Wednesday, May 7, 2008 - The Progress & Freedom Foundation Blog

The Big Trade Debate

One vision of globalization, and the new American policies designed to cope with it, was on display this week, as Harvard's Larry Summers and the FT's Willem Buiter discussed and debated the dilemmas of a flat world, from trade and taxation to international standards and regulation.

Summers has long been an advocate of globalization and free trade, but recently -- with a number of other eminent liberal economists, from Paul Samuelson to Alan Blinder, who has argued that globalization could put 40 million Americans out of work -- Summers has rethought his robust support.

The most important reason for doubting that an increasingly successful, integrated global economy will benefit US workers (and those in other industrial countries) is the weakening of the link between the success of a nation’s workers and the success of both its trading partners and its companies.

While Summers worries about the supposed "decoupling" of the interests of companies and nations on the one hand and workers on the other, he does not advocate closing the borders.

The public policy response of withdrawing from the global economy, or reducing the pace of integration, is ultimately untenable. It would generate resentment abroad on a dangerous scale, hurt the economy as other countries retaliated, and make us less competitive as companies in rival countries continue to integrate their production lines with developing countries.

Summers repeats his basic support for the four chief pro-trade economic arguments, as he sees them: that free trade benefits not just producers but consumers, that it's good for America because we already have low trade barriers, that most dislocation in the economy is due not to trade but technology, and that we should help the dislocated not through protectionism but through "adjustment assistance," and other training and transitional support.

But, Summers says, the economic truth and policy effectiveness of these consensus positions may no longer matter. He believes the politics will no longer support this strategy.

All of these points have the very considerable virtue of being correct economic arguments. Taken together, they make a compelling case that the US is better off with than without trade agreements and that the world will be a richer, safer place with increasing economic integration. It is very possible that, if efforts to help those left behind are pursued with sufficient vigour, support for economic internationalism can be maintained.

But I suspect that the policy debate in the US, and probably in some other countries as well, will need to confront a deeper and broader issue: the gnawing suspicion of many that the very object of internationalist economic policy – the growing prosperity of the global economy – may not be in their interests. 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.

When other countries develop, American producers benefit from having larger markets to sell into but are challenged by more formidable competition. Which effect predominates cannot be judged a priori. But there are reasons to think that economic success abroad will be more problematic for American workers in the future.

What does Summers offer in return?

Summers believes tax competition is harmful and says we must find ways to sustain or even increase progressive taxation -- on a global scale. He also says we need more regulatory harmonization.

Buiter is even more adamant about the benefits and inevitability of globalization, and he disputes Summers' nods to the perennial "fair trade" notions of "labor" and "environmental" concerns.

Labour rights, like environmental rights and human rights are a dangerous fig leaf for protectionist organised labour lobbies. They should be deposited in the dustbin of corrupt ideas.

I am still waiting for a political leader who has the courage to explain to US workers who feel they have fared badly as a result of globalisation, and some of whom undoubtedly have suffered as a result of globalisation, that globalisation is not a government policy that can be reversed. Preventing imports that have replaced US domestic production and jobs from entering the country would not restore the status quo ante. Globalisation is way more than free or less unfree trade in goods and services. It may manifest itself to some workers as losing their jobs to imports, that is, to trade. But pushing that cork under water again would simply cause it to pop up again elsewhere.

Yet Buiter, too, wants less tax and regulatory competition, which inevitably will lead to higher tax rates and more intrusive regulation on the entrepreneurs who make globalization and technological innovation work.

As is so often the case, economists are for "markets," "globalization," "entrepreneurship," and "technological innovation" in the abstract. But when it comes to the particular market, company, industry, entrepreneur, or innovation, they revert to form: if it moves, tax it; if it keeps moving, regulate it; if it stops moving, subsidize it.

By the way. I always want to ask liberal free-traders: Why is free trade among people and businesses in different nations (low tariffs) a good thing but free trade among people and businesses living in the same nation (low tax rates) a bad thing?

It is the very competition among nations, companies, and entrepreneurs that makes globalization go round. Competition and creativity breed innovation and thus rising living standards. Not just for the innovator -- although he may earn outsized rewards -- but for all open economies as products and ideas flow freely. Followers thus catch up quickly in both consumption and, as they build off of others' new ideas, their own innovations.

By seeking to level the playing field on a global level -- with globally agreed taxes and regulations -- Summers and Buiter are inviting not creativity and competition but stagnation. Summers himself, not three weeks ago, warned of just this possibility:

The combination of Britain's losing relative economic ground and deep complacency, lack of major investment in science and technology and governance modes that favored internal equity over external competitiveness caused them to lose their position over two generations.

So, Professor Summers, let me get this straight. The solution is to harmonize the world and define out of existence "external competitiveness" and make "internal equity" a fully global concern?

The basic question really is where to harmonize and where to compete. It's my view that bedrock principles like the soundness of money and property should be harmonized as much as possible. Thus it is helpful for all nations to recognize the basics of intellectual property and to maintain more-or-less stable currencies. IP theft and competitive currency devaluations or volatility do not facilitate commerce and cooperation. Standardization of accounting rules and other baseline rules and measures can be useful. Likewise, free-trade agreements that push down or eliminate barriers are welcome. But the key is to deregulate down. Essentially, we want to level the playing field in a very few but profoundly important instances. We do not want to open up the possibility that we harmonize taxes and regulations upward and outward. Summers seems to be suggesting just this in far too many cases.

And so we begin to see the outlines of a more thoughtful liberal response to globalization's dislocations than the Lou Dobbs populist notions of "reopening Nafta," deporting the Mexicans, and slapping massive tariffs on all-things Chinese. But more thoughtful does not necessarily mean less dangerous. Because it is couched in the terms of openness and free trade, Summers' world government is more plausible and thus more alarming than a crude Lou Dobbsian agenda that could never pass.

posted by Bret Swanson @ 4:58 PM | Trade