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Free Trade in the Dock

Friday, December 28, 2007

Supporters of globalization have a good case to make, writes DUNCAN CURRIE. But they will face a difficult environment in 2008.

Free Trade Roughly a year ago, Rawi Abdelal and Adam Segal published a widely discussed article in Foreign Affairs asking, “Has globalization passed its peak?” They concluded that, while free trade would not soon “grind to a halt,” the process of global integration would face steep barriers stemming from economic nationalism and competition over energy resources. Since their article appeared, we have seen oil-rich governments in Russia and Venezuela, along with the oil-hungry Chinese, pursue what columnist Robert Samuelson calls the “new mercantilism.” We have seen the Doha Round of global trade talks hit the twin roadblocks of agricultural subsidies in rich countries and tariffs in developing countries. We have seen the Democratic-led Congress allow George Bush’s trade promotion authority to expire and propose punitive legislation against China. Hillary Clinton has suggested a “timeout” on free trade agreements. The White House has urged Congress to ratify bilateral FTAs with Panama, Colombia, and South Korea, to no avail. Polls show that Americans have soured on trade expansion. And the recent news of tainted Chinese imports has triggered a public outcry.

“The institutional foundations of globalization—such as the rules that oblige governments to keep their markets open and the domestic and international politics that allow policymakers to liberalize their economies—have weakened considerably in the past few years,” Abdelal and Segal wrote in their Foreign Affairs piece. “Politicians and their constituents in the United States, Europe, and China have grown increasingly nervous about letting capital, goods, and people move freely across their borders.”

Throughout the presidential campaign, top candidates have blamed foreign trade for hurting American workers and warned of new threats to U.S. competitiveness. The anti-trade rhetoric has at times lapsed into demagoguery. But Americans seem increasingly receptive to the protectionist message. A panoply of factors—the rise of China and India, high oil and gas prices, skyrocketing healthcare costs, growing income inequality, the trade deficit, the weak dollar, the subprime mortgage crisis, the credit crunch, immigration anxiety, concerns about future entitlement spending, and more—have brought economic security to the forefront of public worries. In such an environment, free trade makes for an easy scapegoat. “The 2008 presidential election is shaping up to be a battle over nothing less than America’s attitude to globalization,” The Economist magazine opined in July.

Supporters of globalization must make their case to a skeptical U.S. public. But that case is a solid one. Free trade has expanded consumer choice, lowered consumer costs, and created new investment opportunities. These benefits flow to all Americans, and the net effect has been to spur economic growth. Yes, trade liberalization means greater foreign competition. But the World Economic Forum ranks America as “the world’s most competitive economy.” And in a recent interview with columnist George Will, University of Chicago economist Austan Goolsbee (an adviser to Barack Obama) observed that “60 to 70 percent of the economy faces virtually no international competition.”

The anti-trade rhetoric has at times lapsed into demagoguery. But Americans seem increasingly receptive to the protectionist message.

Of course, this may be little comfort to, say, a textile worker from North Carolina whose job was shipped to China. But the negative impact of trade on U.S. employment is often overstated. Daniel Griswold, a trade expert at the Cato Institute, reckons that “trade accounts for only about 3 percent of dislocated workers. Technology and other domestic factors displace far more workers than does trade.” In a new study, Griswold estimates that “the net loss of 3.3 million manufacturing jobs in the past decade has been overwhelmed by a net gain of 11.6 million jobs in sectors where the average wage is higher than in manufacturing. Two-thirds of the net new jobs created since 1997 are in sectors where workers earn more than in manufacturing.”

He acknowledges that “official statistics show that the average real hourly wage paid to American workers is lower today than in the 1970s.” But these statistics can be misleading. “The average real wage is a fundamentally flawed measure of the well-being and progress of American workers, for three reasons,” Griswold explains. “First, the real wage does not include benefits. Second, it relies on cost-of-living estimates that have tended to systematically overstate inflation in recent decades and thus understate gains in real earnings. Third, real wage numbers are often compared to previous peak years, a practice that tends to minimize longer-term upward trends.”

In contrast to the real hourly wage, “real hourly compensation” includes wages and benefits, such as health insurance coverage and 401(k) contributions. “Since 1973, average real hourly compensation for American workers has increased 45 percent, for an average annual growth rate of more than 1.1 percent,” Griswold writes, citing Bureau of Labor Statistics data. “In the decade since 1997, as the U.S. economy has become more globalized, real compensation per hour for American workers has risen by 22 percent. More remarkably, the growth in real hourly compensation has accelerated in the past decade, rising at an annual rate of 2 percent compared with an anemic annual rise of 0.7 percent between 1973 and 1997. Even the average real wage—despite the overstatement of inflation and omission of benefits—was 8.2 percent higher in mid-2007 than 10 years ago.”

Griswold also provides some perspective on household income and net worth figures. “Median household income in the United States is 6 percent higher in real dollars than a decade ago at a comparable point in the previous business cycle,” he says. “The median net worth of U.S. households rose by almost one-third between 1995 and 2004, from $70,800 to $93,100.”

Yet as economists Ronald Findlay and Kevin O’Rourke note in their new book, Power and Plenty, “there has been a distributional shift in rich countries against unskilled workers and in favor of the higher skilled,” largely due to the evolving relationship between education level and earnings. Quite simply, the returns to human capital have ballooned. As Nobel Prize-winning economist Gary Becker and his University of Chicago colleague Kevin Murphy have written in THE AMERICAN, “In 1980, an American with a college degree earned about 30 percent more than an American who stopped education at high school. But, in recent years, a person with a college education earned roughly 70 percent more. Meanwhile, the premium for having a graduate degree increased from roughly 50 percent in 1980 to well over 100 percent today. The labor market is placing a greater emphasis on education, dispensing rapidly rising rewards to those who stay in school the longest.”

That helps explain why income inequality has swelled. It also helps explain why Americans have turned in a populist direction despite enjoying a lengthy period of low-inflation growth. The backlash against free trade may become even fiercer in 2008, especially with the U.S. economy expected to dip and with China planning to flaunt its emergence at the Beijing Olympics. The Economist reports that in 2008 China “is almost certain to overtake Germany as the world’s largest exporter.” Meanwhile, a McKinsey Global Institute study projects that India’s consumer spending may quadruple by 2025. In her new book on India and China, The Elephant and the Dragon, Robyn Meredith says that “their transformations—and the way they will transform the globe—are as stunning as any the world has seen since America itself emerged onto the world economic stage.”

Stunning, yes; but also, for many Americans, Europeans, and others, worrying. Amid rising protectionism and aggressive “oil diplomacy,” preserving a pro-globalization consensus will not be easy. As Abdelal and Segal wrote in Foreign Affairs, “it will require hard and sustained effort by U.S., European, and Chinese leaders.” The 2008 election may determine just how much effort the next U.S. administration is willing to give.

Duncan Currie is managing editor of THE AMERICAN.

Image by Shutterstock.

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