Wednesday, May 21, 2008
The free trade paradox
The Clinton and Obama campaigns are falling all over themselves to denounce free trade, but their policies would actually hurt the voters they are pandering to. The New Yorker (of all magazines):
At times, the campaign has looked like a contest over who hates free trade more: Obama has argued that free-trade agreements like NAFTA are bought and paid for by special interests, while Clinton has emphasized the need to “stand up” to countries like China. Two weeks ago, both senators signed on as sponsors of a new bill that would effectively impose higher tariffs on China if it doesn’t revalue its currency. The candidates are trying to win the favor of unions and blue-collar voters in states like Ohio and West Virginia, of course, but their positions also reflect a widespread belief that free trade with developing countries, and with China in particular, is a kind of scam perpetrated by the wealthy, who reap the benefits while ordinary Americans bear the cost.
It’s an understandable view: how, after all, can it be a good thing for American workers to have to compete with people who get paid seventy cents an hour? As it happens, the negative effect of trade on American wages isn’t that easy to document. The economist Paul Krugman, for instance, believes that the effect is significant, though in a recent academic paper he concluded that it was impossible to quantify. But it’s safe to say that the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. So standing up to China seems like a logical way to help ordinary Americans do better. But there’s a problem with this approach: the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries.
The reason for this is simple: free trade with poorer countries has a huge positive impact on the buying power of middle- and lower-income consumers—a much bigger impact than it does on the buying power of wealthier consumers. The less you make, the bigger the percentage of your spending that goes to manufactured goods—clothes, shoes, and the like—whose prices are often directly affected by free trade. The wealthier you are, the more you tend to spend on services—education, leisure, and so on—that are less subject to competition from abroad. In a recent paper on the effect of trade with China, the University of Chicago economists Christian Broda and John Romalis estimate that poor Americans devote around forty per cent more of their spending to “non-durable goods” than rich Americans do. That means that lower-income Americans get a much bigger benefit from the lower prices that trade with China has brought.
Then, too, the specific products that middle- and lower-income Americans buy are much more likely to originate in places like China than the products that wealthier Americans buy. Despite a huge increase in imports from China—they sextupled as a percentage of U.S. imports between 1990 and 2006—Chinese products are still concentrated mostly in lower-price markets. (By some estimates, Wal-Mart alone has accounted for nearly a tenth of all imports from China in recent years.) By contrast, much of what wealthier Americans buy is made in the U.S. or in high-wage countries like Germany and Switzerland. This is obvious when it comes to luxury goods—Louis Vuitton bags, Patek Philippe watches, and so on—but it’s also true of many other goods, like electronics, kitchen appliances, and furniture, categories in which American and European manufacturers have continued to thrive by selling to the high-end market. According to the Yale economist Peter K. Schott, machinery and electronics products made in developed countries sell in the U.S. for four times the average price of Chinese products. And, since the late nineteen-eighties, that price gap has widened by almost forty per cent.
Sunday morning news show "journalists" would -- if they cared about policy rather than politics -- force protectionist politicians to reconcile this point. Do not hold your breath. Nobody in a position to ask Barack Obama questions is going to force him to reconcile his soaring rhetoric with the frankly obvious consequences of the policies he espouses.
4 Comments:
By 
Elijah, at
Wed May 21, 01:30:00 AM:
Protectionist policies to prevent wealth redistribution?
It seems there is a difference between the term "progressive" and "transnational progressive."
By 
, at
Wed May 21, 01:46:00 PM:
This is what makes politics amazing and frustrating. According to the Bureau of Labor Statistics, in 2007, 15.7 million U.S. workers belonged to a union. Union members accounted for 12.1% of employed wage and salary workers (essentially unchanged from 12% in 2006). In 1983, the first year for which comparable union data are available, the union membership rate was 20.1%
If the number of potential union-member-voters is decreasing, why are Obama and Clinton so focused on this? Wouldn’t it be more valuable to discuss the benefits of free trade for the U.S.? If we limit the extent of the market, the incentive to use technology gets smaller, which hurts everyone.
According to Wikipedia, protectionism can be described as the economic means to achieve the political goal of an independent nation. If you are against free trade, does that automatically make you a protectionist? Does anybody really believe that the United States is not independent, or am I confusing sovereignty with independence?
By Ray, at
Wed May 21, 06:16:00 PM:
swernga: Your analysis makes the mistake of focusing on the national interest, rather than the particular political dynamics of the situation.
Both political parties have undergone significant institutional shifts during the last 20-25 years. It would be more accurate to say, that the old Democratic political machines, which once delivered so many of their votes, have evaporated under the pressures of a more mobile society, disenchantment with party's more elitist national positions, loss of social capital to television and other entertainments, etc. This means that such institutions as remain -- those still capable of mobilizing large blocs of election workers, going door-to-door, etc., become increasingly powerful. The labor unions are about the only group left in the Dem Party that fits that description, really. This gives them massively disproportionate influence.
Add to this the traditional "diffuse benefits, concentrated penalties" problem, and free trade is a losing proposition, politically, for any Dem.
By jj mollo, at
Wed May 21, 08:44:00 PM:
If global competition is actually bad for American workers, then we should be relieved that transportation costs are rising.
