causes the immigration backlash.

The new Peru free trade agreement is coming up for ratification, and the freshmen are opposing it strongly. It may even become an issue in the Presidential race.This is why neoliberalism doesn’t work. Simon Rosenberg has been pushing on the other side of the immigration argument, making the push for Democrats to solidify the Hispanic vote. And that’s smart, but such a strategy requires the coherence of going against corporate written trade agreements.

The candidate who called me in despair is now planning to run against NAFTA, CAFTA, and as Jon Tester put it, SHAFTA.

On a purely analytical level, Stoller’s argument is absurd. For the economically minded, there is little difference between a policy promoting the free movement of good and a policy promoting the free movement of labor (or as we call them in our more lighthearted moments, labor). Stoller also slides in the whammy that economic insecurity and dislocation is primarily caused by free trade agreements. I doubt even the EPI believes this. Paul Krugman thinks this line of argumentation is BS, and it is. There are other industrialized countries with similar or higher levels of trade liberalization than the US and yet still have more economic security for their citizens. All other things being equal, I would not advise Democrats to have their economic security narrative be built around lies and misconceptions.

But, of course, all other things are not equal. The trade agreements likely to be “put on hold” by a Democratic administration are rather small — Korea and Peru, and so it may be worth it to talk about a “time-out” from trade liberalization if it means picking up voters who could be wedged away by appeals related to immigration. In the long run, however, restrictionism on immigration and restrictionism on trade — and the nativist, fearful rhetoric associated with both of those causes — can only help conservatives and hurt progressives. While I’m sure Stoller and many others would say that they only oppose “corporate trade agreements” and would support a deal with sufficient IP leveling, labor and environmental standards, his rhetoric on the Peru FTA betrays that instinct. As far as I can tell, P-FTA is the most progressive trade agreement the US has ever signed on to. Moreover, what happens if the economic insecurity driving the trade/immigration backlash continues, without the signing of any new trade agreements? Then Stoller’s silver bullet of trade-nativism to counter labor-nativism evaporates.

A broader point: I know Stoller’s bid is to oppose certain trade agreements, but let’s say this sentiment metastasizes, as it did in the 80s with Japan, into a larger backlash against foreigners. At that point, trying to neatly break up economic anxiety into anti-immigrant as opposed to anti-trade will be impossible. There will be a backlash against all of it, and the plan to attract Hispanics into the Democratic caucus through being open to immigration, while keeping anxious rust-belt voters in the caucus through trade demagoguery will blow up in their faces.

A better strategy for American consumers, Peruvians and Democrats would be a beefed up version of the old Clintonite compromise. Yes, trade does cause some dislocations, but on balance it’s a good thing. To deal with those dislocations, we’ll beef up the safety net. The problem for Clinton was that beefing up the safety net, especially on health care, was impossible. After 2008, however, we’ll probably have solid majorities that will make passage of universal health care much easier. Unfortunately for Stoller, no electoral alchemy will make the economy of the 50s, with oligopolistic manufacturing companies dominating the US economy and providing stable manufacturing jobs to the not-very-well educated come back.

A microcosm of this would be John Kerry and his “Benedict Arnold CEOs” line. This rhetoric was short-sighted, misleading and just dumb. It won him no votes and didn’t fit into a broader narrative of economic security. And hell, it turns out that not that job loss due to outsourcing was always minimal. The larger trend was these jobs being rendered unnecessary due to productivity and technological gains.

While protectionist posturing may have worked for freshmen Congressman and Senators, it’s still worth remembering that the last Democratic president who didn’t support expansion of trade was…well, it’s hard to remember. Oh yeah, and if you want the back-door argument against progressive-protectionist types like Stoller, who certainly say they care about global poverty, you can always just tell them that free trade agreements in Latin America benefit the rural poor.

PS - Here’s the paper “What Happened to the Great US Job Machine? The Role of Trade and Electronic Offshoring” that was the basis for what may have appeared to be thinly based assertions.

