Asymmetrical Information

The US hardly trades at all, and the bulk of its trading is done within NAFTA.

These billions of dollars we keep sending to China, receiving in exchange the contents of Wal-Mart -- how are they counted if the above is true?

Right on, darling, as always.

I agree that the main issue in poor countries is incompetent government, but trade might put pressure on government to improve. The competition among businesses will encourage higher standards, which in turn might lead those businesses eventually to pressure government to get rid of more barriers, improve the rule of law, etc. And the wealth created from trade may start to build a middle class, which will also put pressure on the government to improve.

It's hard for me to imagine how trade in general is likely to harm poor countries. It's not a foolproof way to improve their governments, but I would think that it would tend to help, not hurt, and will build wealth in the process.

By the way, Winterspeak, at first I thought I was looking at an old post somehow, since Jane had already declared Doha dead. And Linton, do you always call Winterspeak 'darling'?

Anony-mouse, I believe what Winterspeak means is that as a percentage of our total economy the US hardly trades at all. I don't have the exact statistics handy but I seem to recall that US imports + exports = roughly 15% of the total economy, most of it as Winterspeak suggests within the boundaries of NAFTA.

In other words, billions of dollars is a lot of money to you and me, but it's chump change within the American economy as a whole.

Anony-mouse, I believe what Winterspeak means is that as a percentage of our total economy the US hardly trades at all. I don't have the exact statistics handy but I seem to recall that US imports + exports = roughly 15% of the total economy, most of it as Winterspeak suggests within the boundaries of NAFTA.

In other words, billions of dollars is a lot of money to you and me, but it's chump change within the American economy as a whole.

Aargh, double-post. Serves me right for posting from a Blackberry...

If you count intra-European trade as domestic, not foreign trade, then trade is more important to the US then most Europeans.

Real imports have grown from 9% of gdp in 1990 to 18% in 2005.

You need multilateral trade negotiations because in some cases, for example, ag subsidy, it would not make sense for US to cut its subsidy if EC does not cuts its own subsidy. That is why you need WTO or such avenues. Even though economists such as Bhagwati have argued forcefully that unilateral cuts in tariffs and subsidies are beneficial for the country implementing such cuts, multilateralism is politically expedient; you can tell your constitutens that others have cut subsidy as well as your own country. Ironically, it is problems with ag subsidy that caused the breakdown of this round of trade talks.

"I'm not convinced that creating a WTO bogeyman to shove trade deals down the World's collective throat is the best to handle this. Maybe we'd be better off if people were more honest about how trade really works instead of just saying "the WTO made me do it"."

Winterspeak, believing that: "Honesty is the best policy", seems to be the true Radical in these parts.

"fast-track", designed to stifle any sort of broad discussion pertaining to Trade, needs to be derailed. In any open marketplace of Ideas, the WTO would wither on the vine, as well, it should.

You need multilateral trade negotiations because in some cases, for example, ag subsidy, it would not make sense for US to cut its subsidy if EC does not cuts its own subsidy.

Actually, no. That's what he meant about being more honest about how trade really works. Unilateral cuts in ag subsidies would absolutely help our economy. Look at Australia and New Zealand, which unilaterally ended theirs.

OTOH, the WTO bogeyman worked decently well for eliminating the steel tariffs.

Free trade is a *no-brainer*?

Quite the contrary. Humans are hard-wired to make something like a wide trade treaty very hard to pass, requiring quite a lot of brain and political capital to spend.

Specifically, in trade there are winners and losers, and humans value a potential loss much higher than they value a potential gain. So the putative losers fight *much* harder than the putative winners. This is made even harder when it's not clear just who the winners will be and *especially* hard when the winners will be spread widely. (i.e. a few people lose their job vs. everyone saves a few cents...)

Really, it's a wonder (and a tribute to politicians ability to raidroad legislation over the will of their people) that free-trade legilsation ever gets passed at all!

Mark E Hoffer: "fast-track", designed to stifle any sort of broad discussion pertaining to Trade, needs to be derailed.

No, fast-track simply prevents Congress from trying to rewrite an agreement after it's been drafted. The members can have any sort of broad discussion they like, but then they have to vote for or against the deal as it stands.

Bill Woods,

Your technical description, "up or down", is correct. The effect is to truncate discussion.

"We had to take the whole thing to get the slice we wanted. It's not perfect, but it wasn't a la carte, either." Was/Is/Will be heard at "whistlestops" throughout the land, during campaign season.

Funny that we've been hearing about "electronic town hall" meetings for at least 10 years now, yet WTO "rounds"/"talks" are still undertaken in the, virtual, dark of night. Sure sounds like Free(dom) to me.

"Fast-track" is just a tool, as you well repeat, that offers cover to the "Representatives" supporting these Command and Control "trade" deals.

