Monday, December 31, 2007

Krugman: Trouble with Trade

For a long time there was a tendency to pooh pooh the negative results of trade. Krugman at least recognises a few of the negative results but only between high and low wage countries. It is not surprising that unions and workers in general are facing hard times as far as retaining benefits and wages at the level they had before globalisation. There are other negative effects that Krugman does not even touch upon. Trade agreements usually limit sovereignty in numerous ways in the interests of capital. For example agreements usually insist on recognition of international property rights that protect patent holders against no-name competitors for as long as twenty years. This can add huge costs to health care plans but huge profits to pharmaceutical companies. Often regulations will be harmonised downward and local or national preference in contracting outlawed. In the case of NAFTA in relation to Canada the so-called trade agreement is mainly a resource grab for the US. Canada is forced to share basic resources with the US and at prices not above those in Canada. In many ways too US labor has lost out as production shifted to lower wage Mexico. But Mexican subsistence corn farmers were also ruined.

The New York Times / December 28, 2007

Op-Ed Columnist / Trouble With Trade

By PAUL KRUGMAN

While the United States has long imported oil and other raw materials
from the third world, we used to import manufactured goods mainly from
other rich countries like Canada, European nations and Japan.

But recently we crossed an important watershed: we now import more
manufactured goods from the third world than from other advanced
economies. That is, a majority of our industrial trade is now with
countries that are much poorer than we are and that pay their workers
much lower wages.

For the world economy as a whole — and especially for poorer nations

growing trade between high-wage and low-wage countries is a very good
thing. Above all, it offers backward economies their best hope of
moving up the income ladder.

But for American workers the story is much less positive. In fact,
it's hard to avoid the conclusion that growing U.S. trade with third
world countries reduces the real wages of many and perhaps most
workers in this country. And that reality makes the politics of trade
very difficult.

Let's talk for a moment about the economics.

Trade between high-wage countries tends to be a modest win for all, or
almost all, concerned. When a free-trade pact made it possible to
integrate the U.S. and Canadian auto industries in the 1960s, each
country's industry concentrated on producing a narrower range of
products at larger scale. The result was an all-round, broadly shared
rise in productivity and wages.

By contrast, trade between countries at very different levels of
economic development tends to create large classes of losers as well
as winners.

Although the outsourcing of some high-tech jobs to India has made
headlines, on balance, highly educated workers in the United States
benefit from higher wages and expanded job opportunities because of
trade. For example, ThinkPad notebook computers are now made by a
Chinese company, Lenovo, but a lot of Lenovo's research and
development is conducted in North Carolina.

But workers with less formal education either see their jobs shipped
overseas or find their wages driven down by the ripple effect as other
workers with similar qualifications crowd into their industries and
look for employment to replace the jobs they lost to foreign
competition. And lower prices at Wal-Mart aren't sufficient
compensation.

All this is textbook international economics: contrary to what people
sometimes assert, economic theory says that free trade normally makes
a country richer, but it doesn't say that it's normally good for
everyone. Still, when the effects of third-world exports on U.S. wages
first became an issue in the 1990s, a number of economists — myself
included — looked at the data and concluded that any negative effects
on U.S. wages were modest.

The trouble now is that these effects may no longer be as modest as
they were, because imports of manufactured goods from the third world
have grown dramatically — from just 2.5 percent of G.D.P. in 1990 to
6
percent in 2006.

And the biggest growth in imports has come from countries with very
low wages. The original "newly industrializing economies" exporting
manufactured goods — South Korea, Taiwan, Hong Kong and Singapore —
paid wages that were about 25 percent of U.S. levels in 1990. Since
then, however, the sources of our imports have shifted to Mexico,
where wages are only 11 percent of the U.S. level, and China, where
they're only about 3 percent or 4 percent.

There are some qualifying aspects to this story. For example, many of
those made-in-China goods contain components made in Japan and other
high-wage economies. Still, there's little doubt that the pressure of
globalization on American wages has increased.

So am I arguing for protectionism? No. Those who think that
globalization is always and everywhere a bad thing are wrong. On the
contrary, keeping world markets relatively open is crucial to the
hopes of billions of people.

But I am arguing for an end to the finger-wagging, the accusation
either of not understanding economics or of kowtowing to special
interests that tends to be the editorial response to politicians who
express skepticism about the benefits of free-trade agreements.

It's often claimed that limits on trade benefit only a small number of
Americans, while hurting the vast majority. That's still true of
things like the import quota on sugar. But when it comes to
manufactured goods, it's at least arguable that the reverse is true.
The highly educated workers who clearly benefit from growing trade
with third-world economies are a minority, greatly outnumbered by
those who probably lose.

As I said, I'm not a protectionist. For the sake of the world as a
whole, I hope that we respond to the trouble with trade not by
shutting trade down, but by doing things like strengthening the social
safety net. But those who are worried about trade have a point, and
deserve some respect.

Copyright 2007 The New York Times Company
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