Playing Politics with Trade

I’m a little late coming to this, but last week’s New Yorker article “The Free Trade Paradox” is really outstanding. One of the most disappointing things about this primary season for me was watching the Democratic presidential candidates parade around the country talking about their deep seated hatred of NAFTA and their desire to “renegotiate” it and their stances against the Columbian Free Trade Agreement. One of the best things that Bill Clinton did in his presidency was to build and expand a consensus around the concept that trade and globalization are good for the United States. Now, less than 8 years after he left office, Democrats are once again running against trade to try to win working class votes. Instead of explaining to voters why trade is good for them while working to blunt the impact of globalization on those who lose out, Democrats have chose the route of demagoguery. Fortunately James Surowiecki does a good job of deconstructing the arguments against free trade:

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.

The Democrats opposition to trade really is about trying to swindle people who think trade is bad. Just about no one thinks that Obama or Clinton are really opposed to free trade. Their advisers are all broadly pro-trade, especially Obama’s Austan Goolsbee, who got in trouble for suggesting to the Canadians that Obama isn’t really serious about renegotiating NAFTA. But what people miss is that trade agreements didn’t really hurt America:

The first problem with what the candidates have been saying is that Ohio’s troubles haven’t really been caused by trade agreements. When NAFTA took effect on Jan. 1, 1994, Ohio had 990,000 manufacturing jobs. Two years later, it had 1.03 million. The number remained above one million for the rest of the 1990s, before plummeting in this decade to just 775,000 today.

What changed wasn’t NAFTA. It was the rise of China and India as economic superpowers. There’s not a lot we can do to counter than, beyond helping people who are hurt by outsourcing to China and India get back on their feet. Similarly, Democrats have recently come out against the Colombia Free Trade Agreement. While CFTA isn’t an ideal agreement, it seems to be no-lose for America. Per Matt Yglesias, the deal doesn’t really involve any substantive concessions on America’s side, while Colombia makes all sorts of concessions to US interests. That should be a no-brainer. But because of Democratic paranoia over “free trade” Democrats are opposing the deal.

Democrats really need to come to a more sophisticated understanding of trade. Obstructionism and outright rejection of trade deals are bad for everyone and the focus on “environmental and labor standards” is really just a way to oppose every trade agreement that comes along. Obama seems to get this. The question is whether he is brave enough to say it.

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