Monday, January 8, 2007

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A few good trade links

A few if the saner things written about trade in the past few weeks:

1) William Overholt, "Globalization's Unequal Discontents,", December 21, 2006:

Some manufacturing workers in the United States -- such as those who labored in huge factories making basic steel -- have suffered as they've seen their jobs leave America for low-wage countries. But for workers as a whole, the truth about globalization and inequality is the opposite of what the protectionists claim. There are three caveats to the steel worker's story and two larger perspectives on inequality.

One caveat is that protectionists enormously exaggerate the negative effects of globalization by attributing virtually all manufacturing job losses to competition with China. We are told by union leaders and some politicians that America is exporting millions of jobs to China. This is absolutely untrue.

Scholarly studies show that most job losses in the United States are attributable to domestic causes such as increased domestic productivity. A few years ago it took 40 hours of labor to produce a car. Now it takes 15. That translates into a need for fewer workers. Protectionists who blame China for such job losses are being intellectually dishonest. In fact, both China and the U.S. have lost manufacturing jobs due to rising productivity, but China has lost ten times more -- a decline of about 25 million Chinese jobs from over 54 million in 1994 to under 30 million ten years later.

A second caveat is that there are two ways to increase people's standard of living. One is to increase their wages. The other is to decrease prices so that they can buy more things with the same amount of money.

The ability to buy inexpensive, quality Chinese-made shoes and Japanese-made cars at lower prices disproportionately benefits lower income Americans. The Wall Street banker who pays $350 for Church's shoes benefits relatively little, but the janitor who buys shoes for $25 rather than $50 at Payless or Target or Wal-Mart benefits greatly.

Lower prices due to imports from China alone -- ignoring all other similar results of globalization -- probably raise the real incomes of lower income Americans by 5 to 10 percent. That's something no welfare program has ever accomplished.

A third caveat is that the protectionists never mention the jobs created and saved by globalization. If General Motors avoids bankruptcy, as seems likely, one important reason will be the profits it has made by selling cars in China. The vast China market, and the ability of American corporations to expand and refine their operations though a division of labor with China, creates many high level jobs in U.S. operations ranging in diversity from Motorola to IBM to Caterpillar to Boeing to farming.

The first of the larger perspectives on globalization is that open economies adjust faster to their real competitive advantages, allowing them to employ their own people. The most recent U.S. unemployment rate was 4.4 percent. France, along with other relatively protected economies, typically has twice as high a proportion of the population unemployed because their workers are stuck in inappropriate jobs.

Still more protected economies, like many in Latin America, often run much higher rates of unemployment -- up to 40%. Economies more open than the U.S. -- like Singapore and Hong Kong -- historically run lower rates of unemployment.

The worst inequality is between families whose breadwinners have jobs and those who don't. Globalization minimizes that problem.

Globalization has brought countries with about 3 billion people from subhuman conditions of life into modern standards of living with adequate food, basic shelter, modern clothing rather than rags, and life spans that are over 60 rather than under 45. (In the early 1950s China's life expectancy was 41 years, in 2005 it was 72.7 years. This is the greatest reduction of inequality that has happened in human history.

2) Jagdish Bhagwati, "Technology, not Globalisation, Drives Wages Down," Financial Times, January 3, 2007:
Lou Dobbs of CNN, the labour groups’ think-tank Economic Policy Institute and nearly all the Democrats newly elected to Congress believe that globalisation has much to do with the economic distress of the working and middle classes. Therefore they have coherence on their side when they want to lean on the door – even to close it – on trade with poor countries and occasionally on unskilled immigration from them.

Proponents of globalisation, however, find themselves in a politically implausible position: they typically skirt around and hence accept this “distributional” critique of globalisation – yet nonetheless propose that those adversely affected should accept globalisation but be aided so as to cope with their affliction in other ways.

As it happens, globalisation’s supporters are on firmer ground than they fear. Examine the common arguments linking globalisation to the distributional distress and little survives....

The decline in unionisation has been going on for longer than the past two decades of globalisation, shows no dramatic acceleration in the past two decades and is to be attributed to the union-unfriendly provisions of the half-century-old Taft-Hartley provisions that crippled the ability to strike....

