Larry Summers Disingenuous Discussion of Free Trade

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.

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  1. Observer

    All this only proves that economists will be the last to discover the true nature of the current global trade regime. Much is said about self-evident truths without much empirical evidence to support it. If considering the effect on the 500 largest global corporations, trade as now managed is beneficial on the whole but not universally. It has benefitted certain sectors of industrial and emerging economies, but provided them growth with no security.

    It has been much less beneficial, on balance, to populations as a whole. The illusion of quantity hides a deterioration in the quality of the economic system. For example, while Mexico-US trade has dramatically increased, much of the increase is US corporations shifting production across the border and bringing products back across it. This does little to develop Mexico (and much of the production has been moving to even lower-cost and less-regulated areas), and much to rip the fabric of the US manufacturing base and rend communities “bitter.”

    Trade policy is much more now that 20 years ago when it was just about “what you can drop on your foot.” The trade architects of the 1980s very deliberately designed an all-encompassing system reaching well past even ordinary goods and services to include intellectual property, discriminatory immigration (see GATS Mode 4), national social and environmental policy, regulation of professions and displacement of government services with forced deregulation and privatization whether or not that is a good idea in specific cases.

    This is hardly understood by national legislators and political leaders, much less the press and, sad to say, professionals like economists.

    Joseph Stiglitz has a very balanced and broad view of these issues, having adjusted his perspective in light of actual data and analysis. For even more bracing views see the critiques by Tom Palley.

    The trade system needs significant revision. Trade is a good thing, all told, but like other parts of our world system is badly out of balance with the needs and capabilities of our society and our planet. This outcome is the result of errors of logic, not absence of empirical data.

  2. Richard Kline

    All of our ‘competitors’—Japan, China, the EU’s joint partners—have economic policies which are, more or less, intended to bolster their respective countries. The US, to the extent that is has a coherent trade policy, has an economic policy which bolsters parties who trade. There is a ‘pro-business’ policy here, not a pro-country policy. This is one of the many reasons we are competing so poorly: there is little done and often little to gain for many citizens from our trade policy in the US. Through most of its history until the 1940s, the US had a consistent _high tarrif_ and hence anti-import policy, but for exactly the same larger reason, because this best suited the goals and demands of major US capital. Our policy is capitalists first and good luck to the rest ’cause they’re all tied for last.

    It is a critical rhetorical goal by those who favor pro-business trade that this reality—business gets the profits while the public gets the debts—be erased from any discussion. It isn’t ‘this protection is good, that subsidy might work, that restriction is bad,’ but trade/no trade; no questions, no choices. It is us, the US, vs. Them; “You know, boys: take one for the team, we’ll make it up to you.” The only thing that trickles down, here, is the sweat from our brow, when we have work.

    ” . . . [A policy that] more successfully aligns the interests of working people and the middle class in rich countries with the success of the global economy,” is what Summers would foist on us. Let’s get a policy which aligns the _national_ economy more successfully with the interests of working people and the middle class here, and then worry about the rest. But that is exactly what Summers and his like want very much for us NOT to think about, much less organize for. . . . Think about it.

    Personally, I think that many if not all trade protections will fail, but perhaps that is because, to me, trade policy is really much secondary. What is our national _development_ policy? What are we going to focus on being good at, and how are we going to shape our advantages to enhance that, and not just enhance the opportunities FOR THE BOSSES AND THEIR BANKERS. We have a large and well-integrated economy. Education could be better, but it is good compared to much of the world, and very good in some things. Our workforce is mobile. We have a long history of successful entrepreneurial enterprise. Time was we attracted considerable intellectual capital from other countries (a major secret of our success), which with some effort we could again. Taxing the profits on those companies manufacturing offshore would sure even up the playing field and put money in the public fisc for investing IN THE PUBLIC, not in yachts and private wealth funds. In making a national development policy, though, we will have to pick some losers among current Big Money as well as investing in some new and unknown potential winners; that’s the rub. Like turning our health care system in to a regulated national utility for far less money, improved economy, and reduced company leverage with employees no longer held hostage. Those who are picked to lose, or just to win less, will scream bloody murder.

    Yeah . . . a national development policy aligned with the interests of working people and the middle class: _that_ would be something new and different indeed in American history. —We won’t get it by voting for Republicrats, that’s for sure. We’ll have to fight for it, not with bombs but with backbones. And that’s very much out of fashion, here.

  3. Anonymous

    Observed American income inequality is “due to new technology”?

    That is an assertion so patently absurd as to make ignoring anything else claimed rather easy.

  4. Anonymous

    The worst thing about today’s FT piece might be that it is just the first of a series.. a painfully long series. As with political neo-cons, being wrong about everything that is actually happening in the real world does not seem to impact
    Larry’s marketability at all.

  5. Vijay

    Here’s an article by Hal Varian which supports the idea that the rise in inequality is due largely to technology (although it deals more specifically with the 90s)

  6. Kyozen

    Technology is transportable. That’s what got us. Workers in developing nations who make $4.50/day can be trained (or already know) how to apply the technology. Our minimum hourly wage holds, but jobs are lost. Lots of them.

    How it SHOULD have been done is a gradual (very gradual) phase-in over a period of perhaps a decade or two an increase in minimum wage in those countries who are our trading partners, along with a ratcheting down of trade barriers, which we now, as a nation, currently need. That would have created demands for our exports and a much slower (or lower) loss of US workers operating the technology.

    Want to have a job in the US in 20 years? Be in a profession that can’t be outsourced. Better to become a plumber than a programmer.

  7. Anonymous

    With the US economy is getting into a deeper recession, we’d likely to hear increasing chorus of complaints on protectionism, and it would naturally lead to nationalism both here and across the globe as every nation will, rightfully, ask the questions: “Hey, what happened to globalism, the world is flat, and all those arguments when it was working for you, now it’s a bad seed since all of a sudden it’s working against you?”

    We, the western world, have a major problem within our -so called- free-enterprise capitalistic society that we love to bolster our arguments against the old Soviet system (not that I’m defending), yet increasing income inequality in our society, consuming at all costs was going to work against us as anyone with a little bit of anthropological knowledge would easily guess.

    Let’s see if the great intelligent minds of the developed world would provide a solution to a better future or human beings would start fighting for what’s left…

    I certainly hope for the former.



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