"America Needs to Make a New Case for Trade"

Larry Summers says that if we want people to support free trade, we are going to have to explain why it is in their interests to do so:

America needs to make a new case for trade, by Lawrence Summers, Commentary, Financial Times: ...Since the end of the second world war, American economic policy has supported an integrated global economy, stimulating development in poor countries... Yet America’s commitment to internationalist economic policy is ever more in doubt. ...

To [the trade sceptic] the conventional wisdom has a well developed response, with four standard elements. First, the sceptic ... is educated around the many benefits of trade, not just for exporters but also for consumers and the economy more generally.

Second, the sceptic is assured that ... trade ... is not just good classical economics that reaps the gains available from comparative advantage – it is also good mercantilism. This is because the US already has low trade barriers, which it will typically not need to reduce as much as its trading partner. Sometimes the argument is added that we are in competition with other major economic powers and will be at a disadvantage if a developing country has a free-trade agreement with them but not us.

Third, the sceptic is also told that most of the observed increases in income inequality in the American economy are due to new technology rather than increased trade...

Fourth, it is acknowledged that while trade agreements are good for the economy overall, not everyone wins. And so it is increasingly recognised that they must be complemented by more ambitious efforts to reduce income inequality and income insecurity. ...

All of these points have the very considerable virtue of being correct economic arguments. Taken together, they make a compelling case...

But I suspect that the policy debate ... will need to confront a deeper and broader issue: the gnawing suspicion of many that the very object of internationalist economic policy – the growing prosperity of the global economy – may not be in their interests. ...

When other countries develop, American producers benefit from having larger markets to sell into but are challenged by more formidable competition. Which effect predominates cannot be judged a priori. But there are reasons to think that economic success abroad will be more problematic for American workers in the future.

First, developing countries increasingly export goods ... that the US produces on a significant scale, putting pressure on wages. ... Second, the growth of countries such as China raises competition for energy and environmental resources, raising the price for Americans.

Third and most fundamentally, growth in the global economy encourages the development of stateless elites whose allegiance is to global economic success and their own prosperity rather than the interests of the nation where they are headquartered. ...

Even as globalisation increases inequality and insecurity, it is constantly and often legitimately invoked as an argument against the viability of progressive taxation, support for labour unions, strong regulation and substantial production of public goods that mitigate its adverse impacts.

In a world where Americans can legitimately doubt whether the success of the global economy is good for them, it will be increasingly difficult to mobilise support for economic internationalism. The focus must shift ... to designing an internationalism that more successfully aligns the interests of working people and the middle class in rich countries...

Comments

[Jim]

This sounds like the 'they don't feel pain like we do' argument, or possibly the 'all men are not created equal' argument. We live in a competitive world, as it should be.
The key to good margins is barriers to entry. The transportation barrier is gone. Find a different one. They do exist. There are ways to succeed in a changing world. Being a union member in the U.S. is not one of them.

[Winslow R.]

"Third and most fundamentally, growth in the global economy encourages the development of stateless elites whose allegiance is to global economic success and their own prosperity rather than the interests of the nation where they are headquartered"

Bingo!

Need to tie these elites to the currency they take as their home base.

How?

Give direct access to Fed funds only to those that are willing to accept citizenship. Not to corporations or trusts as identities can be hidden.

Access to citizens. International interest farmers should be last in line.

[Andrew]

What is the comparative advantage in international trade?
Simple. Labor and regulation, and every industrialized nation is in a race to the bottom to compete for these 'advantages', while multinational corporations rake in the cash.

The corporations complaining the most about 'inflexible' labor regulations and environmental regulations which stifle competitiveness are the exact same companies investing in the places we compete against. It is a sham. A scam.

We had decades of operating our manufacturing industry profitably with union wages and benefits. If other countries had an honest Ricardian comparative advantage, then they could offer labor in other countries the exact same compensation, abide by the same environmental regulations and still make a greater profit.
But that's not the game. There is no comparative advantage. Just a bunch of greedy bastards stealing from the poor.

[Winslow R.]

Summners wrote : " stateless elites whose allegiance is to global economic success"

Not so much. I picture the typical stateless elite as having the moral fiber of Nicolas Cage in "Lord of War".

http://www.lordofwarthemovie.com/

[Bruce Wilder]

Larry Summers:

"Third and most fundamentally, growth in the global economy encourages the development of stateless elites whose allegiance is to global economic success and their own prosperity rather than the interests of the nation where they are headquartered.