The culprit is not globalisation but labour-saving technical change that puts pressure on the wages of the unskilled. Technical change prompts continual economies in the use of unskilled labour. Much empirical argumentation and evidence exists on this. But a telling example comes from Charlie Chaplin’s film, Modern Times. Recall how he goes berserk on the assembly line, the mechanical motion of turning the spanner finally getting to him. There are assembly lines today, but they are without workers; they are managed by computers in a glass cage above, with highly skilled engineers in charge.

Such technical change is quickly spreading through the system. This naturally creates, in the short-run, pressure on the jobs and wages of the workers being displaced....

The pressure on wages becomes relentless, lasting over longer periods than in earlier experience with unskilled labour-saving technical change. But this technical change, which proceeds like a tsunami, has nothing to do with globalisation.

One slight cavil -- that last paragraph by Bhagwati strikes me as a bit of a stretch. I have to think that globalization is one of the drivers for greater technical change.

3) Susan Aaronson, "Labor Rights Not Optional,", January 5, 2007:

[Both] the Democratic alternative and the current Bush administration approach do little to bolster the demand in developing countries for strong labor protections. Neither approach facilitates the ability of citizens in our trade partners to participate in and monitor labor rights enforcement. In countries such as Oman, a U.S. free trade partner, workers cannot easily influence their government or obtain due process in administrative procedures. In addition, some of America’s free trade agreement partners do not provide their citizens with full information about their labor rights under the law. As a result, it is difficult for activists to monitor their government and hold it accountable.

Labor rights advocates should take a page from the environmental chapters of several recent free trade agreements. In 2004, Democratic Senator Max Baucus pressed U.S. trade policymakers to strengthen public participation provisions and embed them in every future trade agreement.

The Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) is the first trade agreement built on Baucus’ suggestions. It includes both a mechanism and secretariat that allows citizens from any one of the seven signatory nations to challenge enforcement of environmental laws. Moreover, the trade agreement requires policymakers to respond to these complaints. To ensure the viability of this model, the United States agreed to fund the first year of the secretariat’s work. In addition to setting up a complaint mechanism, trade and/or environmental ministries in each of the CAFTA countries reached out to their constituents on the environmental chapters. They held hearings, called for public comments, and published their new regulations on the web and in print. Each environment ministry developed a website on environmental activities and outreach. USTR has agreed to replicate this model in other free trade agreements with Colombia and Peru.

But these citizen submission strategies should not be limited to the environmental chapters of free trade agreements. The U.S. government should adopt a similar approach in the labor chapters as well. As the Democrats have promised, the U.S. first should ask its trade partners to ensure that their labor laws meet internationally accepted labor standards before negotiating a trade agreement. In addition, policymakers should also include provisions that ensure public comment on labor law development and or enforcement; allow citizens to petition their government regarding labor law violations; and set up a complaint and hearing process related to labor rights. By so doing, the U.S. would be strengthening local labor movements as well as expanding grassroots pressure for democratic accountability.

America’s founding fathers recognized that democracy and good governance could not flourish if the public did not participate in decision making. In the long run, good governance, like democracy, can’t be exported. But the U.S. can use trade policy to help workers abroad influence and monitor labor rights in their home countries.

UPDATE: Brad Setser protests in the comments about the Overholt piece -- which reminds me that I should have linked this post of his from last week.

posted by Dan on 01.08.07 at 09:00 AM


I can't believe this statement: "Lower prices due to imports from China alone -- ignoring all other similar results of globalization -- probably raise the real incomes of lower income Americans by 5 to 10 percent. That's something no welfare program has ever accomplished." The poor spend most of their income on food, shelter, utilities, and public transportation, very little of which is imported from China. Any ideas of where the figure came from?

posted by: Bill Harshaw on 01.08.07 at 09:00 AM [permalink]

I second Bill Harshaw's comments.

Plus, isn't it disingenuous to look at areas where China's intergration into the global economy lowered prices but not to look at areas where it has raised them (oil, commodities). And then there is the difficult question of China's impact on housing prices --it clearly has helped push them up, tho its impact on rents/ mortgage int. costs is more ambiguous. With imports from China 2-3%% of US GDP and maybe 4-5% of total US consumption, getting a 5-10% overall fall is rather hard, n'est pas?