For myself, I have more confidence in my fellows. I believe that the American people Can tell beans, when the bag is untied.

"The failure of Doha will not effect the US much. The US hardly trades at all, and the bulk of its trading is done within NAFTA. As for poor countries, their main issue is incompetent governance, and I'm not sure how trade will help them deal with that."

This is a strange conclusion to reach. It's true that trade is a much smaller part of America's economy than Britain's, but it is still significant. Moreover, the anlysis above is retrospective. The rapid growth of India and China means that in the future trade will become a larger part of the American economy, meaning that liberalization is of increasing importance to us.

And there is a geopolitical apect to this which is just as important as the economic one. Free, peaceful trade makes armed conflict less likely. When countries trade with each other they become more aware of their common interests and have more to lose if that mutually beneficial commerce is interrupted. When Nixon and Kissinger opened relations with China, they not only helped to make both countries richer, but they also made peace between us more certain.

It would be wonderful if we could have freer trade without international organizations and thousand page documents, but, as Tom West argued above, there are tremendous obstacles to trade that sometimes only multilateral negotiations can overcome. That is why the collapse of Doha is such a shame.

Australia and New Zealand didn't end agricultural subsidies so much as they toned down industrial subsidies. Australia and New Zealand, unlike the rest of the OECD, have never net subsidised agriculture, ranching, or mining.

If you count intra-European trade as domestic, not foreign trade, then trade is more important to the US then most Europeans.

Real imports have grown from 9% of gdp in 1990 to 18% in 2005.

Well, then it goes the other way if you count intra-NAFTA trade as domestic. Not that it's terribly worth arguing about.

"The US hardly trades at all" begs the question of how much trade with the rest of the world there would be if prices were real (i.e., not distorted by tarrifs, quotas, countervailing duties, subsidies, and barriers nominally--but not actually--based on environmental, labor, and development concerns).

"The US hardly trades at all"

But isn't that the problem? Many farm good and service sectors would be great exports for the US if other countries didn't have such high barriers to entry.

18 comments and nobody has pointed out that in trade negotiations perfectly free trade isn't a self-sustaining Nash equilibrium. From perfectly free trade, each nation (assuming things are bilateral just for the sake of being able to draw the dang thing on a plane) can make itself better off by imposing some restrictions (think sugar quotas benefitting US sugar makers) on trade. There is dead-weight loss, and of course a transfer of surplus, but the country as a whole can move to a higher community indifference curve, so to speak.

Well, this means that perfectly free trade isn't the best option for the other country any more either...so they impose restrictions. If you're not careful you'll end up in a trade war, which will probably send you back to the same results as autarky and can be self-sustaining. Not good. Organizations like the WTO exist primarily to ensure freer trade and to prevent trade wars by adding a negotiating instrument to the process. Remember that the WTO has exactly zero enforcement authority, there aren't exactly consequences other than the shame of the "International Community" if countries ignore it.

Further, you have to think about the political economy picture of trade policy. Powerful lobbies stand the most to gain from restrictions, and those who lose are usually too disparate and bear too little of the cost individually to really care all that much. It only costs me about $8 a year* because the US has sugar quotas, but it makes billions for the folks who own the sugar production. Not to mention the ADM folks, and so on. Who do you think is going to value the time enough to organize about it? $8 isn't even worth half an hour of my time, YMMV.

*Recalled from a class I took a few years ago at Oregon from Prof. Ron Davies, it may be a different number now but the point still holds.

Timothy: It is not so clear to me that a multilateral free trade agreement is not Nash. When I think of sugar quotas benefitting US sugar makers, I think of a small interest group benefitting at the expense of the nation as a whole.

Timothy:

And so long as it's worth a whole lot to a very few losers, and a teeny bit to hundreds of millions who could gain, it won't change -- unless a bunch of issues get lumped together, so collectively they're worth more than $8 to each of us. Or so the theory goes, anyway. And I hope you're mistaken about what Prof. Davies said, because as Josh notes, you're wrong about (eg) making the US better off by imposing tariffs.

About the Nash equilibrium thing...Krugman and others took this issue on (back when he was an economist instead of a talking head). One clear example of protectionism being beneficial is when the industry being protected has important spillover into the rest of the economy. That was the thrust of the "strategic trade policy" that was current in the 1990s. This obviously doesn't apply to sugar.

But at some level, Josh and Shelby miss Timothy's political point. Trade policymakers are politicians. They pay attention to their constituents (as well they should). Constituent interests are not synonymous with "the nation as a whole." Political representatives have incentives to "cheat" the nation for the benefit of their constituents (e.g. "pork"). Some people say this is bad, some people say it is good, but however we feel about it, it happens.

This means that even IF a total free trade equilibria is to each nation's benefit, the political actors that decide trade policy have an incentive to adjust their country's policy away from free trade. Thus, free trade is not a Nash equilibrium.

