Interview with Kazumasa Iwata today

This morning I interviewed Kazumasa Iwata, head of the Japanese Cabinet Office's Economic and Social Research Institute and former deputy governor of the Bank of Japan. Check out Policy Innovations soon for the audio and iTunes for the podcast. He was between meetings with government authorities and financial institutions, so the interview was a brief 16-minutes but nevertheless very rich in insights.

Apropos of Earth Day today and in response to my question about Tokyo's future role in Asia, he listed several environmental measures he saw desirable for Japan, including striving to build a low-carbon society, reducing emissions, replacing older, higher-emitting automobiles, and increasing research and development in clean energy technology--something that Japan has excelled in for decades (see a piece I co-wrote on Japan as an efficiency superpower here).

As for Japan's response to the financial crisis, he seemed worried about the employment situation and gave the impression that Japan's monetary policy and fiscal stimulus packages were meant to cork the loss of jobs but would not necessarily create new ones--as Japan appears to be creeping up to possibly a 6-8 percent unemployment rate.

What was the biggest issue Mr. Iwata saw for the US-Japan relationship for the long term? I was pleased that his answer was to fight protectionism. He sees a growing threat of trade protectionism through the use of WTO-legal measures. As I have advocated with Sherman Katz and Robert Fauver, Mr. Iwata even suggested that the US and Japan pursue a free trade agreement.

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.

WSJ: More bad news for free trade

Free trade sure could use a little good PR. This page one story in the Wall Street Journal underlines my fear that the election season will drive another nail into the free trade casket. Deborah Solomon and Greg Hitt document the growing ambivalence over trade in a state, Iowa, considered a "big winner from global trade."

...over the last couple of years, workers and voters in this blue-collar manufacturing outpost -- and throughout Iowa -- have grown decidedly downbeat about globalization. Trade has become such a hot subject that Democratic presidential candidates seeking support in Iowa's influential Jan. 3 caucuses are turning into trade skeptics, and the issue is splitting traditionally free-trade Republicans.

It's impossible to factor out how much of this trade skepticism can be attributed to Iowa's unique place in the US electoral calendar. But anti-trade sentiment is undeniably gaining steam nationwide despite reports that the falling dollar is stimulating exports. Peter Goodman, writing in the International Herald Tribune this week:

As the United States heads into what many economists predict will be a substantial economic slowdown, the success of U.S. companies in building sales in countries around the world may cushion the blow. It could help prevent the economy from slipping into a recession.

So which presidential candidate is prepared to make the argument that what the US needs is more trade, not less?

Creeping Protectionism

A stunning new Wall Street Journal-NBC News Poll portends a sea-change in U.S. trade policy. According to John Harwood in today’s Wall Street Journal:

Six in 10 Republicans in the poll agreed with the statement that free trade has been bad for the U.S. and said they would agree with a Republican candidate who favored tougher regulations to limit foreign imports.

This makes Matthew Slaughter and Kenneth Scheve’s prediction in Foreign Affairs look even more prescient. This summer they wrote:

U.S. policy is becoming more protectionist because the American public is becoming more protectionist and this shift in attitudes is a result of stagnant or falling incomes. Public support for engagement with the world economy is strongly linked to labor-market performance, and for most workers labor-market performance has been poor.

All of this should be of concern because, as Slaughter recently told Policy Innovations, globalization adds between $500 billion and $1 trillion to annual US income.

The leading Republican candidates for president are all still solidly pro-trade. Will they begin to change their tune in light of this emerging trend among the party base? And what about the Democrats? The new poll claims that a majority of Democrat voters believe that free-trade hurts the US. Hillary Clinton is looking less and less like her free-trading husband. She recently opposed the US-South Korea free trade pact. Will the trading stance of a Clinton presidency look more like the 1990s or the 1930s?

More to the point, if both parties start sounding the protectionist horn, what effect will that have on US incomes and growth rates around the world? Are we headed for a return to the disastrous Smoot-Hawley era of the 1930s?

Say it aint so.

- Matthew Hennessey

Fair Trade Policies Should Help Not Punish

Matthew Slaughter of Tuck Business School wrote an op-ed today in the Wall Street Journal titled, "Let's Have a Real Debate on Globalization." His central point is that globalization has in balance helped the U.S. economy. And that instead of trying to punish countries that appear to be cheating, the U.S. should focus on making sure Americans are equipped to compete in and cope with a globalized economy.

Here is the key quote:

"The preferred course is to complement open borders with a mix of domestic policies to help those that are hurt. But is this what we hear being discussed on the campaign trail? No. It is about fair trade, not free trade. It is about pulling back on previous trade agreements. It is about new laws to hit 'currency manipulators' with new trade barriers."

I totally agree.

In an article I wrote a few months ago titled "The United States Must Redefine Fair Trade" I tried to make the same point. My point is that fair trade policies should start with the freedom to trade and add ethical principles, based on the fair trade movement.

It is fair to give the world the opportunity to benefit from the international trading system. It is also fair to try to protect labor and environmental standards--and it is fair to build human capacity and potential to innovate and prosper. Punishing regimes that we don't like or manipulate their currencies have very little efficacy.

This is how I put it:

"Notice that tariffs and competitive devaluations are not on the list [of desirable policy tools]. Although both of these approaches are advocated under the guise of protecting fairness and even human rights, history and economics tend to dispute those claims. Instead, openness—with the proper safety net—can help advance human rights."

Policy Innovations interviewed Matthew Slaughter recently. Read our interview, titled "Pushing against the Protectionist Drift."

