Larry Summers, in “America needs to make a new case for trade,” worries, as do many others, about rising protectionist sentiments:
In a world where Americans can legitimately doubt whether the success of the global economy is good for them, it will be In a world where Americans can legitimately doubt whether the success of the global economy is good for them, it will be increasingly difficult to mobilise support for economic internationalism. The focus must shift from supporting internationalism as traditionally defined to designing an internationalism that more successfully aligns the interests of working people and the middle class in rich countries with the success of the global economy
Summers presents four arguments in favor of free trade that he not only describes as conventional wisdom but also endorses by saying, “All of these points have the very considerable virtue of being correct economic arguments.” Yet he later finds reasons why Americans indeed may be correct in finding free trade a cause for concern: new markets can offer more growth opportunities to the US but may not be a net gain, since they also expose us to new competitors; trade-induced higher global growth means greater competition for resources; developing country competition in industries that exist in advanced economies puts pressure on their wages.
So what is there not to like about this piece? Of the four items of conventional wisdom that Summers touts, two don’t pass inspection. This is the second on his list:
In a world where Americans can legitimately doubt whether the success of the global economy is good for them, it will be increasingly difficult to mobilise support for economic internationalism. The focus must shift from supporting internationalism as traditionally defined to designing an internationalism that more successfully aligns the interests of working people and the middle class in rich countries with the success of the global economy.
While Summers’ admittedly undercuts that argument later by discussing how a more open economy can come out a net loser if its trade partners are better competitors, there is a more basic reason to take this idea with a grain of salt: we have lower trade barriers because some of our biggest partners (read Japan and China) are mercantilist and fundamentally have no intention of opening their markets very much; the advanced European economies regard maintaining surpluses and protecting labor as priorities, which again limits how much they will concede. We have lower trade barriers because we enter into negotiations with different premises and aims (at least historically) than our counterparts. (Some would also argue that our trade policy is designed more to benefit major US multinationals than the broader populace; that is harder to prove but may not be inaccurate.) To argue theory in the face of this reality is willfully naive, and Summers should not endorse it.
Back to Summers:
Third, the sceptic is also told that most of the observed increases in income inequality in the American economy are due to new technology rather than increased trade – and that even to the extent that trade has a role, most increases in trade are not attributable to trade agreements.
This is dubious and Summers no doubt knows it, yet he panders to his audience (and remember, this is the Financial Times, not USA Today). Paul Krugman, who is a trade economist, has ascertained that the data is inadequate to determine whether trade increases income inequality or not. Yet Summers presents a limited impact as an incontrovertible truth. From Krugman:
The starting point of this paper was the observation that the consensus that trade has only modest effects on inequality rests on relatively old data – that there has been a dramatic increase in manufactured imports from developing countries since the early 1990s. And it is probably true that this increase has been a force for greater inequality in the United States and other advanced countries.
What really comes through from the analysis here, however, is the extent to which the changing nature of world trade has outpaced our ability to engage in secure quantitative analysis—even though this paper sets to one side the growth in service outsourcing, which has created so much anxiety in recent years. Plain old trade in physical goods has become remarkably exotic.
In particular, the surge in developing-country exports of manufactures involves a peculiar concentration on apparently sophisticated products, which seems at first to put worries about distributional effects to rest. Yet there is good reason to believe that the apparent sophistication of developing country exports is, in reality, largely a statistical illusion, created by the phenomenon of vertical specialization in a world of low trade costs.
How can we quantify the actual effect of rising trade on wages? The answer, given the current state of the data, is that we can’t. As I’ve said, it’s likely that the rapid growth of trade since the early 1990s has had significant distributional effects. To put numbers to these effects, however, we need a much better understanding of the increasingly fine-grained nature of international specialization and trade.
Summers apparently is unwilling to take on weaknesses in the classical rationale for trade, no doubt out of concern about legitimating protectionist impulses. But cut to the core, that’s an elitist stance in a debate that has now moved out of the domain of experts into the public arena. Perhaps I am naive, but less than full candor (which means admitting the limits of knowledge) runs the risk of backfiring.
Going deeper into arguments like this would do far more to enhance the quality of debate:
As Paul Samuelson pointed out several years ago, the valid proposition that trade barriers hurt an economy does not imply the corollary that it necessarily benefits from the economic success of its trading partners.
But (and this will have to wait for later posts for fuller discussion), historically, liberal economists did not shy away from nuance, but found themselves trounced by simple, even fact free, sloganeering of the right. Thus Summers’ posture in this piece may simply reflect a general coarsening of public debate in America.