All those exclamation points notwithstanding, nearly all theory and evidence suggest that the benefits of international trade far exceed the costs. The topic is worthy of an entire book; some good ones wade into everything from the administrative structure of the WTO to the fate of sea turtles caught in shrimp nets. Yet the basic ideas underlying the costs and benefits of globalization are simple and straightforward. Indeed, no modern issue has elicited so much sloppy thinking. The case for international trade is built on the most basic ideas in economics.
Trade makes us richer. Trade has the distinction of being one of the most important ideas in economics and also one of the least intuitive. Abraham Lincoln was once advised to buy cheap iron rails from Britain to finish the transcontinental railroad. He replied, “It seems to me that if we buy the rails from England, then we’ve got the rails and they’ve got the money. But if we build the rails here, we’ve got our rails and we’ve got our money.”4 To understand the benefits of trade, we must find the fallacy in Mr. Lincoln’s economics. Let me paraphrase his point and see if the logical flaw becomes clear: If I buy meat from the butcher, then I get the meat and he gets my money. But if I raise a cow in my backyard for three years and slaughter it myself, then I’ve got the meat and I’ve got my money. Why don’t I keep a cow in my backyard? Because it would be a tremendous waste of time—time that I could have used to do something else far more productive. We trade with others because it frees up time and resources to do things that we are better at.
Saudi Arabia can produce oil more cheaply than the United States can. In turn, the United States can produce corn and soybeans more cheaply than Saudi Arabia. The corn-for-oil trade is an example of absolute advantage. When different countries are better at producing different things, they can both consume more by specializing at what they do best and then trading. People in Seattle should not grow their own rice. Instead, they should build airplanes (Boeing), write software (Microsoft), and sell books (Amazon)—and leave the rice-growing to farmers in Thailand or Indonesia. Meanwhile, those farmers can enjoy the benefits of Microsoft Word even though they do not have the technology or skills necessary to produce such software. Countries, like individuals, have different natural advantages. It does not make any more sense for Saudi Arabia to grow vegetables that it does for Tiger Woods to do his own auto repairs.
Okay, but what about countries that don’t do anything particularly well? After all, countries are poor because they are not productive. What can Bangladesh offer to the United States? A great deal, it turns out, because of a concept called comparative advantage. Workers in Bangladesh do not have to be better than American workers at producing anything for there to be gains from trade. Rather, they provide goods to us so that we can spend our time specializing at whatever we do best. Here is an example. Many engineers live in Seattle. These men and women have doctorates in mechanical engineering and probably know more about manufacturing shoes and shirts than nearly anyone in Bangladesh. So why would we buy imported shirts and shoes made by poorly educated workers in Bangladesh? Because our Seattle engineers also know how to design and manufacture commercial airplanes. Indeed, that is what they do best, meaning that making jets creates the most value for their time. Importing shirts from Bangladesh frees them up to do this, and the world is better off for it.
Productivity is what makes us rich. Specialization is what makes us productive. Trade allows us to specialize. Our Seattle engineers are more productive at making planes than they are at sewing shirts; and the textile workers in Bangladesh are more productive at making shirts and shoes than they are at whatever else they might do (or else they would not be willing to work in a textile factory). I am writing at the moment. My wife is running a software consulting firm. A wonderful woman named Clementine is looking after our children. We do not employ Clemen because she is better than we are at raising our children (though there are moments when I believe that to be true). We employ Clemen because she enables us to work during the day at the jobs we do well, and that is the best possible arrangement for our family—not to mention for Clemen, for the readers of this book, and for my wife’s clients.
Trade makes the most efficient use of the world’s scarce resources.
Trade creates losers. If trade transports the benefits of competition to the far corners of the earth, then the wreckage of creative destruction cannot be far behind. Try explaining the benefits of globalization to shoe workers in Maine who have lost jobs because their plant moved to Vietnam. (Remember, I was the speechwriter for the governor of Maine; I have tried to explain that.) Trade, like technology, can destroy jobs, particularly low-skilled jobs. If a worker in Maine earns $14 an hour for something that can be done in Vietnam for $1 an hour, then he had better be 14 times as productive. If not, a profit-maximizing firm will choose Vietnam. Poor countries lose jobs, too. Industries that have been shielded from international competition for decades, and have therefore adopted all the bad habits that come from not having to compete, can be crushed by ruthlessly efficient competition from abroad. How would you like to have been the producer of Thumbs-Up Cola in India when Coca-Cola entered the market in 1994?
In the long run, trade facilitates growth and a growing economy can absorb displaced workers. Exports rise and consumers are made richer by cheap imports; both of those things create demand for new workers elsewhere in the economy. Trade-related job losses in America tend to be small relative to the economy’s capacity to produce new jobs. One post-NAFTA study concluded that an average of 37,000 jobs per year were lost from 1990 to 1997 because of free trade with Mexico, while over the same period the economy was creating 200,000 jobs per month.5 Still, “in the long run” is one of those heartless phrases—along with “transition costs” or “short-term displacement”—that overly minimize the human pain and disruption.