"Even as globalisation increases inequality and insecurity, it is constantly and often legitimately invoked as an argument against the viability of progressive taxation, support for labour unions, strong regulation and substantial production of public goods that mitigate its adverse impacts."

"Legitimately", Larry?!??

But, WOW? For a shameless, reactionary toady to the plutocracy like Larry Summers, that's quite an admission.

The thing about "free trade" is that, if you take "free-trade" seriously as a policy, you have to confront that we've got it -- it's a done deal, and we've had it for quite some time. This is it. There is no longer any low-hanging free-trade fruit.

The emerging reality is that a globalized elite is preying on the middle classes, and issues like global warming, health & safety, labor protections point in the direction of a more regulated trade regime. You can call that "protectionism" if you like, but it is where we are at. There's no incremental progress to be had from "more" free-trade, because there are few practical opportunities to further open trade. But, there is incremental progress to be had from imposing tariffs as a means to address global warming, to strengthen labor unions, to protect health and safety.

The country needs a wealth tax pay back the Bush deficits. The country needs sharply progressive taxation to pay for education and health care. The country needs to reform corporate governance, limiting executive pay. The country needs to reform our own oppressive IP regime, and not be trying to export it to innocent foreign countries, under the guise of free-trade rhetoric. These are the kind of issues Larry should be sticking his nose in.

[dale]

How are these two statements not self-contradictory?:
"it is acknowledged that while trade agreements are good for the economy overall, not everyone wins. And so it is increasingly recognised that they must be complemented by more ambitious efforts to reduce income inequality and income insecurity. ..."
and this: "globalisation increases inequality and insecurity, it is constantly and often legitimately invoked as an argument against the viability of progressive taxation, support for labour unions, strong regulation and substantial production of public goods that mitigate its adverse impacts."

The qualifier "often" does not rescue the acknowledgement that the very forces of globalization that make progressive taxation, etc. more necessary are those that, at the same time, make progressive taxation, etc. illegitmate.

I personally think that a thorough going multi-faceted cultural-economic globalization may be both possible and desirable-- but only if the social whole is redefined in terms of a more pluralistic and radical democratic and socialist project. But then we would see a role reversal of who demands global integration and who demands protection.

[wjd123]

Here is how the New York Times makes its case:

Suppose the critics are right and all those workers were displaced by cheap imports and factories moving overseas. Those lost manufacturing jobs — an average of 400,000 a year — amount to less than 3 percent of the 15 million jobs lost each year across the economy. Meanwhile, about 17 million jobs were created annually, which is why the unemployment rate at the end of 2007 was not much different than it was at the end of 1997.--The New York Times Editorial

Here is what Dean Baker thinks about it:

The article also trivializes the 400,000 jobs a year lost to trade over the last decade by pointing out that the economy loses 15 million jobs a year. Okay, the 400,000 jobs lost is a NET number. This is the total jobs lost to trade after netting out the total number of jobs created due to increased exports. The 15 million job loss figure is a GROSS number. The NYT editorial writers must know the difference between the two and they must know that the comparison is completely bogus. If they want a net number to which to compare the jobs lost to trade, the NYT can use total job creation. This has averaged just under 1.3 million annually. In other words, the jobs lost to trade are equal to more than 30 percent of job creation over the last decade. Does that seem trivial?--Dean Baker

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=04&year=2008&base_name=nyt_on_the_war_path_for_bushcl

[wjd123]

Here is the New York Times reporting on how Senator Obama is going to appeal to blue-collar workers. In order to counter the elitist label he is taking off his coat rolling up his sleeves and meeting with smaller groups of people to listen to them instead of talking at people in large stadiums.

The NYT doesn't tell us what Obama told Bernard Smith, one of the people he listened to, but the article implied that Obama's basic message to people like him is that he was raised by a single mother and helped unemployed steel workers in Illinois.

From "Eyes on Blue-Collar Voters, Obama Shifts Style":

When Mr. Obama walked into his campaign events this weekend, no music played from the loudspeakers. At a stop on Saturday in Marion, Ind., the applause quickly subsided as he took his seat on a stool and listened as a local resident, Bernard Smith, 55, told of how he was laid off from his job at a plant in town after 31 years. His income reduced by half, he now works at the Dollar General store.

