Saturday, May 24, 2008

Free Trade's Benefits Are Not A Paradox (Shhh...The children might be listening.)

James Surowiecki, of The New Yorker's Financial Page, has written an excellent article called:
The Free-Trade Paradox
by James Surowiecki May 26, 2008

Mr. Surowiecki has written some excellent stuff in the past, my favorite being "The Wisdom of Crowds", a book about majority opinions, elections, betting lines, and how something as goofy as Wikipedia can grow to be more helpful than an encyclopedia.
I agree with what he's written here, for the most part. This posting will be a sort of anti-Fisking. What I hope to do here is draw attention to how gently, calmly, and lovingly Surowiecki takes his almost exclusively Democratic Partly Loyalist audience by the hand and tries to lead them to the conclusion that The Sky Is Blue and Grass Is Green.

All the acrimony in the primary race between Barack Obama and Hillary Clinton has disguised the fact that on most issues they’re not too far apart.

Actually, the acrimony hasn't disguised anything. Take the names off their websites, and 95% of us couldn't tell which is which.

That’s especially the case when it comes to free trade, which both Obama and Clinton have lambasted over the past few months. At times, the campaign has looked like a contest over who hates free trade more: Obama has argued that free-trade agreements like NAFTA are bought and paid for by special interests, while Clinton has emphasized the need to “stand up” to countries like China.

The Clintons' position of "standing up" to China is like Neiman-Marcus "standing up" to Dollar General for providing products at a lower cost.

Two weeks ago, both senators signed on as sponsors of a new bill that would effectively impose higher tariffs on China if it doesn’t revalue its currency.

YEAH ! That will Put a tariff on their stuff so we'll have to pay....more. With friends like Hillary, who needs....Obama.

The candidates are trying to win the favor of unions and blue-collar voters in states like Ohio and West Virginia, of course, but their positions also reflect a widespread belief that free trade with developing countries, and with China in particular, is a kind of scam perpetrated by the wealthy, who reap the benefits while ordinary Americans bear the cost.

Actually, with these trade agreements running into the thousands of pages, we don't have true Free Trade with anyone outside our borders. But more trade is better than less.

It’s an understandable view: how, after all, can it be a good thing for American workers to have to compete with people who get paid seventy cents an hour?

How can it be a good thing for everyone who reaps the benefits of lower costs on anything? How can it be good for American oil companies who can only produce oil at $130 a barrel to compete with companies who can bring it in for $90? I believe if confronted with that situation we would all collectively say "Screw the American oil companies". And their employees and their household pets. The benefits for everyone would be big enough to counteract the harm done to someone. It's that simple. But unions are somehow seen as more wholesome....

As it happens, the negative effect of trade on American wages isn’t that easy to document.

Hmmm....wonder why. Could it be that the individual negatives are totally blown away by the group positives? Please remember, Mr. Surowiecki is trying to teach Democrats why their beloved Government Economic Control does more harm than good. Be patient. A master is at work here....

The economist Paul Krugman, for instance, believes that the effect is significant, though in a recent academic paper he concluded that it was impossible to quantify.

I've now read enough Paul Krugman to believe that he couldn't quantify two-for-one pricing at The Dollar Store. Nope, says Dr. Krugman. You can't quantify it, but I know it's bad.

But it’s safe to say that the main burden of trade-related job losses and wage declines has fallen on middle- and lower-income Americans. So standing up to China seems like a logical way to help ordinary Americans do better. But there’s a problem with this approach: the very people who suffer most from free trade are often, paradoxically, among its biggest beneficiaries.

Notice Reverend Surowiecki's continued use of the word "paradox", both in the previous sentence, and in the title of this sermon/essay. He's saying that Free Trade's benefits defy intuition, much like the idea of a round earth defies intuition. Saying it's a "paradox" doesn't imply that the Free Trade skeptics are dumb. It merely suggests that the skeptics don't know what everyone else has clued in on since 1936.

The reason for this is simple: free trade with poorer countries has a huge positive impact on the buying power of middle- and lower-income consumers—a much bigger impact than it does on the buying power of wealthier consumers. The less you make, the bigger the percentage of your spending that goes to manufactured goods—clothes, shoes, and the like—whose prices are often directly affected by free trade. The wealthier you are, the more you tend to spend on services—education, leisure, and so on—that are less subject to competition from abroad.

Wal-Mart denim jeans are subject to the benefits of Free Trade. Houses in The Hamptons, tickets to The Met, and subscriptions to "The New Yorker" are not.

