Keep the costs of trade in perspective

ECONOMISTS are realising that they have got some things about trade wrong in the past. Just because trade can make everyone better off, doesn't mean it will, for instance (at least without some help from politicians). That new research, and this year's political ructions, are generating some reflection on these issues among economists is a good thing. But it is important to maintain one's perspective. Tim Duy has not done that, I think, in this stemwinder of a post on the effects of American trade policy. He quotes Noah Smith, who says:[I]n the 1990s and 2000s, the U.S opened its markets to Chinese goods, first with Most Favored Nation trading status, and then by supporting China's accession to the WTO. The resulting competition from cheap Chinese goods contributed to vast inequality in the United States, reversing many of the employment gains of the 1990s and holding down U.S. wages. But this sacrifice on the part of 90% of the American populace enabled China to lift its...Continue reading ECONOMISTS are realising that they have got some things about trade wrong in the past. Just because trade can make everyone better off, doesn't mean it will, for instance (at least without some help from politicians). That new research, and this year's political ructions, are generating some reflection on these issues among economists is a good thing. But it is important to maintain one's perspective. Tim Duy has not done that, I think, in this stemwinder of a post on the effects of American trade policy. He quotes Noah Smith, who says: [I]n the 1990s and 2000s, the U.S opened its markets to Chinese goods, first with Most Favored Nation trading status, and then by supporting China's accession to the WTO. The resulting competition from cheap Chinese goods contributed to vast inequality in the United States, reversing many of the employment gains of the 1990s and holding down U.S. wages. But this sacrifice on the part of 90% of the American populace enabled China to lift its enormous population out of abject poverty and become a middle-income country. And then writes: Was this “fair” trade? I think not. Let me suggest this narrative: Sometime during the Clinton Administration, it was decided that an economically strong China was good for both the globe and the U.S. Fair enough. To enable that outcome, U.S. policy deliberately sacrificed manufacturing workers on the theory that a.) the marginal global benefit from the job gain to a Chinese worker exceeded the marginal global cost from a lost US manufacturing job, b.) the U.S. was shifting toward a service sector economy anyway and needed to reposition its workforce accordingly and c.) the transition costs of shifting workers across sectors in the U.S. were minimal. Before closing: I don’t know how to fix this either. But I don’t absolve the policy community from their role in this disaster. I think you can easily tell a story that this was one big policy experiment gone terribly wrong. I think Mr Duy is getting the story wrong in a few important ways. He is reacting in part to arguments that deindustrialisation was a technological inevitability and that focusing too much on China trade is a mistake. But those arguments are correct! Deindustrialisation has been a feature of economic life in the rich world for a century now. That process has quite often devastated communities. Technology has played a huge role in this, and not simply through automation; as technology has allowed firms to move factories to places with lower labour costs, those firms have done precisely that. For a very long time. In his novel American Pastoral, Philip Roth describes a Newark that has been gutted, economically and socially, by deindustrialisation: specifically, by companies moving production from Newark to Puerto Rico in the 1960s and 1970s. This was quite a painful thing to happen to Newark! Poverty and unemployment in the city have been endemic for decades. The social change that resulted from deindustrialisation contributed to riots—in 1967. People tended to draw quite different conclusions about the nature of the social ills of that era, and those who argue that the broad outrage we see today about regional decline is linked to the race of those who are suffering have a point. When it wasn't Puerto Rico it was other countries, or other states. Movement of factories from the Northeast and the Midwest to the South, where wages were much lower, and taxes and labour laws much more favourable, caused trouble for communities long before China joined the WTO. Had China not played the role it did over the last two decades, then American workers would have faced less pressure, but they would not have faced no pressure. Second, to say that the policy experiment went terribly wrong is to write off a lot of the benefits that liberalisation with China generated. Cheaper goods did benefit American consumers. Whatever we conclude about the net effects of trade, we should not omit those benefits from the positive side of the ledger. Also, Chinese people are people, and their welfare matters. In 1993, at the beginning of the Clinton administration, real GDP per capita in China (in PPP terms) was not quite $1,500. That is, it was slightly higher than the current level of income in Eritrea. In 2001, at the end of the Clinton administration, income China had risen to about $3,200, or just below the current level of income in Kenya. Today, in contrast, China is about as rich as Brazil, with an income around $15,000. That's an extraordinary, massive improvement in the lives of 1.3bn people. Some of that increase would have occurred without accession to the WTO, and without an undervalued currency. But we cannot ignore that the trade growth of the last two decades made an enormous share of humanity much less poor. I'm sorry; that matters. Third, while the American economy would have performed differently in the absence of freer trade with China, there were enormous missed policy opportunities over the last 20 years to make America's economy run in a more equitable manner. The financial deregulation of the late 1990s and early 2000s, the top-heavy tax cuts of the 2000s, and the decision to allow the world's saving glut to flow into mortgage debt rather than government bonds issued to fund loads of infrastructure, all of those made the American economy a much less equitable place, with fewer good jobs for less-skilled workers. Of the economic orthodoxies in need of sacrificing, I'm not sure that support for free trade ranks anywhere near as high as support for free movement of capital. Economists made mistakes. So did politicians. But if the conclusion we draw from recent experience is that trade is the enemy, or that China is the enemy, then we are failing intellectually as much now as we did in the past. Disregard for the welfare of the non-rich is the enemy.

 

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