U.S. Presidential Candidates Should Defend Trade Liberalization

To date, Campaign 2008 has been marked by substantial divisions that separate the candidates, both across Party lines and within their own Parties. However, there increasingly appears to be an emerging overarching sentiment that transcends those differences: a lukewarm, if not occasionally hostile, attitude toward trade liberalization. In this case, such harmony is not a good thing. A vision that seeks to place a wall around the United States, literally and figuratively speaking, is one that can only detach the United States from the dynamic global economy and undermine its ability to leverage world-class talent. In the longer-run, such an approach can only lead to diminished economic outcomes and reduced growth in living standards relative to the world at large.

Needless to say, at least through the opening of Primary season and perhaps until the candidates' secure their respective Parties' nominations, the candidates’ retreat en masse from sound economic policy could well continue. After all, that is the popular thing to do, even if it makes for very bad economic policy.

Recent survey data shows that Americans have been growing increasingly fearful when it comes to anything to do with borders, whether it concern trade, capital flows, or immigration. According to a newly released report published by The German Marshall Fund of the United States, 61% of Americans felt that their nation’s high labor and environment standards put them at a disadvantage when engaging in freer trade, 61% attributed outsourcing as the leading cause of job loss, 57% said that trade costs more jobs than it creates, and 48% alleged that immigrant workers negatively impact wages. Reflecting such sentiments, a November 2007 Wall Street Journal/NBC News poll revealed that 60% of Americans agreed that “foreign trade has been bad for the U.S. economy.”

Rather than allow themselves to be swept up by a rolling wave of uninformed sentiment, that if it is translated into policy could prove highly damaging to the U.S. economy in general and individuals’ job opportunities and incomes in particular, the Presidential candidates have an obligation of leadership to reaffirm the case for continuing to lower the nation's trade and capital barriers while rebutting the increasingly supersized fears that permeate the electorate on such matters. “[W]e have nothing to gain from a protectionist turn in global markets,” Peter Mandelson, European Union trade commissioner explained.

Trade liberalization, and the larger related phenomenon of globalization, have been beneficial to the United States. Trade liberalization helped fuel robust and sustained economic growth. Globalization, coupled with sound monetary policy, helped foster a disinflationary economic environment that closed the chapter on the stagflation of the 1970s and early 1980s. Competition from imports forced American companies to become more productive and competitive so as to compete in ever more demanding global markets. American consumers benefited from lower prices and better quality goods and services.

“The postwar liberalization of trade helped open up new low-cost sources of supply; coupled with the development of new financial institutions and products (made possible in part by silicon-based technologies), it facilitated the forward thrust toward global market capitalism even during the years of the cold war. In the following quarter century, the embrace of free-market capitalism helped bring inflation to quiescence and interest rates to single digits globally,” former Federal Reserve Chairman Alan Greenspan explained. Turning aside the populist notion that imports are destructive, former Treasury Secretary Robert Rubin observed, “Politicians don’t like to say this, but imports also contribute greatly to our economic well-being, by reducing prices paid by American consumers and producers, by shifting our allocation of resources to areas where we have a comparative advantage in the global economy, and, very importantly, by creating competitive pressure on American companies to be more efficient and productive.” Those are not small benefits.

The appeals to “Fair trade” that reverberate so loudly these days are little more than hollow platitudes aimed at clouding the argument for trade liberalization, locking developing countries out of economic opportunity, and restricting American consumers' product choice. It is a “lose-lose” proposition. Columbia University Professor of Economics, Jagdish Bhagwati explained, “The notion of ‘fair trade’ is inherently vacuous. Economics teaches us that we generally gain from trade regardless of what our partners do. As the Cambridge economist Joan Robinson observed, we may think fairness requires that we throw stones into our harbor because our trading partners throw stones into theirs, but doing so only compounds our losses.”

As the Iowa Caucuses and New Hampshire Primaries approach, more and more, it appears the candidates are ‘throwing stones’ into America’s harbors. Instead, they should be offering a staunch defense of the nation’s trade architecture and advocating completion of the Doha trade round. Not long ago, Presidents Reagan, Bush, and Clinton played pivotal roles in helping erect the architecture under which the U.S. conducts its trade policy by helping bring to fruition CFTA and NAFTA, and strengthening the WTO (formerly GATT). Today’s candidates should seek to expand on that firm foundation. Effective leadership that serves the national interest requires no less, especially when contemporary populist sentiments run counter to the national interest.​

Tlmorg02,

I understand the points you are raising. In my view, they are reasonable arguments. Several quick replies to the points you raised:

1) There clearly are transitional effects associated with globalization. Not every industry or market sector will benefit, even as the overall benefits exceed the costs. In my opinion, rather than attempting to slow trade liberalization or reverse globalization, political leaders should invest more in education and develop mechanisms for offering transitional assistance to dislocated workers.

2) U.S. agricultural products have undermined local producers in some developing countries, not because American farmers are more productive or competitive, but because agricultural subsidies have distorted the marketplace. In my opinion, the U.S. and European Union should phase out such subsidies while lowering trade barriers to agricultural products from developing countries (a major focus of the Doha round).

3) Trade and non-trade issues should be treated separately. I have no objections to negotiating separate agreements that address environmental issues. In fact, the climate change debate may well place greater focus on broader environmental issues. In my view, the separate approach is better, because it allows political leaders to reach agreements where it is possible to do so. Linkages could preclude agreements, even where such agreements might prove beneficial, on average.

4) China has some significant labor market issues. I have been there and seen some of the factories. However, such an experience appears to be more a part of the natural evolution from developing to developed status. In general, one has witnessed increasing labor protections and standards as nations have migrated toward more developed status. I believe China will move along that path, as well. The wildcard at play is whether China's governance system, which is undemocratic at present, will tend to slow that process until the gap between labor standards and needs becomes so great that the government will have little choice but to move toward improved standards.

5) The issue of science and mathematics is one of the reasons I believe the U.S. government should invest much more in terms of education. It should focus more on programs that yield future benefits (education, scientific research, etc.) rather than those that serve consumption but yield no future benefits. At the same time, even as it runs counter to the Lou Dobbs immigration approach that is increasingly embraced by populists, the U.S. should make it easier for talented foreign students who study in U.S. institutions of higher education to remain in the U.S. after they complete their studies and easier for talented professionals from the world over to immigrate to the U.S. Otherwise, the U.S. will underperform in developing its own domestic talent base (its students) and in attracting the kind of world-class talent that other nations might compete to attract. The outcome of such failures would impose long-run costs on the United States, in terms of reduced productivity and foregone opportunity.​