Apparent vs. Real Winners and Losers in Trade

In his latest blog post, Alan Tonelson remarks on a study that puts trade issues in a new light. The study “contends that, since 1970, crooked politicians have stolen just over $12 trillion from the third world countries they’ve ruled.” Moreover, almost 2/3 of this theft has involved just a few countries, notably major American trading partners China and Mexico.

Though the scale of this corruption is stunning, Alan makes a somewhat different point, as follows. An argument made by the Establishment class in the U.S. is that although trade harms the American middle class (something they are now just starting to admit, thanks to Sanders and Trump), it is lifting millions of people in the Third World out of poverty. But Alan ties in the corruption issue by pointing out that if all this stolen wealth had been invested in infrastructure, education and so on, the salutatory effect on the Third World poor would have been far greater than whatever benefit they derive from trade. The “lifting them out of poverty” issue is thus a red herring.

Sounds plausible, but it got me to wondering just who benefits from trade with poor countries, which will be my topic in this post.

I’ll start by noting that Alan and I move in quite different circles. In a post a few days ago, he mentioned that a standard argument in favor of liberal trade policies for the U.S. is that it reduces the chances of war. Yes, I have occasionally heard this argument, as well as the one about reducing world poverty, but really, I think one hears this much more often in Alan’s circles than in the mainstream press — or from Hillary Clinton. The canonical arguments for free trade in most Americans’ minds has been claimed benefits to them, in terms of lower consumer prices and creation of American jobs.

In the last 15 years or so, I’ve begun to understand that claims along the latter lines are often fallacious.  A Wall Street Journal analysis, for instance, showed that only a small part of the price of an iPhone is connected to Chinese labor. My colleague Phil Martin found that use of unauthorized immigrant labor saves consumers of lettuce only about a nickel per head. Due to small profit margins, the use of foreign labor does increase the vendor’s profits proportionally, but the much-vaunted savings to consumers is not there in most cases.

These things have been startling revelations to me, as they clash not only with what we are told in the press, but also with the extensive education in economics that I pursued as an undergraduate and in continuing informal study afterwards. I feel a little sheepish about being so naive, but as Alan points out, plenty of economists are saying the same thing today. Caveat emptor, even in — especially in — university studies.

Thus my first reaction to Alan’s post was to wonder whether the claim that trade helps alleviate Third World poverty is just as subject to misinformation as assertions of benefits to Americans. I haven’t read studies on this, but I know the situation in China fairly well, and I must say it’s not so clear that rural Chinese, the putative group most helped by trade with the U.S., has benefited to the degree implicit in the slogans about “lifting millions out of poverty.” Though it’s certainly true that individual factory workers from rural China have found the income from their work to be worth the quite onerous hardships (leaving their children back home, enduring harsh, dangerous and tedious working conditions etc.), I believe few of them would agree that they have been lifted out of poverty. Instead, it is the well-off in China (or more commonly, in Taiwan, the source of much of the investment) who have reaped the main benefits.

In other words, the main winners on both ends of trade seem to be the upper class, quite contrary to the image most people have of middle-class beneficiaries in the U.S. and lower-class ones in the Third World.

One of the particularly disturbing points Alan makes in his post is that prominent, presumably Democratic, economists such as Harvard’s Kenneth Rogoff are in essence saying that Bernie fans should be ashamed of themselves for supporting Sanders’ call for tighter trade policies. Does Rogoff really believe that? He’s about my age, and thus grew up on a diet of Samuelson-style support for trade, and maybe he has just never taken the trouble to take a serious look at just who the winners and losers are here. Is he yet another member of the Chattering Class, whom I noted recently have no idea what it’s like to be laid off, face eviction or mortgage default and so on? It’s so easy to view things simplistically while sipping a $6 latte’ in Harvard Square.

 

 

 

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22 thoughts on “Apparent vs. Real Winners and Losers in Trade

  1. “contends that, since 1970, crooked politicians have stolen just over $12 trillion from the third world countries they’ve ruled.”

    Imagine how vastly bigger that figure would have been if the amount stolen by crooked politicians in First World countries (especially the U.S.) had been included.

    The mind reels.

