In recent years it has become fashionable for political figures to give speeches on "the growing importance of the global economy." But by now this phrase has become so clichˇd that it is rivaled for meaninglessness and repetition only by that other favorite, "a bridge to the 21st century."
The United States is, and always has been, in a global economy. This does not mean that the government cannot maintain substantial control over the direction of the US economy, nor does it mean that the United States does not have considerable discretion over the manner in which it integrates itself with the rest of world. The global economy is simply one factor that the government must consider in designing US economic policy, sort of like the weather.
Disingenuous and Real Arguments for Expanded Trade
Before discussing some of the key issues about how the United States should further integrate itself into the international economy, it is worth dispelling some of the most often repeated nonsense on this issue. It has become common for political figures to assert that "exports create jobs." President Clinton has often claimed that 30 percent or more of the jobs created in this recovery were due to exports.
Although the statement "exports create jobs" is true, the statement that "imports cost jobs" is true in exactly the same way. If 13,000 workers are typically employed to produce $1 billion in exports (the number the Commerce Department has used, adjusted for inflation), then $1 billion of imports represents 13,000 jobs that were lost in the United States. In this game of exports creating jobs and imports losing jobs, the net impact depends on the change in the trade balance. On that score we have seen a deterioration of $131 billion from 1992 to 1998. This means, in the simple "exports create jobs" world, that trade has cost the United States approximately 1.7 million jobs over the first six years of the Clinton administration.
More honest and knowledgeable individuals don't rely on this exports-create-jobs line to make the case for expanding trade. The more serious argument relies on either an economies-of-scale view--that by expanding the size of the market, production costs fall--or the traditional comparative advantage view that nations can gain by specializing in the goods they produce best.
Taking these in turn, the economies-of-scale view notes the enormous efficiencies that have been associated with the mass production of everything from toasters to computers. Machinery that can produce such items in vast quantities allows the cost for each unit to fall dramatically. However, this sort of mass production can only be profitable if the market is large enough to absorb huge quantities of output. For this reason, expanding trade to a world market will produce gains for everyone.
Although this view clearly has some element of truth, it is questionable whether it really has much meaning in the context of the US economy at the end of the 20th century. The US economy by itself is already an enormous market. Furthermore, the United States presently has extensive trading relations with most nations. The idea that the per-unit cost of cars or of computers is going to fall further as a result of the small expansion in the size of this market that would result from removing more trade restrictions seems far-fetched, at best. Clearly, most of the available economies of scale for US producers have already been captured. While industry in developing nations may benefit from access to the world market, the United States is not in the same position.
If the economies-of-scale view doesn't hold much water, there is still the standard economic argument for trade: comparative advantage. In this view, nations should specialize in producing the goods they are best at producing, and export these goods to buy the other goods they need. The classic example (dating from Ricardo's work early in the 19th century) is that England should specialize in producing cloth, while Portugal specializes in producing wine. England trades its surplus cloth to Portugal for that nation's surplus wine, and trade makes both nations better off than if they had each tried to produce both wine and cloth.
The classic view of comparative advantage usually centered on specialization; in this view, natural factors played a large role in dictating the choice of goods. For example, Portugal's countryside is clearly more suited for growing grapes, while England and Scotland have vast expanses well-suited for grazing sheep. Over the past few centuries, the world has taken advantage of most naturally dictated possibilities for comparative advantage. Farmers in the Midwest don't try to grow coffee, and in Hawaii they don't try to grow wheat. In most cases (with some important exceptions), countries have long since adopted patterns of specialization that are dictated by natural factors.
The argument for comparative advantage no longer rests on natural factors; it depends on economies being at different levels of development. Specifically, the poorer nations in the world have large pools of labor that can do the same tasks as many of the less-skilled workers in the United States and in other industrialized nations, for less money. Workers receive much lower wages in countries such as Mexico, China, or Indonesia than do less skilled workers in the United States or Europe. This means that clothes, steel, cars, and other manufactured goods can often be produced much lower costs in developing nations than in the industrialized nations. The US gains by purchasing these items from developing nations, and selling goods in areas where it enjoys a comparative advantage. These goods would require large amounts of capital and highly educated labor to produce, such as airplanes and computer software.
Several points about this scenario deserve attention. First, although standard economic theory indicates that the US would gain from this pattern of trade, it also predicts that the gains would be quite small. Reasonable estimates of the gains from liberalized trade rarely exceed even 1 percent of GDP. This is acknowledged by honest advocates of expanding trade such as Harvard's Dani Rodrick.
