Naked Economics (36 page)

Indeed, we’re back to the same discussion about capitalism that we had at the beginning of the book and again in Chapter 8. Markets create a new, more efficient order by destroying the old one. There is nothing pleasant about that, particularly for individuals and firms equipped for the old order. International trade makes markets bigger, more competitive, and more disruptive. Mark Twain anticipated the fundamental dilemma: “I’m all for progress; it’s change I don’t like.”

Marvin Zonis, an international consultant and a University of Chicago Booth School of Business professor, has called the potential benefits of globalization “immense,” particularly for the poorest of the poor. He has also noted, “Globalization disrupts everything, everywhere. It disrupts established patterns of life—between husband and wife, parents and children; between men and women, young and old; between boss and worker, governor and governed.”
⁷
We can do things to soften those blows. We can retrain or even relocate workers. We can provide development assistance to communities harmed by the loss of a major industry. We can ensure that our schools teach the kinds of skills that make workers adaptable to whatever the economy may throw at them. In short, we can make sure that the winners do write checks (if indirectly) to the losers, sharing at least part of their gains. It’s good politics and it’s the right thing to do.

Kenneth Scheve, a Yale political science professor, and Matthew Slaughter, an economist at the Tuck School of Business at Dartmouth, wrote a provocative piece in
Foreign Affairs
arguing that the United States should adopt a “fundamentally more progressive federal tax system” (e.g., tax the rich more) as the best way of saving globalization from a protectionist backlash. What’s interesting is that these guys are not left-wing radicals wearing tie-dye shirts; Matt Slaughter served in the George W. Bush administration. Rather, they argue that the huge benefits for the U.S. economy as a whole are being put at risk by the fact that too many Americans aren’t seeing their paychecks get bigger. Scheve and Slaughter explain:

The authors propose “a New Deal for globalization—one that links engagement with the world economy to a substantial redistribution of income.” Remember, this isn’t hippy talk. These are the capitalists who see angry workers with pitchforks loitering outside the gates of a very profitable factory, and they are making a very pragmatic calculation: Throw these people some food (and maybe some movie tickets and beer) before we all end up worse off.
⁸

Protectionism saves jobs in the short run and slows economic growth in the long run.
We can save the jobs of those Maine shoe workers. We can protect places like Newton Falls. We can make the steel mills in Gary, Indiana, profitable. We need only get rid of their foreign competition. We can erect trade barriers that stop the creative destruction at the border. So why don’t we? The benefits of protectionism are obvious; we can point to the jobs that will be saved. Alas, the costs of protectionism are more subtle; it is difficult to point to jobs that are never created or higher incomes that are never earned.

To understand the costs of trade barriers, let’s ponder a strange question: Would the United States be better off if we were to forbid trade across the Mississippi River? The logic of protectionism suggests that we would. For those of us on the east side of the Mississippi, new jobs would be created, since we would no longer have access to things like Boeing airplanes or Northern California wines.
But nearly every skilled worker east of the Mississippi is already working, and we are doing things that we are better at than making airplanes or wine.
Meanwhile, workers in the West, who are now very good at making airplanes or wine, would have to quit their jobs in order to make the goods normally produced in the East. They would not be as good at those jobs as the people who are doing them now. Preventing trade across the Mississippi would turn the specialization clock backward. We would be denied superior products and forced to do jobs that we’re not particularly good at. In short, we would be poorer because we would be collectively less productive. This is why economists favor trade not just across the Mississippi, but also across the Atlantic and the Pacific. Global trade turns the specialization clock forward; protectionism stops that from happening.

America punishes rogue nations by imposing economic sanctions. In the case of severe sanctions, we forbid nearly all imports and exports. A recent
New York Times
article commented on the devastating impact of sanctions in Gaza. Since Hamas came to power and refused to renounce violence, Israel has limited what can go in and out of the territory, leaving Gaza “almost entirely shut off from normal trade and travel with the world.” Prior to the Iraq War, our (unsuccessful) sanctions on Iraq were responsible for the deaths of somewhere between 100,000 and 500,000 children, depending on whom you believe.
⁹
More recently, the United Nations has imposed several rounds of increasingly harsh sanctions on Iran for not suspending its clandestine nuclear program. The
Christian Science Monitor
explained the economic logic: Tougher sanctions “would hit the ruling mullahs hard by raising Iran’s already high unemployment, and perhaps force trickle-up regime change.”

