How has trade changed in the last 30 years? How is this an example of basic economic theory? How does Krugman also argue that those who oppose free trade shouldn’t be thought of as economically ignorant?
Trouble With Trade
By PAUL KRUGMAN
28 December 2007, New YorkTimes <
While the United States has long imported oil and other raw materials from the third world, we used to import manufactured goods mainly from other rich countries like Canada, European nations and Japan.
But recently we crossed an important watershed: we now import more manufactured goods from the third world than from other advanced economies. That is, a majority of our industrial trade is now with countries that are much poorer than we are and that pay their workers much lower wages.
For the world economy as a whole — and especially for poorer nations — growing trade between high-wage and low-wage countries is a very good thing. Above all, it offers backward economies their best hope of moving up the income ladder.
But for American workers the story is much less positive. In fact, it’s hard to avoid the conclusion that growing U.S. trade with third world countries reduces the real wages of many and perhaps most workers in this country. And that reality makes the politics of trade very difficult.
Let’s talk for a moment about the economics.
Trade between high-wage countries tends to be a modest win for all, or almost all, concerned. When a free-trade pact made it possible to integrate the U.S. and Canadian auto industries in the 1960s, each country’s industry concentrated on producing a narrower range of products at larger scale. The result was an all-round, broadly shared rise in productivity and wages.
By contrast, trade between countries at very different levels of economic development tends to create large classes of losers as well as winners.
Although the outsourcing of some high-tech jobs to India has made headlines, on balance, highly educated workers in the United States benefit from higher wages and expanded job opportunities because of trade. For example, ThinkPad notebook computers are now made by a Chinese company, Lenovo, but a lot of Lenovo’s research and development is conducted in North Carolina.
But workers with less formal education either see their jobs shipped overseas or find their wages driven down by the ripple effect as other workers with similar qualifications crowd into their industries and look for employment to replace the jobs they lost to foreign competition. And lower prices at Wal-Mart aren’t sufficient compensation.
All this is textbook international economics: contrary to what people sometimes assert, economic theory says that free trade normally makes a country richer, but it doesn’t say that it’s normally good for everyone. Still, when the effects of third-world exports on U.S. wages first became an issue in the 1990s, a number of economists — myself included — looked at the data and concluded that any negative effects on U.S. wages were modest.
The trouble now is that these effects may no longer be as modest as they were, because imports of manufactured goods from the third world have grown dramatically — from just 2.5 percent of G.D.P. in 1990 to 6 percent in 2006.
And the biggest growth in imports has come from countries with very low wages. The original “newly industrializing economies” exporting manufactured goods — South Korea, Taiwan, Hong Kong and Singapore — paid wages that were about 25 percent of U.S. levels in 1990. Since then, however, the sources of our imports have shifted to Mexico, where wages are only 11 percent of the U.S. level, and China, where they’re only about 3 percent or 4 percent.
There are some qualifying aspects to this story. For example, many of those made-in-China goods contain components made in Japan and other high-wage economies. Still, there’s little doubt that the pressure of globalization on American wages has increased.
So am I arguing for protectionism? No. Those who think that globalization is always and everywhere a bad thing are wrong. On the contrary, keeping world markets relatively open is crucial to the hopes of billions of people.
But I am arguing for an end to the finger-wagging, the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express skepticism about the benefits of free-trade agreements.
It’s often claimed that limits on trade benefit only a small number of Americans, while hurting the vast majority. That’s still true of things like the import quota on sugar. But when it comes to manufactured goods, it’s at least arguable that the reverse is true. The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.
As I said, I’m not a protectionist. For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.
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1. Draw a supply and demand curve demonstrating the effect of US subsidies on world prices. What is the net effect of American aid and trade policies?
2. Why does the US engage in practices that effectively impoverish, and possibly kill, poor people around the world?
Farm Subsidies That Kill
By NICHOLAS D. KRISTOF, New York Times, July 5, 2002
J'accuse! I hate to condemn a colleague this way, but our tax dollars are going to pay an indolent New York journalist for not growing wheat on the West Coast.
Could there be a worse indictment of American agricultural policy, rendered even more scandalous by the new $180 billion farm bill signed by President Bush?
Actually, there is a worse indictment. By inflating farm subsidies even more, Congress and the Bush administration are impoverishing and occasionally killing Africans whom we claim to be trying to help.
Last week at the G-8 summit conference in Canada, Mr. Bush and other world leaders spoke piously about their desire to help Africa help itself. Earlier, Treasury Secretary Paul O'Neill traveled around Africa with Bono complaining about African governance (but in a compassionate sort of way).
Our compassion may be well meant, but it is also hypocritical. The U.S., Europe and Japan spend $350 billion each year on agricultural subsidies (seven times as much as global aid to poor countries), and this money creates gluts that lower commodity prices and erode the living standard of the world's poorest people.
"These subsidies are crippling Africa's chance to export its way out of poverty," said James Wolfensohn, the World Bank president, in a speech last month.
Mark Malloch Brown, the head of the United Nations Development Program, estimates that these farm subsidies cost poor countries about $50 billion a year in lost agricultural exports. By coincidence, that's about the same as the total of rich countries' aid to poor countries, so we take back with our left hand every cent we give with our right.
"It's holding down the prosperity of very poor people in Africa and elsewhere for very narrow, selfish interests of their own," Mr. Malloch Brown says of the rich world's agricultural policy.
It also seems a tad hypocritical of us to complain about governance in third-world countries when we allow tiny groups of farmers to hijack billion of dollars out of our taxes.
For example, the U.S. has only 25,000 cotton growers, but they are prosperous (with an average net worth of $800,000) and thus influential. So the U.S. spends $2 billion a year subsidizing them, and American production of cotton has almost doubled over the last 20 years — even though the U.S. is an inefficient, high-cost producer. The result is a glut that costs African countries $250 million each year, according to a World Bank study published in February.
And when a poor cotton farmer in West Africa goes bust because of our cotton subsidies, he has no savings to fall back on. Rather, he starves. He cannot afford medicine for his sick baby, and the child dies. He cannot afford a midwife when his wife is pregnant, and so she is crippled in childbirth. He cannot afford worming medication for his children, and so they grow anemic and do poorly in school — and cannot concentrate when Americans lecture them about their poor governance.
Back to the freeloading journalist, whom I'll rat on in a moment. He defends himself by saying that his plot of farmland was put into a federal subsidy program by a previous owner. So he gets $588 each year for what rural America calls "farming the government, rather than farming the land."
Such absurdities — and particularly the latest farm bill, a transparent political payoff — accomplish nothing. I grew up in rural America, and if the farm bill revived small towns like Wapato, Ore., a hamlet that once flourished near my family's farm and has now completely disappeared, then I would be sympathetic. But the fact is that 60 percent of American farmers get no subsidies at all, and 47 percent of commodity payments go to large farms with average household incomes of $135,000.
The subsidies go overwhelmingly to farmers tilling the ground, not those raising livestock. When I was a kid, we raised sheep — a lousy idea, since fewer and fewer Americans eat lamb or wear wool. So in the absence of a good sheep subsidy, we bowed to market forces, and now the only sheep left on my parents' farm are a few family friends. That's the way a market economy is supposed to work.
The bottom line is that farm subsidies cripple Africa and go to people who don't really need them — like that grasping journalist who gets $588 a year for not growing wheat. Who is that person? Er, it's me.