A second point is that a predicted outcome of this pattern of trade is a decline in the wages of less-skilled workers. By importing goods that require a large amount of less-skilled labor, we are reducing the demand for less-skilled workers in the United States. This will lead to a decline in their wages. This is exactly what the United States has experienced in the past 20 years, as the three-quarters of the work force without college degrees has seen a large relative and absolute decline in their real wages. This decline cannot be attributable entirely to trade, but almost all economists acknowledge that trade has been a factor.
It is important to recognize that the decline in wages for less-skilled workers is not an accidental outcome of trade; it is the whole point. If the relative wages of less-skilled workers did not decline, there would be no gains from trade. In other words, according to standard economic theory, expanded trade will provide small gains to the economy as a whole, but this will come at the expense of growing inequality. Most workers will end up losers in this picture.
Free Trade for Whom?
Not surprisingly, large segments of the American population have opposed trade agreements like NAFTA and GATT. They rightly recognize that they stand little to gain by being placed directly in competition with workers in some of the poorest nations in the world. While the public may have little understanding of the theory of comparative advantage, they recognize that competing with Mexican workers who are paid $1 an hour will place downward pressure on their wages.
Higher-skilled workers in the United States also understand this basic truth. However, these workers have considerably more political power and are therefore better able to direct the trade or immigration policies that affect their well-being. For example, earlier this year there was a controversy over the number of foreign doctors that should be allowed to enter the United States to practice medicine. The American Medical Association (AMA) argued for sharply limiting the entrance of foreign doctors, explicitly claiming that they were depressing the wages of US doctors. The AMA succeeded in getting regulations that sharply restricted the number of foreign doctors allowed to practice in the United States.
It is worth noting that restrictions on the entrance of foreign doctors was never treated as a trade issue. In fact, the proponents of freer entry did not advance the argument that this would lower the cost of medical care to consumers and therefore provide economic gains. Instead they disputed the claim that foreign doctors depressed doctors' wages, and argued that, to the contrary, they often went to practice in inner cities and small towns where wages are significantly smaller. Both sides in the controversy accepted the view that lowering the wages of doctors would be bad. The proponents of free trade were nowhere to be found in this dispute.
The debate over the entrance of foreign doctors clearly shows the class bias in trade policy. NAFTA, GATT, and other trade agreements did little to standardize medical training, accounting practices and legal procedures, or to make other changes that would give well-paid professionals in the United States the opportunity to compete with relatively low-paid professional workers in poor countries. Proponents of free trade, who come disproportionately from this protected minority of highly educated people, have shown little interest in freeing up trade in professional services.
Similarly, proponents of free trade in manufactured goods have been anxious to extend protectionism to other areas. Specifically, a major focus of trade policy has been to extend the US type of copyright and patent laws throughout the world. Patents and copyrights are unambiguously forms of protectionism. In a free market, items subject to copyright or patent protection would sell for a small fraction of the protected price. In countries that don't enforce copyright laws, thereby allowing free-market transactions, compact disks and videocassettes often sell for $1 or $2 each. By comparison, their copyright-protected price is in the range of $12 to $40. The economic loss associated with this type of protection is enormous. In fact, the static gains from eliminating patent and copyright protection would be hundreds of times as large as the gains from removing most existing restrictions on trade. Other types of trade restrictions rarely raise the price of a product by more than 10 to 15 percent.
Obviously there is a rationale for copyright and patent laws, but there is also a rationale for every other type of protection that has ever been imposed. Alternative ways are available to support the artistic and intellectual work that is currently supported by copyright and patent protection. It is very questionable that the copyright and patent system provides the most efficient means of supporting this work. However, free traders are willing to uncritically accept protectionism in this case, without any real examination of the evidence that it provides gains for the economy.
In short, trade policy has not been an honest push for free trade across the board. Instead, it has been a class-biased quest to put less-skilled workers in competition with low wages around the world. The small economic gains from this expansion of trade go entirely to those at the top of the income ladder. In this context, globalization has been and will be extremely important. It has been a tool for redistributing income upward. If it is allowed to continue in its current form, it will impose ever greater costs on the bulk of the working population of the United States.
Dean Baker is Senior Research Fellow at the Preamble Center for Public Policy, in Washington, D.C. Until January 1998 he was Senior Economist at the Economic Policy Institute, also in Washington.