PS: MEH--sorry I didn't respond to your questions on the other Doha post,I was too busy looking around for an independent central bank. Went all the way to Japan, but there certainly weren't any there. :)

Free trade between free countries can only improve the average physical standard of living in the trading countries - else they wouldn't trade. However, as has been pointed out here, within each society there are winners and losers.

When we undertake free trade with poor countries - or fail to effectively enforce immigration laws - "everyone" benefits a little bit, while the wages of the working poor are suppressed.

As an engineer, I know that reversing these policies would cost me financially by shrinking the market for my services and by raising my cost of living. But quality of life includes much more than shoes and shirts.

I'd gladly pay more for these things to live in a country where their makers can support a middle class standard of living on the market value of their labor.

Ken

The failure of Doha does not surprise me. As the world economy slips into recession, expect more tariffs and other nationalistic means of protecting local economic sectors at the price of foreigners, not less. The point about Nash equilibrium (the term is new to me, thanks for the pointer) is very interesting. I would speculate that no economy beyond the level of ancient China/Egypt can be stable, because of constantly changing population pressure, supply/demand issues, etc. and that ignores the cultural ones.

Cultural issues should not be ignored, as they often reflect deeper things. European governmental officials who remembered WW II and other wars had and have reason to desire an agricultural sector within their borders capable of at least minimally feeding the population. The fact that this also means ag-political policies such as French farming laws is a side effect. It isn't just about cheese and pate', although that's how it is covered in the Main $tream Media.

"I'd gladly pay more for these things to live in a country where their makers can support a middle class standard of living on the market value of their labor."

But, if I understand you correctly, you want to prevent many people from receiving the true, unrestricted 'market value of their labor', because you feel that the market value under free trade would be too low. Aren't you saying that we should set up restrictions to harm the poorest in poor countries, in order to allow more people in the US to afford a nicer second car and a larger third TV?

fyi...

http://www.forbes.com/2006/07/19/wto-gaming-inquiry-cx_lm_0719gaming.html?partner=ecommerce_newsletter

George,

Glad to see you made it back in one piece.
Also, Was good news you saw "Independent Central Banks" as the "Wooden Nickel" they are :)

wfwef

Israel Intensifies Hezbollah Attacks Deeper Into Lebanon

Ann,

"Aren't you saying that we should set up restrictions to harm the poorest in poor countries, in order to allow more people in the US to afford a nicer second car and a larger third TV?"

Roughly, yes, and thank you for pushing back.

Those we honor on Memorial Day paid dearly to create, among other things, a better life for us, their descendants and countrymen. We dishonor them when we expect our present day countrymen to suffer the standard of living of impoverished foreigners.

A truly free market would oblige our low-end workers to move to where their work was sent, which I oppose. Do you? Why?

As for the 3rd TV, etc., we're talking about folks pulling down $10/hr at Wal-Mart and glad for the work.

Ken (ken@sqrt-1.com)

Ken -

Former factory workers wouldn't have to move 'where the work was sent'. They could do something else - it's not as if there's a set quota of jobs, and sending one overseas means that we're now short of them. My grandfather used to have a job lighting gas streetlights - that's a job that just vanished into thin air, but others came to take its place. I believe that the people of the US are very capable and can compete and find ways to add value, if they're allowed to and are given the right incentives.

I want to help poor people in our country, but I would rather do it through the Earned Income Tax Credit (EITC), rather than either a high minimum wage or protectionism. Why not mandate that the proportion of the population making candles and shoeing horses must be the same as it was 200 years ago? Isn't it a shame that all those good blacksmith jobs are gone? There's a huge efficiency cost to adding on distortion after distortion, all for a possible short-term gain for a select few.

this blog is dead

"but I would rather do it through the Earned Income Tax Credit (EITC)"..."There's a huge efficiency cost to adding on distortion after distortion, all for a possible short-term gain for a select few."

Ann,

Is, the above, from you, not a logical contradiction?

And, with this: "My grandfather used to have a job lighting gas streetlights - that's a job that just vanished into thin air, but others came to take its place." as an observation, don't you think that your grandfather, in the role of informal "watchman" while "lamplighting", lowered "opportunity crime"? And that some of the 'jobs', that "replaced" his, were additional police officers and insurance adjusters? (note, I'm not necessarily arguing for the return of "lamplighters", it's just an observation of, potentially, unintended consequences.)

If your point is that the EITC is also a distortion, I agree. But I think that, properly done (for example phased in, to still give some incentive to work, which can also make it pretty expensive), it's much less of a distortion than either a high minimum wage or extensive limits on trade.

If there were a way to help poor people, and even lower middle class people, without any distortions or incentive effects at all, then I would certainly prefer that!

