Wednesday, April 16, 2008

Fighting the last war on trade

Once again, trade is in the headlines. As the resident trade hawk on this blog, I cherish the unexpected opportunity to defend the principles of free trade that this presidential campaign season has repeatedly generated.

The economic argument in favor of free trade centers on efficiencies gained through specialization, not on the opportunity for increased political leverage that can be brought to bear on trading partners. Yet, many of trade's harshest critics insist on linking the two. Why? Many of these same critics howl in protest - and rightly so, I think - at the hawkish promotion of democracy through military intervention that has characterized the last several years of U.S. foreign policy. Violence aside, both approaches represent a degree of unwanted meddling in the sovereign affairs of another nation. Both approaches are intended to bring about a positive change in the lives of ordinary citizens. There is an argument to be made that the best thing you can do to help poor people living in less-than-open socities is to trade with them. But it's an economic argument and, therefore, destined to be misunderstood, discounted as a tool of commercial interests or, worse, manipulated to reach an opposite conclusion.

The promise of freer trade can be a useful carrot in a nation's foreign policy toolbox, I'm not denying that. Market access and closer political ties are often strong incentives for targeted domestic reforms in areas such as labor rights, environmental stewardship and civil liberties. Yet, the economic argument in favor of free trade says nothing about these effects. They have been linked to trade over the years by political actors and used to demonize what is essentially a positive aspect of a nation's development: openness.

I am tempted to reprint Robert J. Samuelson's entire column from today's Washington Post. I won't. But the following excerpt makes many of my points for me. Quite frankly, I wish I had written it myself.

...[I]t's politically convenient to oppose the [Colombian free] trade agreement because the popular imagery is that trade destroys U.S. jobs. The loss of almost 4 million U.S. manufacturing jobs since 1998 seems easy to explain by cheap imports or the flight of plants to Mexico, China and other poorer countries. The truth is murkier: Although this has occurred, job losses also stem from greater efficiency (fewer workers producing more goods) and slumping domestic demand (for communications equipment and computers after the dot-com bust and for housing materials and vehicles now). Nor has falling factory employment crippled overall U.S. job creation.

Look at the numbers. From 1998 to 2007, total non-farm payroll employment rose 12 million, and unemployment averaged only 4.9 percent -- despite the 4 million lost factory jobs. In that period, U.S. manufacturing output rose 22 percent.

No matter. Globalization and trade have become lightning rods for myriad grievances (job insecurity, wage inequality, eroding fringe benefits). But even if trade caused all the factory job loss, its impact is shifting. The dollar's dramatic depreciation (down an inflation-adjusted 20 percent since early 2003 against a basket of currencies) has enhanced the competitiveness of U.S. exports. Their growth now looms as a major source of job creation and economic expansion.

You can read Samuelson's whole column here.

Photo by vlauria.


mike's spot said...

Hey Matt!

I agree totally when you say the truth is murky between job creation / loss.

I feel your logic is flawed. You talk about US exports being more competitive with the falling dollar, but we are producing less and less as our manufacturing jobs leave the country. We are in a system now where our dollar buys less goods that we used to make.

With the increasing amount of working poor in the US, a dollar that is falling, and the US being dependent on other nations for goods- we have the makings of tough times ahead for the middle and lower class.

Our only hope is that if the Dollar falls enough it becomes financially worthwhile to retool America and have a resurgence of American Manufacturing.

We need less of factories going abroad, paying less, polluting, and making share holders rich and more of leading by example in the US making great products, that are eco friendly, and pay an honest wage.

Matthew Hennessey said...

Mike, First of all, that was Samuelson making that argument, not me. But, I must say, it is economically sound. A falling dollar makes goods we produce more attractive to outsiders. As their currency appreciates against ours, they can afford to buy more of the stuff we make. Depreciating currencies have many downsides, but the effect on exports is positive.

Don't confuse domestic inflation with the dollar's slide. The rising price of goods produced domestically is happening independent of the dollar's value internationally. If anything, the sliding dollar should forestall the closure of domestic plants. Repeat: Weak currency favors exporters.