Mr. Obama’s sleeves were rolled up, his suit jacket left behind stage. He took questions for nearly an hour, often weaving in the fact that he was raised by a single mother and his grandparents. “Nobody is looking for a handout,” the senator said. “Nobody is looking for easy street.”

http://www.nytimes.com/2008/04/28/us/politics/28obama.html?ex=1367121600&en=c893b6be016ac533&ei=5089&partner=rssyahoo&emc=rss

It's insulting to Senator Obama for the NYT to suggest that the only thing he has to offer blue-collar workers is a change in style. "You do have more than that to offer, don't you Senator Obama?"

[hari]

Summers is arguing against *protectionism* and reversal of US foreign trade policy (under HRC for sure!). His contradictory or dialectical formulation is precisely for the purpose of justaposing the *pro* and *con* of free trade.

There is no q' HRC will introduce protectionist legislation or shall we call it NTBs under WTO rules - to restructure and adjust how China, in particular, amassed such a huge net increase in trade flow under bilateral/global competition - in such a short time. Emerging markets must be *controlled* and *redirected*, so goes the protectionist mantra (to allow even subsidized job creation in Ohio and elsewhere).

If you take Summmers think-piece seriously, as a policy challenge, you can vizualize how Congress is likely to dominate debate (if Dems win by great majority) on reigning in *free trade* mantra under guise of protecting domestic sectors of industry and labour unions.

All this may take place while EU/China/India are formalizing their bilateral/multilateral trade agreements with the object of introducing a bit more orderly global trade policy development.

[wjd123]

In the full article by Summers you will find a reference to this proposition by Paul Sameulson:

But I suspect that the policy debate in the US, and probably in some other countries as well, will need to confront a deeper and broader issue: the gnawing suspicion of many that the very object of internationalist economic policy – the growing prosperity of the global economy – may not be in their interests. As Paul Samuelson pointed out several years ago, the valid proposition that trade barriers hurt an economy does not imply the corollary that it necessarily benefits from the economic success of its trading partners.

When other countries develop, American producers benefit from having larger markets to sell into but are challenged by more formidable competition. Which effect predominates cannot be judged a priori. But there are reasons to think that economic success abroad will be more problematic for American workers in the future.

[ndd]

Let's grant arguments 1 2 and 3. Argument 4 depends on the losers being compensated for their losses. Now let me list here the ways the losers in the US and elsewhere have been compensated for their losses:

-
-
-
-
(crickets)

Without this crucial part, free trade simply becomes a way to engage in global wage arbitrage where the gains are all kept by the importing corporations and their biggest investors and senior management.
It is rational economic self-interest then which causes the losers, which may be an absolute majority of the members of society, to oppose free trade at the ballot box.

[reason]

ndd...
And it is worse still. Economists are using Kaldor-Hicks in cost-benefit analysis which likes to pretend a change is an improvement as long as compensation COULD result in a Pareto efficient outcome. Under this condition there is no guarantee that the welfare outcome is not worse!

[reason]

ndd...
You are absolutely correct, the whole argument is a classic bait and switch. Someone will be better off, it just is not likely to be you.

[wjd123]

On May 5th, I hope his new international design isn't just warmed over talk about a stronger social safety net. That not a new international design but a national response to globalism.

I hope that this paragraph isn't a hint to his new design.

All of these points have the very considerable virtue of being correct economic arguments. Taken together, they make a compelling case that the US is better off with than without trade agreements and that the world will be a richer, safer place with increasing economic integration. It is very possible that, if efforts to help those left behind are pursued with sufficient vigour, support for economic internationalism can be maintained.

Summers points out how the needs of nationalism and globalism are at odds with each other. What "international" solution will he present?

Third and most fundamentally, growth in the global economy encourages the development of stateless elites whose allegiance is to global economic success and their own prosperity rather than the interests of the nation where they are headquartered. As one prominent chief executive put it in Davos this year: “We will be fine however America does but I hope for its sake that it will cut taxes and reduce regulation and put more pressure on young people to study in the ways that are necessary for it to be able to keep competing successfully.”

The chief executive was sincere and he captured an important truth. Even as globalisation increases inequality and insecurity, it is constantly and often legitimately invoked as an argument against the viability of progressive taxation, support for labour unions, strong regulation and substantial production of public goods that mitigate its adverse impacts.

In a world where Americans can legitimately doubt whether the success of the global economy is good for them, it will be increasingly difficult to mobilise support for economic internationalism. The focus must shift from supporting internationalism as traditionally defined to designing an internationalism that more successfully aligns the interests of working people and the middle class in rich countries with the success of the global economy. This will be the subject of my next column, which will appear on Monday May 5.

I'll be anxious to hear his international proposal. I expect it will show how these conflicts can be reconciled internationally. Can I say international one more time.

