Free-trader fear mongering

I like Fred Bergsten a lot. He named, supported, and published my book Has Globalization Gone Too Far?--despite the loud protests of some on his board of directors. I am a member of his advisory committee at the Peterson Institute (although it has been a while since I have attended the annual meetings).  But I think he goes overboard in his WSJ oped today when he says that Democratic refusal to play by usual trade rules represents the "the gravest threat to the global trading system in decades."

What is at issue is Nancy Pelosi's decision to effectively kill "fast track" procedures that guarantee a yes-or-no vote on trade agreements within 90 days.

The immediate effect is to scuttle the pending free trade agreements with Panama and Korea, as well as Colombia, and to end any remaining prospect for an early conclusion of the Doha Round in the World Trade Organization.

The much more profound impact, however, is to remove the U.S. from any significant international trade negotiations for the foreseeable future. Current and former chief trade officials of three of the world's largest trading entities have told me that, since the House action, the U.S. has lost all credibility. In other words, the "time out" proposed for trade policy by one of the major presidential candidates – a central goal of the opponents of globalization – has already been called.

If this is indeed a time out, I say "good"!  For the real threat to the global trading system today is not that we will forgo signing more trade agreements, but that we will fail to implement the reforms needed to sustain globalization.  By presenting the debate as one between globalizers and anti-globalizers (instead of what it really is: a debate over the rules that govern globalization) globalization's cheerleaders are radicalizing and doing considerably more damage to the economic system they admire so much.  It is time to give up on the bicycle theory.    

Larry Summers, who recently assumed the chairmanship of Bergsten's advisory committee, has it right when he points to the unhelpfulness of those who would argue that

economists should stick with the mantra “freer trade is good” and not acknowledge in newspapers the implications of their models for fear of emboldening protectionists. This is a dangerous game. It is ethically problematic to withhold knowledge in fear of its misuse. It is likely over time to undermine the credibility of the experts who fail to share all that their science knows. And most importantly as demonstrated by recent debates the strategy of sweeping distributional issues under a rug and simply insisting on various kinds of dislocation assistance has been a political disaster for advocates of freer trade.

Comments

[Jorge Romero-Habeych]

I think economists agree that all nations stand to benefit from "Freer Trade", just as individuals do from trading with each other. Some groups might suffer (lose) but the countries as a whole benefit (win). Why can't we pursue free trade without the "Free Trade Agreement" vehicle?

[John V]

Dr. Rodrik,

I understand your concerns and acknowledge that you are trying to convey the valid idea that policy makers need to ensure the continued push toward without jeopardizing it at the same time by attempting to prevent pessimistic public opinion from impeding progress by dwelling on negatives. Point taken.

However, I really honestly don't see how any "governing of rules governing globalization" is going to reap any real rewards.

Thoughtful economists like you and others aside, the debate really, truly is between globalizers and anti-globalizers. THAT is the real paradigm in the street and away from the ivory towers. It really really is.

Besides, and more to the point, what "rules" are you talking about?? What on God's green earth do you think can truly be done to really improve globalization through these "time-outs" on trade agreements? What?

I genuinely don't see how we in this country stand to benefit in any way from any deliberative and complex rule governing. I really, really don't.

I'm not trying to be a free market libertarian ideologue here....though some would argue that I am. I'm talking about POLICY. I read your book. I thought it was very insightful in the abstract but at the same time I kept wondering:

"HOW does he plan to actually do this or that?"

at other times I would go:

"Yes! yes....but No!"

Because, in the end, the part of about "globalizers'" mantra that you can have a slight tendency to misrepresent is that they do acknowledge the problems globalization can cause. HOWEVER, and this is the key part, they simply remain unconvinced (rightly IMO) that most interventionist remedies devised by deliberation are going to be BETTER. That's a key nuance that often gets overlooked. It's not:

"No problems vs. Problems"

it's really:

"Can we really fix it without causing new problems? "Yes, No or Maybe?"

Because unless it's an empathic and unequivocal "YES", I simply don't see the point and remain humble.

So, not only does such intellectual hubris inhibit and complicate free exchange between individuals on philosophical level, it also (and more importantly), on a practical level, throws wrenches in an extremely complex and motley mix of people, incentives, goods and acts of nature that cannot possibly take enough enough account to be considered wiser than leaning on first principles....at least for our country.

Whether any ideas can be justified in a developing country is another ball of wax and still extremely tricky and unique on a country by country basis.

[Justin Rietz]

Two words: Smoot Hawley.

It is an election year, and the economy is sinking. Rhetoric about the problems caused by foreign trade (couched as "reassessing trade agreements") is popular with many people and therefore is a good way to get votes. The problem is that this can quickly snow ball into real anti-trade measures.

[wjd123]

"It would help if Congress and the present administration could pick up the pieces and pass the Colombia agreement, and the pending Korea and Panama agreements as well. But the fundamental problem of U.S. international credibility on trade will remain until a foolproof Trade Promotion Authority, or some equivalent successor, is renewed in perpetuity.