Maine shoe workers are expected to pay their mortgages in the short run. The sad reality is that they may not be better off in the long run, either. Displaced workers often have a skills problem. (Far more workers are made redundant by new technology than by trade.) If an industry is concentrated in a geographic area, as they often are, laidoff workers may watch their communities and way of life fade away.
The New York Times documented the case of Newton Falls, a community in upstate New York that grew up around a paper mill that opened in 1894. A century later, that mill closed, in part because of growing foreign competition. It’s not pretty:
Since October—after a last-ditch effort to save the mill fell through—Newton Falls has edged closer to becoming a case study of doleful rural sociology: a dying town, where the few people left give mournful testament to having their community wind down like an untended clock, ticking inexorably toward a final tock.6
Yes, the economic gains from trade outweigh the losses, but the winners rarely write checks to the losers. And the losers often lose badly. What consolation is it to a Maine shoe worker that trade with Vietnam will make the country as a whole richer? He’s poorer and probably always will be. I’ve gotten those e-mails, too.
Indeed, we’re back to the same discussion about capitalism that we had at the beginning of the book and again in Chapter 8. Markets create a new, more efficient order by destroying the old one. There is nothing pleasant about that, particularly for individuals and firms equipped for the old order. International trade makes markets bigger, more competitive, and more disruptive. Mark Twain anticipated the fundamental dilemma: “I’m all for progress; it’s change I don’t like.”
Marvin Zonis, an international consultant and a University of Chicago Booth School of Business professor, has called the potential benefits of globalization “immense,” particularly for the poorest of the poor. He has also noted, “Globalization disrupts everything, everywhere. It disrupts established patterns of life—between husband and wife, parents and children; between men and women, young and old; between boss and worker, governor and governed.”7 We can do things to soften those blows. We can retrain or even relocate wor
kers. We can provide development assistance to communities harmed by the loss of a major industry. We can ensure that our schools teach the kinds of skills that make workers adaptable to whatever the economy may throw at them. In short, we can make sure that the winners do write checks (if indirectly) to the losers, sharing at least part of their gains. It’s good politics and it’s the right thing to do.
Kenneth Scheve, a Yale political science professor, and Matthew Slaughter, an economist at the Tuck School of Business at Dartmouth, wrote a provocative piece in Foreign Affairs arguing that the United States should adopt a “fundamentally more progressive federal tax system” (e.g., tax the rich more) as the best way of saving globalization from a protectionist backlash. What’s interesting is that these guys are not left-wing radicals wearing tie-dye shirts; Matt Slaughter served in the George W. Bush administration. Rather, they argue that the huge benefits for the U.S. economy as a whole are being put at risk by the fact that too many Americans aren’t seeing their paychecks get bigger. Scheve and Slaughter explain:
[U.S.] policy is becoming more protectionist because the public is becoming more protectionist, and the public is becoming more protectionist because incomes are stagnating or falling. The integration of the world economy has boosted productivity and wealth creation in the United States and much of the rest of the world. But within many countries, and certainly within the United States, the benefits of this integration have been unevenly distributed—and this fact is increasingly being recognized. Individuals are asking themselves, “Is globalization good for me?” and, in a growing number of cases, arriving at the conclusion that it is not.
The authors propose “a New Deal for globalization—one that links engagement with the world economy to a substantial redistribution of income.” Remember, this isn’t hippy talk. These are the capitalists who see angry workers with pitchforks loitering outside the gates of a very profitable factory, and they are making a very pragmatic calculation: Throw these people some food (and maybe some movie tickets and beer) before we all end up worse off.8
Protectionism saves jobs in the short run and slows economic growth in the long run. We can save the jobs of those Maine shoe workers. We can protect places like Newton Falls. We can make the steel mills in Gary, Indiana, profitable. We need only get rid of their foreign competition. We can erect trade barriers that stop the creative destruction at the border. So why don’t we? The benefits of protectionism are obvious; we can point to the jobs that will be saved. Alas, the costs of protectionism are more subtle; it is difficult to point to jobs that are never created or higher incomes that are never earned.
To understand the costs of trade barriers, let’s ponder a strange question: Would the United States be better off if we were to forbid trade across the Mississippi River? The logic of protectionism suggests that we would. For those of us on the east side of the Mississippi, new jobs would be created, since we would no longer have access to things like Boeing airplanes or Northern California wines. But nearly every skilled worker east of the Mississippi is already working, and we are doing things that we are better at than making airplanes or wine. Meanwhile, workers in the West, who are now very good at making airplanes or wine, would have to quit their jobs in order to make the goods normally produced in the East. They would not be as good at those jobs as the people who are doing them now. Preventing trade across the Mississippi would turn the specialization clock backward. We would be denied superior products and forced to do jobs that we’re not particularly good at. In short, we would be poorer because we would be collectively less productive. This is why economists favor trade not just across the Mississippi, but also across the Atlantic and the Pacific. Global trade turns the specialization clock forward; protectionism stops that from happening.