Trade works because it makes both sides better off. As Samuelson points out, not a single job will be created by walling off the U.S. economy.

For more on the human rights issues surrounding the Colombian free trade pact, read Susan Aaronson's article from last year at

Katrina said...

Interesting post, Matt. I am just glad that someone is talking about something else besides the presidential election!

Mike Plugh said...

Hey Matt. Good post. I disagree with you about free trade, but your arguments are well made.

The problem with free trade as it exists is that it's a stacked deck. We can argue about the real effects on labor, but there are some indisputable facts about the global brand of neoliberalism that exists. Neoliberal theory relies upon non-intervention by government in markets. To take an example of how this doesn't work in practice, the US federal reserve bailed out Bear Stearns to stabilize the economy, while doing little to help regular people.

In a true neoliberal state, Bear Stearns would have been allowed to collapse. It may not be the most favorable outcome for the short term US economy, but that's the nature of a free market. The onus for success or failure is on the lender, not the borrower. That's what we've seen throughout the last 30 years. US banks purchased the petroleum futures of Mexico and when Mexico defaulted and declared bankruptcy the IMF stepped in to protect US interests and bail out the banks.

There are thousands of examples. They almost always involve members of the G8 stepping in to force third world countries to open their markets to receive debt relief. The World Bank and the IMF are controlled by the US. The US holds a 50%+ voting control of both, I believe, but certainly one. Structural adjustment is a neoliberal device for exploiting the weakness of those nations and it has created a few billionaires in the process of further impoverishing millions of others.

We operate a stacked deck of free trade that goes against the very principles on which it was founded.

The main problem I have with globalization is that it rarely accounts for social justice. It's an economic theory to rule the world. It's a principle of financial governance which I think is a flawed priority. The economy is meant to serve the people and to serve the social contract. It's not meant to constitute the social contract. Economists have become the kings, or at least the king makers, of the neoliberal paradigm, and have a set up a deep class system that works well for some, but fails many, many more.

The social contract is an arrangement between the people and the structure set up to govern their affairs. Every person under that arrangement should be provided with equal protection and equal opportunity. That means a public commitment to education and health care, among other things. It means that the safety net of social welfare must remain strong. It means that wages need to remain high and that a protection of jobs must be part of the platform.

The way it works now, the safety net is either eliminated or privatized. Budget cuts in the safety net fuel the profit margins of the large corporations and the economy. They set up a short term boom, but the benefits to the economy end up being a long term loss for labor. Privatization sets up an imperative where profit and efficiency are valued above all else. The goals of profit and efficiency are often at odds with the social justice aspects of their mission.

I could go on and on, but free trade is as much a pipe dream as Marxism. The theory fails miserably in practice because its subject to the machinations of power that corrupt it to serve their agenda. The best we can do as a civilization is a guaranteed protection for people which maintains a broad middle class with fewer uber-rich and fewer living in poverty. If that means that our economy isn't the dominant global force that it's become, great. A more balanced world is a better way to guarantee peace and justice.

Just my opinion.

Matthew Hennessey said...

Mike Plugh, You have taken my defense of the economic principles undergirding free trade and built it into a straw-man called "the global brand of neoliberalism." In the process you have confirmed my claim that free trade is frequently misunderstood or twisted to account for the failure of some countries to develop. As I'm sure you know, there are many explanations for laggard economic performance in the developing world. Among these are corruption, mismanagement and non-accountability; all potentially abated via a closer trading relationship.

You will note that this blog is called Fairer Globalization, not NO Globalization. As such, I am inclined to disagree with much of your comment. A number of things spring to mind here. Not sure what this has to do with trade, but I'll entertain the premise.

1. In what way would the collapse of Bear Stearns have HELPED regular people? You've caught yourself in your own trap by arguing the "neoliberals" aren't neoliberal enough to let one of the world's biggest investment banks go under.