And if low priced goods from China are such a boon why hasn't there been stronger growth in real wages (median) and real compensation (Median). both have lagged productivity growth. I don't think we yet know why, and perhaps this is changing now, but it there is little doubt that the recent surge in corporate profits stems in no small part from a broad economic environment wage growth that has lagged productivity growth (combined with soaring profits in the financial sector/ resource sector).

The past few years have been far better for those holding financial assets than for those selling their labor to buy goods and services -- falling real prices for manufactured goods have been offset by rising real prices for commodities. The extent to which China has contributed to this is debatable, but it is hard to make a case that China has been good for the median worker when the median worker's share of national income is slipping ...

posted by: bsetser on 01.08.07 at 09:00 AM [permalink]

I should add that many welfare programs have increased real income of their target population by much more than 10 percent. Certainly food stamps, TANF, and EITC would all qualify.

It looks to me as if Mr. Overholt forgot his own admonition to avoid emotion (third from last paragraph) in his zeal to wage the good fight for free trade.

posted by: Bill Harshaw on 01.08.07 at 09:00 AM [permalink]

So GM avoiding bankrupcy is a BENEFIT of globalization??? I was under the impression that foreign competition is the main reason that GM is having problems in the first place.

Also, arguing over the loss of manufacturing jobs is beside the point. The reason for the screaming over globalization is the loss of white collar jobs. It may well be that there are new, high-paying jobs in their place, but I don't know what they are.

Finally, it's true that globalization has lifted hundreds of millions of people out of poverty, but they're in Asia, and I'm not so sure that's as important to me as my family.

None of this is to suggest that I am anti-free-trade. I am 100% in favor. But there is a price and we need to talk about it plainly.

posted by: OpenBorderMan on 01.08.07 at 09:00 AM [permalink]

"...The worst inequality is between families whose breadwinners have jobs and those who don't. Globalization minimizes that problem...."

I happen to be working in Michigan this week, and this is bull. Light and medium manufacturing has been offshoring since about 1995, and now the crashing auto industry (much self-induced) is making this worse.

I just can't believe all of these econ pinheads trying to deny any significant damage from offshoring and globalization. It reminds me of the Kristin Forbes (MIT) cheap sneakers argument (so what if you lose a big chunk of your income, you can now buy cheap sneakers at Wal-Mart).

If the intelligensia continues to ignore reality you will have more Sherrod Brown types in Congress and that will not bode well for trade.

posted by: save_the_rustbelt on 01.08.07 at 09:00 AM [permalink]

STR, Globalization DOES reduce the inequity between those with jobs and those without --- by lowering wages. I don't know if that is the point that the original author intended.

posted by: OpenBorderMan on 01.08.07 at 09:00 AM [permalink]

"...Some manufacturing workers in the United States -- such as those who labored in huge factories making basic steel -- have suffered as they've seen their jobs leave America for low-wage countries...."

Just a thought, but the steel workers largely lost their jobs two decades ago, it is light and medium manufacturing that has been devastated in the past decade.

So just how credible is this author anyway?

posted by: save_the_rustbelt on 01.08.07 at 09:00 AM [permalink]

OBM - yes, unfortunately

and dittos to Brad Setser

Real wages are lagging here because $18 an hour jobs are being destroyed and $8 an hour jobs are being creaated - it takes a lot of investment banker bonuses to offset that trend in the real income numbers

posted by: save_the_rustbelt on 01.08.07 at 09:00 AM [permalink]

I was under the impression that foreign competition is the main reason that GM is having problems in the first place.

Only insofar as the foreign competition are declining to make a product that sucks more than the GM product.

GM's problems are ultimately attributable to GM's management making bad decisions, not to it's competitors making good decisions. The 'foreign' aspect is a red herring.

posted by: rosignol on 01.08.07 at 09:00 AM [permalink]

It'd probably be politically difficult, but why don't the Democrats combine the populist attitudes with the aim of eliminating protetictionist barriers like the ones for professionals, as Dean Baker has described them?

posted by: Brian on 01.08.07 at 09:00 AM [permalink]

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