Economists Growing Brains

Economists often say they are embarrassed by their profession. I am not exactly sure why, but it probably has something to do with the common belief that economists are generally poor and work in the "miserable science." As John Keynes famously said, "In the long run, we are all dead."

Mainstream, neo-liberal economic theory, which students learn in most American universities, provides basic tools for understanding the underlying mechanics such as supply and demand.

I personally enjoyed my economics classes in college and grad school, but soon realized that the real world, not the hypothetical world of economics case studies, is far more complicated and even more counter intuitive than one would conclude after reading a microeconomics text book. No surprise. Like, if people maximize utility or wealth, how does one explain charity? A cynic would say that donors get some type of benefit, such as prestige, social standing, or other side benefits. No room for altruism. I remember talking to a brilliant French economist in Tokyo a few years ago and I was trying to make sense of some of his ideas by applying rational choice theory. He scoffed and called "rat choice" passe.

Remember, the answer to any economics question is, "It depends."

Seeing Joseph Stiglitz speak in Tokyo several years ago was also an enlightening experience. The Washington consensus of free trade and low budget expenditures was not the final word on development policies? Top economists, such as Stiglitz, Jeff Sachs, Larry Summers, Alan Blinder, and Robert Reich, are drawing attention to the failings of free market economics. Some thinkers, like our friends Sanjay Reddy, Thomas Pogge, and Christian Barry, are even applying ethics to economics, and asking is this policy just... is it fair?

New York Times reporter Patricia Cohen reports on this cadre of emerging heterodox economists in an article last week titled "In Economics Departments, A Growing Will To Debate Fundamental Assumptions." You can read it here. I remember just a year ago the phrase heterodox economist was alien to some. One person asked me what that was; I simply said, "the opposite of orthodox." Oh.

Cohen's point is that "in recent months" economists are feeling less ashamed about questioning the fundamental assumptions, less fearful of being ostracized. I might put the time frame in "recent years," but here are a couple of nice snippets from Cohen's report:

For many economists, questioning free-market orthodoxy is akin to expressing a belief in intelligent design at a Darwin convention: Those who doubt the naturally beneficial workings of the market are considered either deluded or crazy.

But in recent months, economists have engaged in an impassioned debate over the way their specialty is taught in universities around the country, and practiced in Washington, questioning the profession’s most cherished ideas about not interfering in the economy.

“There is much too much ideology,” said Alan S. Blinder, a professor at Princeton and a former vice chairman of the Federal Reserve Board. Economics, he added, is “often a triumph of theory over fact.” Mr. Blinder helped kindle the discussion by publicly warning in speeches and articles this year that as many as 30 million to 40 million Americans could lose their jobs to lower-paid workers abroad. Just by raising doubts about the unmitigated benefits of free trade, he made headlines and had colleagues rubbing their eyes in astonishment.

The article ends with this great story on Dani Rodrick:

Most mainstream economists think that voicing any skepticism or doubt provides “ammunition to the barbarians,” he said, and allows narrow-minded people to “hijack any argument to suit their purpose.”

Mr. Rodrik said he used to worry about this until he realized that “on any issue, there are barbarians on both sides,” so there was no point in shading an argument to “suit one set of barbarians over the other.”

“And I’ve slept a lot better since.”

Toward a Fairer Trade Policy?

House Ways and Means Committee Chairman Charles Rangel yesterday presented to the Administration a set of recommendations on future FTAs to increased labor and environmental protection. Rangel is laying out what the Democrats need to forge a new trade policy consensus and what will be needed for Bush to renew fast track and successfully complete the US-Korea FTA (KORUS). Fast track will expire at the end of June and the White House wants to make sure that the four trade agreements being considered are signed.

The endorsement of the proposal “would put fresh emphasis on environmental protection and access to low-cost medicines, as well as labor rights, in all new international trade pacts,” The Wall Street Journal reported. Modified texts of agreements will require: the adoption, maintenance, and enforcement of basic International Labor Organization (ILO) standards; and the implementation and enforcement of multilateral environmental agreements (such as CITES).

Finally, the Administration has been asked to strengthen American anti-dumping and countervailing laws against China.

Are we seeing the emergence of a fairer trade agreement? I made the case for such an approach in Policy Innovations in an article titled United States Must Redefine Fair Trade.

Such a policy tool may also provide one method by which basic human rights can be protected in the context of international economic relations. The lack of a binding international agreement on human rights that can guide business activities was a major concern of the panelists of a workshop we held last week at the Carnegie Council. We have uploaded audio clips of the panel "Taking Stock of Business and Human Rights." On the panel: Christine Bader of BP (audio clip), Joanne Bauer of Business and Human Rights Resource Centre (audio), Frank Mantero of GE, and David Schilling of Interfaith Center on Corporate Responsibility (audio).

Alan Blinder Reconsiders Free Trade

Like most mainstream economists, Alan Blinder has been a free trader. But a front-page Wall Street Journal article today says Blinder, a Princeton economist and former Federal Reserve Board vice chairman, is joining a growing number of economists who say "the downsides of trade in today's economy are deeper than they once realized."

For those of us who learned about the simple beauties of free trade in school, the world keeps getting more complicated.

According to the WSJ article, Blinder says the complicating factor is a new revolution in the global economy driven by communication technology that allows services to be delivered from far away, which may put 40 million Americans out of jobs over the next 20 years. The most vulnerable professions include computer programmers, data entry workers, actuaries, film editors, mathematicians, translators, graphic designers, and yes... even economists.