2. In no way does a commitment to free trade rule out a public commitment to education and health care.

3. Privatization is sometimes good, it is sometimes bad.

4. With regards to the international financial institutions. You are parroting the oft-repeated claims of Starbuck's window smashers everywhere when you say that these institutions pry markets open as a condition of debt refief. The World Bank's sole mission is to reduce world poverty. There is no ulterior motive at the World Bank I can assure you. They are often ineffective, but that in no way should impugn their motives. The IMF is charged with preserving the stability of the international financial system. They play the role of "lender of last resort" to troubled cental banks. In other words, nobody goes to the IMF for help unless they've already screwed things up pretty badly. So, where to place the onus for success or failure in such cases? On the lender or the borrower? You can't have it both ways, Mike - when the bank screws up, the banks pays and when the lender screws up, the bank pays.

PS. When Mexico nearly defaulted it was the US that stepped in and loaned $20 billion from a Treasury Department account known as the Exchange Stabilization Fund. The IMF kicked in $17 million - but as you rigthly point out, the U.S. retains an 18% share of voting rights in that institution because it funds 18% of its operations. (Incidentally, that is somewhat misleading because much of the currency used by developing countries to purchase Special Drawing Rights in the institution are totally worthless.)

Reference: IMF voting share chart.

Mike Plugh said...

"The World Bank's sole mission is to reduce world poverty"

According to the good people that we've entrusted with its management like Paul Wolfowitz, right?

The problem with the religion of free trade is that its doctrine is no more based in reality than the doctrine of Marxism. Bailing out Bear Stearns is a neoconservative reaction to the fallout of the crisis. As we cut the social welfare state to fuel our economy we prop up the corporate welfare state. There is zero acceptable defense for that.

Not bailing out Bear Stearns would have hurt as well. The problem that you're missing in the critique of my position is that the general economic ideology of the marketplace in 2008 presents us with this problem in the first place. We're forced to debate the bailout precisely because the system has failed miserably. See: Enron.

You say, "You can't have it both ways, Mike - when the bank screws up, the banks pays and when the lender screws up, the bank pays."

That's just not true. When the bank screws up the government (with our tax money pays). When the borrower screws up, they pay or file for bankruptcy in which case the taxpayer pays. It's a systematic problem.

As for trade specifically, name one successful free trade state. I mean long term stability. It's not possible. Every nation that's adopted the free trade gospel has seen its society slip more deeply into a divided class structure of uber-wealthy, volatile middle class, and expansive working poor. When the economy experiences a downturn people can't feed their families. When it is good they get by while the richest 2% buy an island somewhere.

Don't take this as a slam against trade. Trade is vital. Free trade is a stacked game. Fairer globalization is like saying fairer indentured servitude. It goes against the very nature of the thing. The economic principle of free trade depends on having no barriers to the market. If I put you and your 10 best friends in a room with 8 lions with no barriers, who's going to win? Maybe they'll get full before they eat everyone?

Free trade puts the developing world under the stewardship of the G8. Opening barriers lets the lions in to do what they want. What protection exists for those countries if the G8 decide to act unscrupulously? Goodwill? God?

We set up barriers in society to give everyone a fair shake. If we didn't the predatory nature of our animal instinct would manifest itself in a dog eat dog world. Hell, we even admit "it's a dog eat dog world." Those barriers may not be efficient or fuel unparalleled prosperity, but they protect against the natural state of the predatory world. It's easy for economists to play around with the numbers and the theories and forget that fuck ups destroy lives. It's easy to forget that the most efficient way or the most productive way might just favor one man over another in a way that tosses the 2nd into the garbage.

Instead of worrying about what the most efficient or productive economy is, we should be worried about what economy will provide for every man, woman, and child on earth. The reality is, none will ever accomplish that lofty idea, but free trade and the overarching economic theory from which it was born aren't remotely concerned with that let alone equipped to accomplish it.

By the way, you show your colors when you lump me in with "window smashers" since that propaganda is used more frequently than any other by those preaching the ideology of neoliberalism. There are plenty of Harvard educated economists who testify to my way of thinking on the subject, so branding my comments as a radical, extremist mode of thought is simple propaganda.

Mike Plugh said...

