Markets & Finance

Getting Real on Global Trade


The U.S. economic policy of free trade and open borders is at risk. The latest Doha round of world trade talks aimed at further liberalizing borders recently collapsed (see BusinessWeek.com, 07/24/06, "Why Doha's Derailment Matters "). Skilled immigrants are finding it tough to move here because of post-September 11 restrictions. Erecting barriers to Chinese trade is a popular pastime in Washington D.C. "Blame trade" has become the motto for a whole host of our economic and social ills.

Let's take a step back. Congress, the Bush Administration, and others in the policymaking elite would do well to read a brief report from the Hamilton Project at the Brookings Institution called Growth, Opportunity, and Prosperity in a Globalizing Economy. Authors Peter Orszag and Michael Deich are director and managing director of the Hamilton Project, respectively. The report is a persuasive preamble to a concerted intellectual and policy effort by the Hamilton Project to improve the benefits of freer trade while minimizing the costs to U.S. workers and their families.

Sad to say, odds are that hardly anyone will even look at the 12-page document (you can download it at The Hamilton Project). That's because the Hamilton Project (named after the nation's first Treasury Secretary, Alexander Hamilton) includes a number of Clinton-era "New Economy" stalwarts, including former Treasury Secretary Robert Rubin and investment banker Robert Altman.

THINKING, NOT REACTING. For instance, here's how David Sirota, a writer at the progressive publication Working for Change reacted to the Hamilton Project on his blog: "…the Wall Street wing of the Democratic Party renewed its war on the progressive movement and working people in general." Former U.S. Treasury Secretary John Snow has also attacked it, saying "they intend a recipe of more government and higher taxes that is antithetical to growth itself."

Come on. Let's cut out the knee-jerk rhetoric. What I like about the report is that the scholars recognize that free trade and open borders have brought enormous economic and social benefits to U.S. consumers, businesses, and workers over the past two decades and more.

Exports and imports now account for more than 25% of the U.S. economy, up from about 17% some 20 years ago. Consumers enjoy lower prices and greater choice, from shopping for clothes at Target (TGT) to picking a car at a mega-dealership to the abundance of ethnic food at the grocery store. What's more, the competition from overseas rivals has encouraged corporate efficiency and innovation.

CONCENTRATED COSTS. The authors also refer to data from a recent economic study that attempted to quantify the aggregate benefits of international trade to the U.S. economy. In The Payoff to America from Global Integration, economists Scott C. Bradford, Paul L.E. Grieco, and Gary C. Hufbauer came up with a gain of $800 billion to $1.5 trillion in 2003 alone. Their results, write Orszag and Deich, suggest that the U.S. economy benefits by some $1 trillion annually. That's still a lot of money. And I don't see any war on workers here or a call for big government.

Here's the rub. As everyone knows from Econ 101, the gains from trade are dispersed throughout the economy while the costs are highly concentrated, especially among workers. Too many U.S. employees are feeling the downside of "creative destruction.". Thanks to the corporate restructurings, downsizings, reengineerings—pick your favorite euphemism—that are routine in Corporate America, there's little job security.

Research by Jacob Hacker of Yale University suggests that the probability of a family experiencing a substantial drop in income has doubled since the early 1970s. Real wages for workers with a college sheepskin fell by more than 5% between 2000 and 2004. Both blue-collar and white-collar employees are worried about losing out to Chinese, Indian, and other competitors in developing nations. There's no denying that international competition has contributed to the increase in income inequality and job insecurity of recent decades.

SACRIFICIAL PLAN. So what are we as a society doing about it? Not much. There are two dominant policy responses—one Republican and one Democrat—and Orszag and Deich are right to dismiss them both. The first approach they label YOYO economics, as in "you're on your own." Lost your job? Find a new one. Plant moved to Mexico? Change careers. Kids aren't getting a good education? Move.

The only policy response to economic turmoil the advocates of YOYO seem to like is cutting taxes on labor and capital. The problem: This approach entails a lot of individual sacrifice and suffering, as well as significant risks to economic performance.

The other policy centers on adopting traditional protectionist measures against so-called "unfair traders." It's a classic Washington response to erect trade barriers against, say, Chinese textile imports or to shovel subsidies at an industry threatened by international competition, such as agriculture.

WHAT ARE THE PRESCRIPTIONS? Typically, trade barriers harm consumers by raising domestic prices. Economists have long looked into industry subsidies and found them wanting. Management doesn't make the kinds of investments that improve efficiency, and workers still lose their jobs over time (although the subsidies usually end up lining the pocket of senior management). "The 'sand-in-the-wheels approach' is just as unrealistic and unwise as YOYO economics," Orszag and Deich write.

The authors' preferred policy prescriptions are thin, though they promise that the reforms will be elaborated on in future reports. And the suggestions the scholars put forward are hardly revolutionary. But they are still well worth repeating. For instance, they say a quality education truly matters in an increasingly integrated global economy that more than ever competes for sales with brainpower and talent. Schools must be held to higher standards.

They also reject basing economic security on protecting specific jobs or subsidies targeted to specific industries. "Thus, economic security must be provided, but it must be provided in the forms of skills and market-based social insurance schemes, not by holding back the tide of competition through the protection of one or another industry," write Orszag and Deich. I would add to the list universal health-care coverage and universal pension plans attached to the worker rather than the company.

MUCH TO LOSE. That said, I think the Hamilton Project is onto something when it ends on a note of seeking solutions. Economists have done a wonderful job documenting the gains from open borders, and have eloquently defended the policy over the past quarter-century. But economists have not spent enough brainpower and effort on devising ways that give hope and opportunity to those who lose to foreign competition in an increasingly integrated global economy.

Coming up with viable solutions ranks among the most compelling intellectual challenges of our time. My fear is that without concerted intellectual firepower and nonpartisan action along the lines suggested by the authors, the backlash against immigrants and trade will gain additional momentum. In that case, everyone loses.


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