Yes, Some on the Right Oppose the WTO

Max Bergman is amazed that many of the reasons the black helicopter crowd opposes LOST are also applicable to the WTO.  So, if the Right is so worked up about sovereignty, they should oppose the WTO, right?

The fact is that the WTO regulates global trade and polices its member’s adherence to WTO regulations. If maintaining all aspects of U.S. sovereignty is the right’s number one priority than they simply can’t support the WTO. And if they don’t support the WTO, than you have to question the right’s commitment to free trade, since the whole purpose of the WTO is to enable free trade. If the right is really so scared about the erosion of U.S. sovereignty than they should join all the left wing anti-globalization activists and protest the WTO.  That would be quite a sight.

Well, Max, sorry to break it to ya, but the populist-nationalist right opposes both the WTO and LOST.  Pat Buchanan isn’t a big WTO fan, nor are Alan Keyes and Phyllis Schlafly.  60 percent of Republicans think free trade has been bad for the economy.  What we have in both the LOST and the WTO/free trade debates in the GOP is a split between the corporate elites and the populist masses.  The corporate wing just wants more markets to sell stuff, and a steady regulatory infrastructure to facilitate the selling of their wares and expansion of their businesses.  Thus, the WTO and LOST.  The populist-nationalist wing is more concerned with America’s sovereignty and generally being incredibly skeptical of anything having to do with foreigners. It’s a very uneasy alliance, and I imagine that big portion of Ron Paul supports comes from the populist-nationalist wing of the party, which overlaps significantly with the anti-Iraq war wing.

If you asked me before the primary got heated up, I would have expected someone like Tom Tancredo to be the Ron Paul like insurgent candidate.  Bashing Romney, Guiliani and Bush as “globalists” who will sell out America to illegal immigrants, international trade and international organizations could probably garner around 10 percent of the primary vote.  Too bad Tancredo is absolutely nuts.  But I assure you that in the coming years, the populist-nationalist wing of the GOP will realize , much like the Religious Right, that it’s the corporate paymasters who ultimately control the GOP and that there isn’t really much of a place for them in the coalition.

Obama and Peru

Glenn Hurwitz is mad that Obama dare support the Peru Free Trade Agreement, a real cornerstone of the Bush Agenda:

On Tuesday, Barack Obama announced his support for President Bush’s bid to expand the North American Free Trade Agreement to Peru.

Yup - Obama is once again helping pass one of President Bush’s top priorities - even as Bush blocks the entire Democratic agenda and daily rains rhetorical abuse down on Democratic heads. Is this how Obama is going to negotiate in the White House?

As a pretty devoted free trader myself, let me say that the Peru FTA, and free trade as a whole, hasn’t been one of Bush’s “top priorities.”  Free trade isn’t a particularly popular position among the rank and file of either party, so even if it’s part of “Bush’s Agenda”(which is a fishy concept at this point anyway, his agenda consists of two things: terrorism and Iraq), it’s certainly not part of the conservative movement’s agenda, especially after 2008, when they no longer have to carry water for the “Bush Agenda.”  So why is it so bad that Obama is supporting a deal that he probably thinks is a good idea?

Hurtwitz proposes a false choice, implying that supporting the Peru FTA “is more of a priority than tackling the climate crisis, ending the war in Iraq, protecting civil liberties, or expanding health care - all core elements of the Democratic agenda that have been blocked by President Bush and the Republicans.”  Does Glenn really think that Bush would be more open to withdrawing from Iraq, reducing executive powers or signing the S-CHIP expansion is the Democrats gave him the Peru-FTA?  There isn’t a trade off, Obama and the Democrats can walk and chew gum at the same time - except it’s more like support the P-FTA and have Bush be totally intransigent on everything else OR don’t support the PFTA and have Bush be totally intransigent on everything else.

Also, Obama being comparatively more supportive of free trade than either Clinton or Edwards is very much in accordance with his claim to be God’s Gift to the rest of the world.

I wonder what the Obama Youth Movement Superstar, Minipundit, thinks about the whole deal.