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Economists Discuss the Pros and Cons of Free Trade

16:02PM Nov 02, 2016

American_Flag_USA( AgWeb )

The benefits of free trade have been a cornerstone of economic thought for decades. Recently, though, trade agreements have become the target of a populist backlash, with opposition to trade deals emerging as a key issue in the presidential race. At the same time, new research suggests that trade led to lower wages and higher unemployment for some Americans, particularly middle-class manufacturing workers. We asked Bloomberg View columnists Tyler Cowen and Noah Smith to meet online to debate the pros and cons of trade.

Cowen: Given slow middle-class wage growth, it’s a common claim that American politicians oversold the benefits of trade deals to their voters. I take the contrarian view that the benefits of trade deals are more typically underappreciated.

The key point is that America’s longer-term future depends on a world that is relatively free and prosperous.

The last few decades have been the best for mankind in all of history. For the most part, peace has increased, severe poverty has declined and wealth and life expectancy have gone up for most of the world. At such a macro level it is hard to pinpoint the causal role of trade deals in particular, but a relatively free world trading order has been a big part of this process. For both practical and symbolic reasons, we should do everything possible to sustain and extend those institutions.

Consider economic growth in China. It was admitted to the World Trade Organization in 2001, and earlier Deng Xiaoping derived the inspiration for his reforms from Singapore, a free-trading nation. Americans will regularly benefit from the innovations coming from China, just as the British benefited from American innovations during the 19th century.
QuickTake Free Trade Feud

Or why has Latin America turned from a region of autocrats to having plenty of vigorous democracies? It is very likely that participation in a broader global economic order has played a key role.

I understand full well that such indirect chains of causation, involving foreign nations, are difficult for American politicians to articulate to voters. They are true nonetheless, and these dynamic benefits are what will go down in the history books.

Smith: I agree about the overall benefits of trade. In China, particularly, there’s a very stark difference -- it went from very little foreign trade to a whole lot, and it's become much more prosperous. Everyone agrees trade was essential to its economic miracle. And likewise, if the U.S. were to shut itself off to trade, it would be a total economic disaster.

But economists are trained to think not in terms of overall benefits, but marginal benefits. The question is whether a little bit less free trade might have been better. And it’s here that I think economists have done too much one-way cheerleading and not enough thoughtful discussion of the costs versus the benefits.

We know trade can disrupt people’s whole careers and lives. We know it can cause inequality. These aren’t controversial statements in the econ world, and yet economists largely ignored and waved away these issues for decades when talking to the public. Now, as recent research from David Autor and others has shown, we’re paying the price.

Trade with China hurt a lot of U.S. workers in the 2000s -- it cut off their careers and shunted them permanently into lower-paying jobs or onto the welfare rolls. If the U.S. had been just a little more restrictive in the amount and the kinds of trade we had allowed with China, maybe we could have protected some of those Americans from getting hurt.

Cowen: It’s not always so easy to choose a “little less” free trade. Take the integration of China into the global economic order. That was achieved in part by China’s entry into the WTO, which showed the Chinese leadership that world markets would indeed stay open if China liberalized and tried to compete. It worked. But that’s not a process the U.S. government can or should control, rather it was governed by a treaty. We need such treaties precisely because so many governments have their reasons for wanting a “little less” free trade, and then the final result is a lot less free trade.

Even without a treaty constraint, do you trust the American system of government to serve up the right marginal adjustments to free trade? I don’t. This is the same government that makes protection for farmers and intellectual-property holders a priority in its trade negotiations.

So when it comes to trade, again I say full steam ahead. Sometimes there may be overshooting from a domestic point of view, but the alternative is a lot of reasons never to move away from excess protectionism.

Smith: I’m advocating for more-nuanced and realistic rhetoric from economists. I say they shouldn’t just talk about the potential benefits of free trade, but also the potential costs. It seems like you’re saying that if economists are honest and nuanced, the result will be a hopeless mishmash of government pork, inefficient regulations and instinctive protectionism -- but that if economists simplify their message and present only one side of reality, government will end up doing mostly OK.

I’m sympathetic to the view that economists should take politics more into account when giving advice. But in this case, what seems to have happened is that econ has lost a lot of legitimacy by doing this. People know that trade has big potential costs, and now, thanks to Autor and other researchers, it’s becoming clear that economists knew this as well. So I think a lot of people feel like economists hoodwinked them. That reduces the profession’s credibility with the public, and in the long term leads to people ignoring economists and going with things like Donald Trump.

If you ask people why they don’t trust economists, the 2008 financial crisis and free trade will probably be the two things they mention.

Cowen: I think we economists should tell the truth, not present overly simplified statements. And in my view the truth is that free trade has been overall better than what we economists had thought.  We hadn’t understood or emphasized its dynamic international properties as we should have.  And WTO entry has turned out to be very good for China, though at the time many observers wondered whether the country really could stick to the regime. That’s the true and nuanced view, and the benefits many economists missed turned out to be more important than the costs that were missed.

You are correct to suggest the public does not always trust economists. The public also does not always trust the smarter politicians or the better media sources.

We economists should try to communicate as accurately and effectively as possible. But winning the trust of the public is not the final standard here.

Smith: Let’s talk about these “dynamic international properties.” When you talk about Latin America, you imply that trade produces good government. Why haven’t we seen that in China, which has arguably benefited the most from trade agreements? The country seems to have become steadily more repressive since it joined the WTO in 2001. In fact, according to the think tank Freedom House, freedom in the world has been on the decline for 10 years. Why isn’t trade working its supposed magic here? In any case, with these big overall trends, it’s difficult to separate correlation and causation.

Anyway, you say economists should tell the truth. Well, the truth is that even the most basic theories say that free trade can have big costs for whole swaths of society. And recent evidence shows that many Americans in fact paid those costs after the “China shock.” If economists are going to tell the truth, I don’t see how they can leave those important truths out of the equation.

Cowen: Most of the decline in freedom in China has come in the last few years, when economic growth and foreign trade rates also have been falling. You mention that freedom in the world is down in the last 10 years, but note world trade takes a steep dip almost 10 years ago. I’m not suggesting we understand the cause and effect story here, but the overall pattern fits the standard neoliberal intuition, namely that international trade and freedom go together. That’s been the general connection for most of the past few centuries.

I agree that trade with China has lowered and held down some middle-class American wages, and in fact I warned of this myself, even before the research of David Autor, as did many other economists. But Noah, you are my Exhibit A for my claim that many economists are still undervaluing the benefits of trade. You’ve written on losers from globalization, but not sufficiently stressed the point that tariffs are an especially regressive tax. They tend to be applied to food and clothing, which the poor spend a disproportionate share of their income on. A lot of the poor also have service jobs that aren’t hurt so much by trade with lower-wage nations. In other words, free trade is (usually) a good antipoverty remedy.

Smith: It would be odd if continuous increases in free trade are necessary to maintain levels of democracy. If that’s true, then free trade eventually hits a ceiling and democracy starts to backslide. If the governmental benefit from free trade is that ephemeral, it should probably be a minor long-term factor in our cost-benefit analysis.

As for my own writings, I’ve written in support of the Trans-Pacific Partnership, and pointed out that free trade with other developed countries has few if any downside. I’ve highlighted work showing the potential downsides of trade precisely because I don’t want the public to think economists are monolithic on this subject.

Regarding policies to mitigate the impact of big trade shocks, I would try export subsidies before I’d try tariffs. But that is a discussion for another day.