"This can probably be done only as part of a "grand bargain" that recognizes the costs as well as the huge benefits of liberalization, and thus includes a substantial expansion of governmental assistance to workers dislocated by trade."--C. Fred Bergsten, "The Democrats' Dangerous Trade Game."

If Dean Baker in "Trade inequality: The role of economist" is right about the lost wages of millions of Americans effected by trade what Bergsten is offering is a "petite bargain" not a "grand bargain." Is Bergsten trying to distorting the distributional effects of free trade in order to sell it on the cheap?

According to Dean Baker,

"The policies proposed to redistribute to the losers from trade involve retraining or in some other way compensating the workers who can directly trace their job loss to trade. This group typically numbers in the low hundreds of thousands, as opposed to the tens of millions of workers who can realistically claim to have suffered wage declines due to trade....
the most generous trade adjustment assistance to displaced workers does nothing for the tens of millions of workers who suffer wage reductions as a result of trade.

It is certainly possible to imagine political scenarios in which various forms of trade adjustment assistance will be substantially expanded so that those who lose their jobs as a result of trade are not as negatively affected as is the case presently. It is not possible to imagine any measures that will offset the losses to the larger group of workers who suffer wage reductions. They are expected to simply endure this reduction in living standards as a necessary sacrifice for a larger economic agenda."--Dean Baker

http://www.paecon.net/PAEReview/issue45/Baker45.pdf

[Anh Tran]

The problem is not free trade itself. The problem is how different interest groups define free trade to advance their interests. To Obama and Clinton, free trade is defined in such a way that it harms the workers, destroys the environment, and puts Americans at risk due to dangerous imports. To the neoliberals, free trade is defined in such a way that it advances freedom, increases efficiency in allocating resources globally, and provides wellfare gain all the way through.

Ok, which definition of free trade do you buy in? For those of you who oppose free trade, I'd like to remind you of the period during the Great Depression when protectionism was the motto of the day. Did it do any good? And for those who are for free trade unconditionally, I'd like to remind you of the reported, dangerous Chinese imports sold in the American markets and the negative environmental effect in some regions in Asia as people clear mangroves to farm shrimp for the U.S. and E.U. markets.

Well, I can go on and on. The point is that neither camp is entirely correct when they see thing lopsided. Globalization is not a bad thing. The bad thing is how people take advantage of globalization. And for that, we need something beyond economic theories to solve the problem.

[wjd123]

Ever since Al Gore brought along his picture of Mr. Smooth and Mr Hawley to debated Ross Perot on NAFTA, I've notice a growing inclination to blame the great depression on tariffs. In so far as Gore blamed the depression on Smooth-Hawley he engaged in a huge non sequitur since the depression was well underway long before these tariffs were enacted. To argue that Smooth-Hawley caused the depression is putting the cart before the horse.

Also whenever I hear economist talk about Smooth-Hawley as a mistake that deepened the depression I get the distinct impression that they are presuming this from their economic models instead of relying on any empirical evidence. Show me the evidence. Show me that the trade gains without Smooth-Hawley would have more than compensated for the lost employment (production) here at home.

[Ross Eisenbrey]

Bergsten claims his institute's analysis shows a $1 trillion gain for the US economy after 60 years of freer trade and tariff reductions. A 7% improvement in GDP after 60 years is not nothing, but it has been accompanied by a much bigger rise in inequality, including a doubling of the share of national income going to the top 1% of Americans. Much less plausibly, Bergsten predicts another gain from completing the free trade agenda, half as big as that attained over the last 60 years, despite the fact that most tariffs are now a small fraction of what they were 60 years ago. There's much less at stake than Bergsten claims in making more free trade deals, and the costs in terms of labor arbitrage and environmental destruction are more significant.

[Don]

Free trade advocates leave out HOW exactly you are going to pay for a more generous subsidy to those displaced by trade. We are already facing serious financial issues in the near future as the Social Security Surplus gradually shrinks and the headline deficit grows. Tax increases are probably inevitable just to keep the existing promises to retired and low income workers.

Somehow on top of this we are going to enact more sweeping subsidies to displaced workers and/or low income workers. Any such program that is large enough to make a difference is going to be a ripe target for demagoguery. Are we going to increase taxes on the declining real wages of the lesser losers to pay benefits to the greater losers? I'm pretty sure the Republicans will find plenty of wannabe John Galts to complain about their money being taken to subsidize "the lazy and the foolish".

[Per Kurowski]

I completely agree with Anh Tran in that this has very little to do with free trade as such, which by the way is a quite elusive concept in itself in a world where intellectual property rights reign, the credit rating agencies direction the flow of funds and cross-border migration is not free.

One of the problems is that at the levels of development achieved by some of the most developed countries the usefulness of our standard economic measurements has outgrown their usefulness. If we are not able to clearly explain how much better of we are than by using a 40.000$ against a 45.000$ GDP per capita I guess we do not really know where a country should go.

The question in the US, as in all other countries, has to start with questioning how the US could be better of as a part of an undistinguishable global reality And that’s when the going gets too tough, and makes most of us want to run back to our comforting GDPs.