Ann wrote:
"Former factory workers wouldn't have to move 'where the work was sent'. They could do something else - it's not as if there's a set quota of jobs, and sending one overseas means that we're now short of them."

You're right. It means we're short one job of which a particular worker is capable, in exchange for openings in, say, computer programming, which openings she was not blessed with enough intellectual horsepower to pursue, education notwithstanding.

When we trade freely with impoverished countries, we ship goods relatively rich in contributions from high-skill people, in exchange for goods rich in contributions from the low-skilled. This improves the wages of our most blessed compatriots and suppresses the wages of our least.

A national border exists to regulate the flow of persons and goods in the interest of that nation's people. On what fundamental basis does one assert that it is OK to regulate the flow of people, but distorting to regulate the flow of goods? What is distorted exactly and why is that bad?

EITC is a fine thing in a fashion. It mitigates an injury inflicted by the same folks as who offer it - the federal authorities responsible for free trade with poor countries and lax immigration enforcement.

Ken

Ann,

with this: "If there were a way to help poor people, and even lower middle class people, without any distortions or incentive effects at all, then I would certainly prefer that!"

Consider direct donation of your time, energy, and resources.

As an, somewhat in jest, example: You could picket out front of a "Rent-to-Own" store and show their potential "customers/victims" how to read the classified ads found in the local fishwrap.

More to the point of the thread:

http://www.amazon.com/gp/product/031235522X/002-5469496-1932817?redirect=true

http://www.dailykos.com/storyonly/2006/7/7/161930/8532

Byron Dorgon's book: "Take this Job and Ship It"

Sen. Byron Dorgan, spelling error above.

"A national border exists to regulate the flow of persons and goods in the interest of that nation's people. On what fundamental basis does one assert that it is OK to regulate the flow of people, but distorting to regulate the flow of goods? What is distorted exactly and why is that bad?"

Ken,

In the long run, free trade enhances productivity by allowing for a more efficient allocation of resources. But increased productivity means higher wages and a higher standard of living. Economists disagree about many things, but they do not disagree about the tremendous long term benefits of free trade.

Those who wish to use tariffs and import quotas "to protect jobs," don't realize the heavy costs associated with such policies.

Isocrates' defense of free trade with poor countries is the standard one familiar to most readers of this blog, I imagine. It argues on purely practical grounds of interest, as it should.

My point is that our national interest is better served by trade policies that reduce the amount of competition endured by our low-end workers from impoverished foreigners. I'd rather they are able to earn a decent living by working at the new higher market value of their labor than subsidize them with free money from Uncle Sugar. Better the shoes and shirts are more expensive and my countrymen can earn a living making them.

In this country, free trade's winners are people like me who get those cheaper shoes and shirts, or in Ann's memorable phrase, "a nicer second car and a larger third TV."

Yes, my plan results in a lower overall physical standard of living in this country. I argue that it results in a higher total standard of living in this country, that total including things like low-skill parents joining the PTA and coaching little league instead of working second jobs.

Free markets between sovereign countries has no independent moral authority beyond its practical effects.

Ken

"My point is that our national interest is better served by trade policies that reduce the amount of competition endured by our low-end workers from impoverished foreigners. I'd rather they are able to earn a decent living..."

Ken,

First, cutting us off from trade with foreign countries will raise the cost of consumer goods, as you yourself admit. But these higher costs will be felt most by those with the lowest incomes. The biggest beneficiaries of cheaper imports are poor people themselves. Bill Gates will not feel any pain if the cost of televisions rises, but the janitors who clean up at Microsoft will.

Second, by slowing American growth protectionism will create more poverty in the long run. Slower growth means lower output and less government revenues. That means less money for education and for social servics from which, again, poor people are the biggest beneficiaries.

Third, the effects of trade on unskilled or lower-skilled labor have been greatly overstated in popular discussions. Technological change has been by far the greater culprit, for that has increased the returns to skills and education and capital and decreased the reurns to unskilled labor. Even without any trade at all, the same pattern would have emerged, with income disparities widening due to differences in educational attainment.

Fourth, protectionism is an extremely inefficient way to address income inequality, as economists widely agree. As Ann says, the EITC is much better, as is trade adjustment assistance. But the best long term solution is to increase the quality of education in poor areas. Tariffs are no substitute for better schools.

"...and less government revenues. That means less money for education and for social services from which, again, poor people are the biggest beneficiaries."..."But the best long term solution is to increase the quality of education in poor areas. Tariffs are no substitute for better schools."

Sounds like everyone would be better off if we got "The Government" out of the business of Market Manipulation, period.

Note: again with the ol' bromide: "More Money=Better Schools". Seriously, after 40 years, at least, of ever burgeoning budgets for "public" schools, and the results they've been able to (not) come up with, can't we just admit: "that Nag ain't winning the Derby."(?)

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