America punishes rogue nations by imposing economic sanctions. In the case of severe sanctions, we forbid nearly all imports and exports. A recent New York Times article commented on the devastating impact of sanctions in Gaza. Since Hamas came to power and refused to renounce violence, Israel has limited what can go in and out of the territory, leaving Gaza “almost entirely shut off from normal trade and travel with the world.” Prior to the Iraq War, our (unsuccessful) sanctions on Iraq were responsible for the deaths of somewhere between 100,000 and 500,000 children, depending on whom you believe.9 More recently, the United Nations has imposed several rounds of increasingly harsh sanctions on Iran for not suspending its clandestine nuclear program. The Christian Science Monitor explained the economic logic: Tougher sanctions “would hit the ruling mullahs hard by raising Iran’s already high unemployment, and perhaps force trickle-up regime change.”
Civil War buffs should remember that one key strategy of the North was imposing a naval blockade on the South. Why? Because then the South couldn’t trade what it produced well (cotton) to Europe for what it needed most (manufactured goods).
So here’s a question: Why would we want to impose trade sanctions on ourselves—which is exactly what any kind of protectionism does? Can the antiglobalization protesters explain how poor countries will get richer if they trade less with rest of the world—like Gaza? Cutting off trade leaves a country poorer and less productive—which is why we tend to do it to our enemies.
Trade lowers the cost of goods for consumers, which is the same as raising their incomes. Forget about shoe workers for a moment and think about shoes. Why does Nike make shoes in Vietnam? Because it is cheaper than making them in the United States, and that means less expensive shoes for the rest of us. One paradox of the trade debate is that individuals who claim to have the downtrodden at heart neglect the fact that cheap imports are good for low-income consumers (and for the rest of us). Cheaper goods have the same impact on our lives as higher incomes. We can afford to buy more. The same thing is true, obviously, in other countries.
Trade barriers are a tax—albeit a hidden tax. Suppose the U.S. government tacked a 30-cent tax on every gallon of orange juice sold in America. The conservative antigovernment forces would be up in arms. So would liberals, who generally take issue with taxes on food and clothing, since such taxes are regressive, meaning that they are most costly (as a percentage of income) for the disadvantaged. Well, the government does add 30 cents to the cost of every gallon of orange juice, though not in a way that is nearly as transparent as a tax. The American government slaps tariffs on Brazilian oranges and orange juice that can be as high as 63 percent. Parts of Brazil are nearly ideal for growing citrus, which is exactly what has American growers concerned. So the government protects them. Economists reckon that the tariffs on Brazilian oranges and juice limit the supply of imports and therefore add about 30 cents to the price of a gallon of orange juice. Most consumers have no idea that the government is taking money out of their pockets and sending it to orange growers in Florida.10 That does not show up on the receipt.
Lowering trade barriers has the same impact on consumers as cutting taxes. The precursor to the World Trade Organization was the General Agreement on Tariffs and Trade (GATT). Following World War II, GATT was the mechanism by which countries negotiated to bring down global tariffs and open the way for more trade. In the eight rounds of GATT negotiations between 1948 and 1995, average tariffs in industrial countries fell from 40 percent to 4 percent. That is a massive reduction in the “tax” paid on all imported goods. It has also forced domestic producers to make their goods cheaper and better in order to stay competitive. If you walk into a car dealership today, you are better off than you were in 1970 for two reasons. First, there is a wider choice of excellent imports. Second, Detroit has responded (slowly, belatedly, and incompletely) by making better cars, too. The Honda Accord makes you better off, and so does the Ford Taurus, which is better than it would have been without the competition.
Trade is good for poor countries, too. If we had patiently explained the benefits of trade to the protesters in Seattle or Washington or Davos or Genoa, then perhaps they would have laid down their Molotov cocktails. Okay, maybe
not. The thrust of the antiglobalization protests has been that world trade is something imposed by rich countries on the developing world. If trade is mostly good for America, then it must be mostly bad for somewhere else. At this point in the book, we should recognize that zero-sum thinking is usually wrong when it comes to economics. So it is in this case. Representatives from developing nations were the ones who complained most bitterly about the disruption of the WTO talks in Seattle. Some believed that the Clinton administration secretly organized the protests to scuttle the talks and protect American interest groups, such as organized labor. Indeed, after the failure of the WTO talks in Seattle, UN chief KofiAnnan blamed the developed countries for erecting trade barriers that exclude developing nations from the benefits of global trade and called for a “Global New Deal.”11 The WTO’s current round of talks to reduce global trade barriers, the Doha Round, has stalled in large part because a bloc of developing nations is demanding that the United States and Europe reduce their agricultural subsidies and trade barriers; so far the rich countries have refused.
Trade gives poor countries access to markets in the developed world. That is where most of the world’s consumers are (or at least the ones with money to spend). Consider the impact of the African Growth and Opportunity Act, a law passed in 2000 that allowed Africa’s poorest countries to export textiles to the United States with little or no tariff. Within a year, Madagascar’s textile exports to the United States were up 120 percent, Malawi’s were up 1,000 percent, Nigeria’s were up 1,000 percent, and South Africa’s were up 47 percent. As one commentator noted, “Real jobs for real people.”12
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