In a recent paper on the effect of trade with China, the University of Chicago economists Christian Broda and John Romalis estimate that poor Americans devote around forty per cent more of their spending to “non-durable goods” than rich Americans do. That means that lower-income Americans get a much bigger benefit from the lower prices that trade with China has brought.

Surowieckie has now removed his Clue Stick from its scabbard, but he has not yet struck anyone about the head and shoulders....he takes a few practice swings....

Then, too, the specific products that middle- and lower-income Americans buy are much more likely to originate in places like China than the products that wealthier Americans buy.

He is now raising the Clue Stick above his head....

Despite a huge increase in imports from China—they sextupled as a percentage of U.S. imports between 1990 and 2006—Chinese products are still concentrated mostly in lower-price markets. (By some estimates, Wal-Mart alone has accounted for nearly a tenth of all imports from China in recent years.)

Using perfect form, Surowieckie swings towards the addle-pated noggins of his audience with all his might ! ! !

By contrast, much of what wealthier Americans buy is made in the U.S. or in high-wage countries like Germany and Switzerland.

The Clue Stick makes contact ! ! ! And now, the follow-through....

This is obvious when it comes to luxury goods—Louis Vuitton bags, Patek Philippe watches, and so on—but it’s also true of many other goods, like electronics, kitchen appliances, and furniture, categories in which American and European manufacturers have continued to thrive by selling to the high-end market. According to the Yale economist Peter K. Schott, machinery and electronics products made in developed countries sell in the U.S. for four times the average price of Chinese products. And, since the late nineteen-eighties, that price gap has widened by almost forty per cent.

But, but, but....Hillary said all this was bad ! ! ! How can this be ? ? ?

This may not always be the case; as China’s economy continues to boom, its companies will likely move up the quality ladder and, eventually, become serious competition for high-end American and European manufacturers. But for the moment the benefits of free trade with China, at least when it comes to shopping, are concentrated overwhelmingly among average Americans. And the result is that, in the past decade, the products that they spend more on have become a lot cheaper compared to the stuff that rich people spend more on.


Broda and Romalis, in their recent paper, calculate that between 1999 and 2005 alone the inflation rate for lower-income Americans was almost seven points lower than it was for the wealthiest Americans.

IT'S NOT TRUE ! NOT TRUE ! I DON'T WANT IT TO BE TRUE ! trade&business&freedom are bad!!!Hillary&Barack are good ! ! ! NAFTA is bad ! ! Freedom is bad ! ! Excessive regulations are good ! ! Pelosi told me so ! AAAaaaarghhh !

That means that free trade with China has made average Americans, at least as consumers, much better off—in the sense that it’s made their dollars go further than they otherwise would have.

There, there now....I know this is hard to take, Surowiecki is saying. Maybe this next part will help you feel better.

Now, there’s a lot that’s left out of this equation, such as the fact that free trade may help richer Americans by increasing corporate profits.

O thank God I can still say the rich bastards benefit from trade. Thank you James Surowiecki, thank you thank you thank you....

And cheap DVD players may not, on balance, make up for lost jobs.

But notice that Reverend Surowiecki say "may" not. He's having a Krugman moment....

But the reality is that if we toughen our trade relations with China the benefits will be enjoyed by a few, since only a small percentage of Americans now work for companies that compete directly with Chinese manufacturers, while average Americans will feel the pain—in the form of higher prices—far more quickly and more directly than rich Americans will. Obama and Clinton, in their desire to help working Americans—and gain their votes—are pushing for policies that will also hurt them.

Ok, did James Surowiecki's sermon convert anyone? No? You're still going to base your beliefs about trade on pure emotion?
Thought so.
But before you click away, look at who made your computer.
For another take on this essay, click here to go to a Blog called The Economist's View.


subadei said...

I think your article breakdowns are my favorite of your posts.

The good news is these positions that each of the two candidates take on free trade are very likely pandering and little more. Should they ascend to the presidency neither is likely to follow through with such foolishness as placing tariffs on Chinese imports... I hope... At least that's what I tell myself.

The Whited Sepulchre said...

Thanks. Sometimes I'm afraid that I come across as the bitter old guy who has been P.O.'d since 1975.

Obama's people have already gotten in trouble by telling Canada that he isn't serious about blowing up NAFTA.

Now that I have your encouragement, I intend to do a Fisking of an entire New York Times.