Civil War buffs should remember that one key strategy of the North was imposing a naval blockade on the South. Why? Because then the South couldn’t trade what it produced well (cotton) to Europe for what it needed most (manufactured goods).

So here’s a question: Why would we want to impose trade sanctions on ourselves—which is exactly what any kind of protectionism does? Can the antiglobalization protesters explain how poor countries will get richer if they trade less with rest of the world—like Gaza? Cutting off trade leaves a country poorer and less productive—which is why we tend to do it to our enemies.

Trade lowers the cost of goods for consumers, which is the same as raising their incomes.
Forget about shoe workers for a moment and think about shoes. Why does Nike make shoes in Vietnam? Because it is cheaper than making them in the United States, and that means less expensive shoes for the rest of us. One paradox of the trade debate is that individuals who claim to have the downtrodden at heart neglect the fact that cheap imports are good for low-income consumers (and for the rest of us). Cheaper goods have the same impact on our lives as higher incomes. We can afford to buy more. The same thing is true, obviously, in other countries.

Trade barriers are a tax—albeit a hidden tax. Suppose the U.S. government tacked a 30-cent tax on every gallon of orange juice sold in America. The conservative antigovernment forces would be up in arms. So would liberals, who generally take issue with taxes on food and clothing, since such taxes are regressive, meaning that they are most costly (as a percentage of income) for the disadvantaged.
Well, the government does add 30 cents to the cost of every gallon of orange juice, though not in a way that is nearly as transparent as a tax.
The American government slaps tariffs on Brazilian oranges and orange juice that can be as high as 63 percent. Parts of Brazil are nearly ideal for growing citrus, which is exactly what has American growers concerned. So the government protects them. Economists reckon that the tariffs on Brazilian oranges and juice limit the supply of imports and therefore add about 30 cents to the price of a gallon of orange juice. Most consumers have no idea that the government is taking money out of their pockets and sending it to orange growers in Florida.
¹⁰
That does not show up on the receipt.

Lowering trade barriers has the same impact on consumers as cutting taxes. The precursor to the World Trade Organization was the General Agreement on Tariffs and Trade (GATT). Following World War II, GATT was the mechanism by which countries negotiated to bring down global tariffs and open the way for more trade. In the eight rounds of GATT negotiations between 1948 and 1995, average tariffs in industrial countries fell from 40 percent to 4 percent. That is a massive reduction in the “tax” paid on all imported goods. It has also forced domestic producers to make their goods cheaper and better in order to stay competitive. If you walk into a car dealership today, you are better off than you were in 1970 for two reasons. First, there is a wider choice of excellent imports. Second, Detroit has responded (slowly, belatedly, and incompletely) by making better cars, too. The Honda Accord makes you better off, and so does the Ford Taurus, which is better than it would have been without the competition.

Trade is good for poor countries, too.
If we had patiently explained the benefits of trade to the protesters in Seattle or Washington or Davos or Genoa, then perhaps they would have laid down their Molotov cocktails. Okay, maybe not. The thrust of the antiglobalization protests has been that world trade is something imposed by rich countries on the developing world. If trade is mostly good for America, then it must be mostly bad for somewhere else. At this point in the book, we should recognize that zero-sum thinking is usually wrong when it comes to economics. So it is in this case. Representatives from developing nations were the ones who complained most bitterly about the disruption of the WTO talks in Seattle. Some believed that the Clinton administration secretly organized the protests to scuttle the talks and protect American interest groups, such as organized labor. Indeed, after the failure of the WTO talks in Seattle, UN chief KofiAnnan blamed the developed countries for erecting trade barriers that exclude developing nations from the benefits of global trade and called for a “Global New Deal.”
¹¹
The WTO’s current round of talks to reduce global trade barriers, the Doha Round, has stalled in large part because a bloc of developing nations is demanding that the United States and Europe reduce their agricultural subsidies and trade barriers; so far the rich countries have refused.

