Thu Mar 29th, 2007 at 02:42:47 AM EST
The standard pro-free trade argument:
Nations prosper by focusing on things they do best -- their "comparative advantage" -- and trading with other nations with different strengths. . . . [rich-country] trade with large low-wage countries . . . will make all of them richer -- eventually. . . . trade can create jobs . . . and bolster productivity growth.
is being called into question in some unusual places recently:
Wall Street Journal: Pain From Free Trade Spurs Second Thoughts
For decades, Alan S. Blinder -- Princeton University economist, former Federal Reserve Board vice chairman and perennial adviser to Democratic presidential candidates -- argued, along with most economists, that free trade enriches the U.S. and its trading partners, despite the harm it does to some workers. "Like 99% of economists since the days of Adam Smith, I am a free trader down to my toes," he wrote back in 2001.
Politicians heeded this advice and, with occasional dissents, steadily dismantled barriers to trade. Yet today Mr. Blinder has changed his message -- helping lead a growing band of economists and policy makers who say the downsides of trade in today's economy are deeper than they once realized.
Promoted by Colman
Although still accepting of the traditional gains-from-trade argument, Blinder argues that the costs of free trade and outsourcing to US workers (and, by extension, possibly European workers as well) will be far higher than most economists have yet acknowledged:
[Blinder]is saying loudly that a new industrial revolution -- communication technology that allows services to be delivered electronically from afar -- will put as many as 40 million American jobs at risk of being shipped out of the country in the next decade or two. That's more than double the total of workers employed in manufacturing today. The job insecurity those workers face today is "only the tip of a very big iceberg," Mr. Blinder says. . . . the harm done when some lose jobs and others get them will be far more painful and disruptive than trade advocates acknowledge.
Ralph Gomory, former head scientist at IBM, argues that "changing technology and the rise of China and India could make the U.S. [and Europe?] an also-ran if it loses many of its important industries." Gomory more directly challenges the traditional economic logic of free trade:
. . . Mr. Gomory has done research challenging the relevance of David Ricardo's 1817 theory of "comparative advantage" . . . in an era in which the global scale of industries is huge and technology rapidly crosses borders.
Mr. Gomory recruited economist William Baumol . . . The pair produced computer models showing that an increase in trade between nations could lead to harm . . . If one nation were to gobble up enough of the powerful industries of the other, the losses would be so widespread for the losing country that its national income would decline, they found. Producers in the losing nation would lay off workers, and consumers there wouldn't have as much income to pay for imports. Trade no longer would be a win-win proposition. . . .
Large corporations, freed by technology, no longer can be counted on to locate plants and research facilities at home. "What's new is that globalization makes it possible for companies that we think of as American to take their technology and capital and put it in almost any work force in any country."
Harvard's Dani Rodrik is another free-trade skeptic:
The 49-year-old, Turkish-born, American-educated economist's primary target is what he calls the "ideology" of free trade. That's the notion that the economic gains from trade are so vast that they benefit every nation, even if some sectors suffer. Sometimes countries are better off protecting growing industries and subsidizing their exports, he argues, as China, Japan and other Asian nations have done. . . . [Rodrik also] warned that economic integration could lead to "domestic social disintegration" in rich countries unless governments do a better job at protecting middle-class workers.
In his FT op-ed The Cheerleaders' Threat to Global Trade, Rodrik further emphasizes that the most succesful modern developing countries have not followed orthodox free-trade nostrums.
So what should be done? Blinder recommends a fairly traditional center-left approach:
Mr. Blinder's answer is not protectionism, a word he utters with the contempt that Cold Warriors reserved for communism. . . . He wants government to do far more for displaced workers than the few months of retraining it offers today. He thinks the U.S. education system must be revamped so it prepares workers for jobs that can't easily go overseas, and is contemplating changes to the tax code that would reward companies that produce jobs that stay in the U.S.
Oops, was that a whiff of industrial policy? Gomory and Rodrik are more explicit about this:
Mr. Gomory would reduce the corporate tax rate for companies that produce "high value-added" jobs in the U.S. -- the kinds of jobs that pay high salaries for high productivity work. . . . Mr. Rodrik . . . recommends [developing nations need to look to different ways to spur growth, such as] reviving industrial policies . . . subsidizing domestic industries and protecting new exporting companies
So don't throw out the industrial policy playbook yet, Europe! And you may want to hang onto that social safety net as well. It's going to be a bumpy ride.
h/t Max Sawicky