By the way Matt, I wanted to comment on this line from your post:

"Both approaches are intended to bring about a positive change in the lives of ordinary citizens."

Your ideology really depends on this, and I think that's where our disconnect exists. I don't believe that either approach intends to be a positive change for ordinary citizens. I think that's overly idealistic. I believe that those with power will do anything they can to keep and further their power. If that is accomplished via contrary rhetoric and through institutions whose missions are altruistic, they don't care one bit.

For the record, I don't count you among those people in any way, shape, or form. I think good intentions often stand behind ideas and institutions, but the nature of power corrupts those intentions unless checked by barriers, regulations, and watchdogs. In my humble opinion, that's where free trade falls short. It places far too much trust in the notion that there's a commitment to doing good.

mike's spot said...

Matt- sorry about misquoting you earlier. My bad.

shumily said...

Hennessey, I question your claim that the falling dollar helps ordinary people, considering the current state of our economy. In response to Plugh's first comment, you said,

"A falling dollar makes goods we produce more attractive to outsiders. As their currency appreciates against ours, they can afford to buy more of the stuff we make."

How much of what Americans consume is in fact being produced here in America? Plugh talked about American outsourcing, cheap labor, and our dependence on foreign goods. Even if this theory you claim were true, would it be applicable to our current situation?

Like what Plugh said in response to your arguments for free trade, how much of free trade agreements is more for our interests and benefits over the other countries than for "fairer globalization"?

I'm not convinced that our government would put in such efforts, into trade agreements specifically, to ensure the social health of the other country, i.e.: education, health care.

Best quote in this string of comments so far:
"Fairer globalization is like saying fairer indentured servitude."

Matthew Hennessey said...

Gravity makes planes go down, but it is not responsible for plane crashes. Human error, mechanical failure or some other such things cause plane crashes. Railing against globalizaiton is like railing against gravity. Best not to waster your energy and instead learn to fly.

Many of you are conflating the economic argument in favor of trade, and the benefits it conveys on all parties, to the inequities that you see magnified by some aspects of globalization.

No one can deny that globalization has its downsides, I certainly wont. But my point here has been that to highlight those shortcomings says nothing about the economic logic of free trade.

Globalization has made much of the world better off. Don't take my word for it, take the word of the people in the developing world that took part in last year's Pew Global Attitudes Survey. Support for free trade is off the charts in much of the developing world.

Where is support for free trade waning? In the US and Europe, where living standards have been so high, for so long, that it can be difficult to see with your own eyes just how globalizaiton has made your life better. An environment of diminishing economic returns from trade has led to fierce political competition for your opinion.

It can be easy to forget how well airplanes have served us when they crash.

Shumily, you may be inclined to agree with Plugh because he is a smart guy who makes a coherent argument. But he is wrong on this. He alternates between claims that globalization has been a conspiracy designed to enrich the neoliberal West at the expense of social justice throughout the world, and the contradictory position that holds globalization responsible for the economic hardships of those in the politically sensitive battleground states in the U.S. presidential election.

Plugh sees consipiracy where I see room for improvement.

If you don't understand how the depreciating dollar helps ordinary Americans than you probably don't work for Caterpillar Inc., which has been adding workers at its plants across the Southern United States to keep up with global demand for its tractors and stuff.

Krys said...

First off, great blog. You make some very interesting arguments. I agree with some of them.

But the one thing that I think you left out is the simple fact that in a free trade economy, there is going to be some political leverage. Thats the name of the game. There are pros and cons to every decision, position, and situation. Like communism, although generally frowned upon by Americans, does have it's pros. Not to say that I support communism ,because its flaws surely do outweigh the positives. But I, for one, love living in a free trade society because opportunities for personal expansion and self-made success are abundant.

I see the political leveraging as both a blessing and a curse. Yes, corruption does exist and there have been unfair dealings, but we live in the real world where greed is a real thing with real effects on business. It's the naive beliefs that some people cling to that sets them up for disappointment. So basically what I'm saying is, if you have the chance to make the money you want and you have the freedoms you want, don't complain about it just because it doesn't fit into your "perfect, textbook" definition of free trade.