Trade gives poor countries access to markets in the developed world. That is where most of the world’s consumers are (or at least the ones with money to spend). Consider the impact of the African Growth and Opportunity Act, a law passed in 2000 that allowed Africa’s poorest countries to export textiles to the United States with little or no tariff. Within a year, Madagascar’s textile exports to the United States were up 120 percent, Malawi’s were up 1,000 percent, Nigeria’s were up 1,000 percent, and South Africa’s were up 47 percent. As one commentator noted, “Real jobs for real people.”
¹²

Trade paves the way for poor countries to get richer. Export industries often pay higher wages than jobs elsewhere in the economy. But that is only the beginning. New export jobs create more competition for workers, which raises wages everywhere else. Even rural incomes can go up; as workers leave rural areas for better opportunities, there are fewer mouths to be fed from what can be grown on the land they leave behind. Other important things are going on, too. Foreign companies introduce capital, technology, and new skills. Not only does that make export workers more productive; it spills over into other areas of the economy. Workers “learn by doing” and then take their knowledge with them.

In his excellent book
The Elusive Quest for Growth,
William Easterly tells the story of the advent of the Bangladeshi garment industry, an industry that was founded almost by accident. The Daewoo Corporation of South Korea was a major textile producer in the 1970s. America and Europe had slapped import quotas on South Korean textiles, so Daewoo, ever the profit-maximizing firm, skirted the trade restrictions by moving some operations to Bangladesh. In 1979, Daewoo signed a collaborative agreement to produce shirts with the Bangladeshi company Desh Garments. Most significant, Daewoo took 130 Desh workers to South Korea for training. In other words, Daewoo invested in the human capital of its Bangladeshi workers. The intriguing thing about human capital, as opposed to machines or financial capital, is that it can never be taken away. Once those Bangladeshi workers knew how to make shirts, they could never be forced to forget. And they didn’t.

Daewoo later severed the relationship with its Bangladeshi partner, but the seeds for a booming export industry were already planted. Of the 130 workers trained by Daewoo, 115 left during the 1980s to start their own garment-exporting firms. Mr. Easterly argues convincingly that the Daewoo investment was an essential building block for what became a $3 billion garment export industry. Lest anyone believe that trade barriers are built to help the poorest of the poor, or that Republicans are more averse to protecting special interests than Democrats, it should be noted that the Reagan administration slapped import quotas on Bangladeshi textiles in the 1980s. I would be hard pressed to explain the economic rationale for limiting the export opportunities of a country that has a per capita GDP of $1,500.

Most famously, cheap exports were the path to prosperity for the Asian “tigers”—Singapore, South Korea, Hong Kong, and Taiwan (and for Japan before that). India was strikingly insular during the four decades after achieving independence from Britain in 1947; it was one of the world’s great economic underachievers during that stretch. (Alas, Gandhi, like Lincoln, was a great leader and a bad economist; Gandhi proposed that the Indian flag have a spinning wheel on it to represent economic self-sufficiency.) India reversed course in the 1990s, deregulating its domestic economy and opening up to the world. The result is an ongoing economic success story. China, too, has used exports as a launching pad for growth. Indeed, if China’s thirty provinces were counted as individual countries, the twenty fastest-growing countries in the world between 1978 and 1995 would all have been Chinese. To put that development accomplishment in perspective, it took fifty-eight years for GDP per capita to double in Britain after the launch of the Industrial Revolution. In China, GDP per capita has been doubling every ten years. In the cases of India and China, we’re talking about hundreds of millions of people being lifted out of poverty and, increasingly, into the middle class. Nicholas Kristof and Sheryl WuDunn, Asian correspondents for the
New York Times
for over a decade, have written: