First Principles October 2007

Beyond Belief

Some economists are beginning to doubt the benefits of free trade. What’s wrong with them?

Why has this happened? What has changed? I wish I could tell you. No new theoretical insight has emerged to challenge the old pro-trade presumption. Samuelson’s 2004 article was mistaken for that in some quarters, but was actually a muddled combination of erroneous new theory on offshoring and uncontested old theory about monopoly power in global markets. The novel part was conclusively rubbished by Columbia’s Arvind Panagariya, who showed that Samuelson had got his offshoring model plain wrong. So far, anyway, nobody has explained why offshoring needs a new theory; it is just another kind of trade. The old part—the idea that the United States might see its income fall if trade drives down the prices of its exports—was already encompassed by the earlier consensus.

Jagdish Bhagwati, a preeminent trade scholar, also of Columbia, helped to theorize this danger in the 1950s. As he explained, “immiserizing” trade can arise only under quite unusual circumstances. The principal benefit to a country from openness to trade is cheaper imports. In the ordinary case, additional imports may put some domestic producers out of business, but the displaced capital and labor get applied to more efficient new uses, so the economy as a whole still gains. Suppose, however, that the country had previously been collecting some monopoly profits on its exports. If new trade drives up its production of those goods, their price might fall—and in theory, they could fall by enough to outweigh the gains from cheaper imports. In practical terms, this is an unimportant exception. Bhagwati himself remains a trenchant defender of liberal trade.

"When the facts change, I change my mind,” said John Maynard Keynes. “What do you do, sir?” Theory aside, the past decade has supplied a lot of new facts—not least, rising inequality and a protracted stagnation of middle-class earnings. It seems natural to blame the quickening pace of globalization for this. Again, however, no careful examination of the new facts on earnings shows trade or offshoring to be more than minor culprits. When you look closely, the shifts in earnings and the shifts in trade fail to marry up: The periods when imports have risen most rapidly are not the periods when wage pressures have been most intense. Studies suggest that labor-saving technology is a much more powerful force. No empirical work even comes close to supporting the claim that globalization is failing to benefit America in the aggregate. Countless studies have shown, and continue to show, the benefits of trade. Yes, some industries have shrunk or disappeared because of trade, and their workers have suffered the consequences; the pace of this change has probably quickened lately; better policies to insure and compensate the victims are surely called for. But to say this is very different from supposing that open markets hurt the United States as a whole.

The new trade doubters, as their disclaimers insist, are not yet trade-policy revisionists. For the moment they would mostly agree that a presumption in favor of open markets is best—but a weaker presumption than before, to be expressed more tentatively. Militant support for free trade, they seem to feel, will offend opinion at a time when so many are experiencing economic stress. The way to maintain open markets is a softer sell—one that acknowledges, and even seems to validate, popular fears that trade is to blame. But this posture is surely unwise. The doubters are influential, especially in Democratic politics, and their seeming conversion is itself altering the political climate. Would the campaign positions of the leading Democratic contenders for the presidency—so different from Bill Clinton’s position on the issue—be so hostile to trade otherwise? Ideas do matter, and for the first time, America’s leading orthodox economists are failing to speak with one voice in defense of liberal trade.

Samuelson once regarded the principle of comparative advantage—the modern theory of the gains from trade—as nontrivial. I would go a little further and say it was the greatest gift that economic wisdom ever bestowed on humankind. In a way that Samuelson did not envisage, the doubts that he and others have expressed threaten to make that idea trivial after all—dismissed as nothing more than an arresting curiosity, apt to be oversimplified by blinkered pro-trade types, with no real policy content and no claim on politicians’ attention. What a tragedy that would be. And not just because economics would no longer have an answer to Stanislaw Ulam’s question.

Presented by

Clive Crook is an Atlantic senior editor.

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