[Jay]

What we really need to do is to stop Mississipians, Alabamans and those pesky South Carolinians from trading with other states. These right to work states have put too much downward pressure on wages for unionized jobs in Michigan, Ohio and Indiana (and stealing those auto jobs)!

Gotta love logical arguments based on neanderthal tribalism. God forbid African's, Chinese, Indians, etc. are lifted up out of poverty while in the slightest bit disrupting our "domestic" economy.

[save_the_rustbelt]

Tell it to the former Electrolux workers in Michigan.

Jay, once the jobs move south and the wages are driven as low as possible then the jobs will go overseas.

'Course you care less.

[save_the_rustbelt]

Probably every job Summers has ever had, especially in academia, has been indirectly or directly subsidized by taxpayers.

He lived well on the government.

[Jay]

STR: You are ignoring the biggest contributor to U.S. manufacturing job losses, technology. Notice how manufacturing output continued to rise even as manufacturers reduced staff at their plants.

[ndd]

Jay:
What we really need to do here is to stop Mississippians, Alabamians, and those pesky South Carolianians from having the ability to move from state to state freely without penalty in order to search for the best labor deal. We also need to stop those pesky M's, A's and pesky SC's from sharing in the tax revenue created as a result, where public works - roads, bridges, social security, unemployment benefits - for the national polity aren't created as a result.

Your next argument, please.

[OhNoNotAgain]

Jim,

"The key to good margins is barriers to entry. The transportation barrier is gone. Find a different one. They do exist. There are ways to succeed in a changing world. Being a union member in the U.S. is not one of them."

Let me preface: I'm not normally a fatalist, instead believing that we can get a better government that looks out for the interest of workers. However, your comment above is as about as accurate as they come. The one industry with significant barriers to entry is renewable energy. It would be like hiring millions of new electrical engineers, electricians, operators, biologists, etc. that, for the most part, *have* to work in the US at US wage levels. You can't fix a wind turbine or electric auto powerplant remotely from India, and you can't replace a solar panel or mirror from China. But, you can export that technology to both places.

[OhNoNotAgain]

"STR: You are ignoring the biggest contributor to U.S. manufacturing job losses, technology. Notice how manufacturing output continued to rise even as manufacturers reduced staff at their plants."

Yes, but what about white-collar jobs ? Are you saying that Indian programmers are *better* at software development than US programmers ? That hasn't been my experience at all. Furthermore, how would you explain the fact that some technology jobs such as programming are coming back to the US now that Indian wages for these jobs have risen dramatically ?

Most of the posters on this thread are correct - there isn't actually a comparative advantage apart from cost. None of these countries are actually better (quality) or more productive at these tasks. Rather, the labor situation is allowing corporations to shift money away from capital expenditures directly into the profit category, all because of cheap labor and lax regulation. It is unsustainable, and therefore, undesirable.

[save_the_rustbelt]

Manufacturing output measured how, and composed of what? Do I trust the government works? Not really.

Within 100 miles of home I can find a couple dozen empty factories due to outsourcing, but only a couple that laid anyone off due to improved technology. Anecdotal to be certain, but over the past decade I am having trouble finding all that new tech (if that was the case why aren;t more factories open with smaller work forces?).

It is all about driving down wages and benefits, and when that hits bottom more jobs will be offshored.

But we will have nirvana, 'cause economists tell us we will.

[keno]

A bakeneko will haunt any household it is kept in, creating ghostly fireballs, menacing sleepers, walking on its hind legs, changing its shape into that of a human, and even devouring its own mistress in order to shapeshift and take her place. When it is finally killed, its body may be as much as five feet in length. It also poses a danger if allowed into a room with a fresh corpse; a cat is believed to be capable of reanimating a body by jumping over it..

keno

[Real Person from the Real World]

I am sure all the professional, and non-professional economists will argue with me, but doesn't importing labor (h1b visas) interfere with the labor market? We give jobs away, that pay well $40-$125+ per HOUR, for commodity IT jobs (java, oracle, SAP, .NET) and these guys get vetted by companies at home and over seas somewhere, then get the mid level experience here, and when they get that green card, suddenly, they are in line to run IT and charge and get the going salary rate, while US grads are competing all along the line, and there are few entry level jobs and no subsidized education and health care here, as there is elsewhere. Meanwhile, while these guys face backlash from Americans, the small foreign vendors are the ones making most of the money, in the visa stage and forging under the table ties with their compatriots.