Trade isn't all bad

The Pak Banker - - OPINION - Noah Smith

DEMO­CRATIC pres­i­den­tial can­di­date Bernie San­ders has promised to scut­tle new free trade agree­ments like the Trans-Pa­cific Part­ner­ship and the Trade and In­vest­ment Part­ner­ship. He has vowed to undo trade deals with Latin Amer­i­can coun­tries, such as the North Amer­i­can Free Trade Agree­ment and the Cen­tral Amer­i­can Free Trade Agree­ment. And he has de­clared his in­ten­tion to re­move Per­ma­nent Nor­mal Trade Re­la­tions with China, paving the way for tar­iffs on im­ports from that coun­try. In other words, pro­tec­tion­ism is back in a big way, and San­ders is its stan­dard-bearer. Repub­li­can can­di­date Don­ald Trump is say­ing very sim­i­lar things, though his pro­pos­als are less con­crete.

This is in­cred­i­bly frus­trat­ing for peo­ple like me. I've long com­plained­about the profree-trade con­sen­sus among econ­o­mists. I've pointed out ev­i­dence that open­ing up trade with China has hurt Amer­i­can work­ers. I've ar­gued against pre­sent­ing a sim­plis­tic profree-trade view to the pub­lic, and against treat­ing Econ 101 text­book the­o­ries as if they are the gospel truth.

But in­stead of thought­ful mod­er­a­tion of free-trade pol­icy, what San­ders is of­fer­ing is an up­end­ing of the con­ven­tional wis­dom. This is like find­ing out that read­ing in low light can be bad for your eyes, and re­act­ing by giv­ing up books. As usual, San­ders sub­sti­tutes pas­sion for thought and con­vic­tion for ev­i­dence. But I want to be clear that I surely don't want my own cau­tions and caveats about free trade to be­come ammo for this kind of emo­tion-driven cru­sade. The first prob­lem with San­ders' pro­tec­tion­ism, as Vox's Zack Beauchamp points out, is that it would hurt poor peo­ple in de­vel­op­ing coun­tries around the world. Beauchamp points to a 2008 pa­per­show­ing that trade lib­er­al­iza­tion is fol­lowed by a burst of growth in poor coun­tries. This is a con­sis­tent find­ing among eco­nomic re­searchers, go­ing back to a fa­mous 1999 study by Jef­frey Frankel and David Romer. There is ev­i­dence that trade gave a big boost to South Korea, which suc­cess­fully made the leap from poverty to riches. The World Bank has found that trade boosts growth in sub-Sa­ha­ran Africa, one of the world's most im­pov­er­ished re­gions. Trade was ob­vi­ously a big fac­tor in China's eco­nomic de­vel­op­ment, which led to the great­est re­duc­tion of poverty the hu­man race has ever seen.

The ac­cu­mu­lat­ing moun­tain of ev­i­dence has con­vinced many of trade's ben­e­fits. U2 singer Bono, a tire­less cam­paigner for the de­vel­op­ing world, re­cently de­clared that "Com­merce, en­tre­pre­neur­ial cap­i­tal­ism takes more peo­ple out of poverty than aid -- of course, we know that." But San­ders hasn't got­ten the mes­sage.

Free trade isn't the only thing that helps poor coun­tries pros­per, of course, but it's an im­por­tant com­po­nent. To re­voke trade deals with th­ese poor coun­tries could con­demn mil­lions of in­di­gent farm­ers to re­main on the land, scratch­ing out a mea­ger ex­is­tence, their bel­lies growl­ing with hunger. That would be a shame­ful legacy for some­one like San­ders, a self-de­fined so­cial­ist, given that so­cial­ism was orig­i­nally con­ceived as a world­wide move­ment ded­i­cated to wip­ing out poverty.

What about the U.S.? The coun­try isn't a global char­ity, and there are lim­its to what it can do for the poor in other na­tions. And it's pretty clear that trade has hurt a huge num­ber of work­ing class Amer­i­cans, es­pe­cially in the past 15 years. The ques­tion, though is would pro­tec­tion­ism help the U.S. work­ing class to­day?

Prob­a­bly not. First, trade isn't al­ways good for the U.S., but it usu­ally is. Be­fore 2000, most work­ers dis­placed by trade man­aged to find new em­ploy­ment. But that didn't hap­pen af­ter the U.S. started los­ing jobs to China. China was prob­a­bly a spe­cial case be­cause of its un­der­val­ued ex­change rate, heavy govern­ment pro­mo­tion of ex­ports, very low in­come and enor­mous size. It pre­sented U.S. work­ers with a chal­lenge un­like any they faced from Ja­pan, Europe or even South­east Asia.

But that chal­lenge is over, for the most part. China's growth has slowed, its trade has flat­lined, its wages have sky­rock­eted and its cur­rency is now over­val­ued in­stead of un­der­val­ued. All the man­u­fac­tur­ing and sup­ply chains that could re­lo­cate to China have al­ready done so, and now some are even re­turn­ing to the U.S.

So what would re­strict­ing trade with China do for the U.S. now? It might sim­ply pro­voke a trade war, as Beauchamp notes. More likely it would have no ef­fect ex­cept to an­tag­o­nize China and in­crease the chance of a fu­ture war. But re­strict­ing trade with other coun­tries would be more harm­ful for the U.S. than in the past. As the graph below shows, the U.S. has be­come more de­pen­dent on ex­ports in re­cent years.

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