    P.S. Of course, the true figures can never be known. It is hard to even estimate how much gets effectively skimmed off from the whole of the GDP, in any country, by politicians whose legislative and/or regulatory thefts are directed to their backers, contributors, and supporters (aka “cronies”) rather than to themselves, in the first instance, but with corresponding quid pro quo payoffs (e.g. lucrative directorships after retirement from government service) carefully arranged and put into place, where the payoff is simply time-shifted into the future in order to avoid suspicion and condemnation.

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  2. > One of the particularly disturbing points Alan makes in his post is that prominent, presumably Democratic, economists such as Harvard’s Kenneth Rogoff are in essence saying that Bernie fans should be ashamed of themselves for supporting Sanders’ call for tighter trade policies.

    I’m especially surprised that Kenneth Rogoff should be so strident since he and Carmen Reinhart had that infamous Excel error in an NBER working paper titled “Growth in a Time of Debt” a few years ago. I describe it at http://usbudget.blogspot.com/2013_05_01_archive.html . I don’t know much else about him so he may well have done some good work in his career. But I will always remember him as one of those people who helped to convince me that all studies should be peer-reviewed, replicated, and their data and calculations made public before their conclusions are allowed to affect public policy.

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  3. Norm – Bernie and Trump should get a Nobel prize for changing how the masses (global) look at American politics, including trade. They both ripped the scab off a festering wound. Should have happened decades ago before the middle class was destroyed. But perhaps like an addict, one has to spiral all the way down into the gutter before doing anything, if anything.

    Daylight is often a great cure of a disease.

    The more Paul Ryan squawks, the more I feel he (and Romney) is all about sour grapes having lost the last election, and looking at his own run for President next time. And the lack of Bush support is simple family loyalty and all about JEB!’s loss. I think Donald is absolutely right to not cave to Ryan and become “establishment” to make so-called peace. Although Sara Palin is not my cup of tea (no pun on tea party), I really love how she will “Cantorize” Rayn at the primary.

    Linda K.

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    • I disagree. I think Ryan is sincere, taking a very Midwestern “fair play” for all”, “Don’t shout, be polite” point of view. And he probably has a firm belief that the GOP should make absolutely sure not to do anything that might offend Latino voters, as was decided by the party in their “autopsy” of 2012.

      That said, I must admit to a bit of schadenfreude in watching the unfolding Palin/Ryan story. 🙂

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  4. Free trade benefits free traders, and no one else. Who is a free trader? These are financial persons who benefit from arbitrage (differential prices in different places) and other persons who move around large amounts of money. By removing the sand from the gears (no tariffs or other barriers), the production of goods can be moved to the low-cost locations. In other words, US jobs are decreased, jobs in Vietnam, Bangladesh, and China are increased. This should not be a surprise to anyone. Only the lies and obfuscation of the free traders, who own also the instruments of mass communication, have kept this obvious stuff from people’s consciousnesses. It’s the same with illegal immigration. Everyone learns about supply and demand, and then with labor, they refuse to admit that it works the same there as with heads of lettuce. Most liberals are idiots about this. They say stuff like “We need to force businesses to pay a living wage, AND we need to help those peooorrrrr Mexican/Guatamalan/Salvadoran/Haitian/Columbian persons fleeing gangs/poverty/low quality sex life.” Beyond stupid, really.

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  5. Norm – your post covers a lot of ground. I offer a two comments.
    1. Whatever success China has had in raising living standards comes from their well-designed industrial policies, which are focused on acquiring the means of production – a high priority in their Marxist tradition. Our trade policy and the essence of Free Trade Agreements it to oppose industrial policies, blur boundaries, and place corporate interests above public interests. Similarly, Japan, Korea, Singapore and other countries have done very well with national policies that are the opposite of our free trade orthodoxy.

    2. The likelihood of war is reduced when countries integrate their economies. This argument was much stronger in the design of the European Union. We made a similar argument in justifying the Marshall plan with Germany, and our post-war engagement with Japan. That said, economic integration is associated with Absolute Advantage – are leveling. “Trade” involves separate economies, specializing by comparative advantage, and the promise of mutual gain. If you look at successful examples of economic integration, they usually involve a parallel political structure that manages how gains are shared. Free trade undermines political integration, and accentuates inequalities. The geo-poliitcal argument with China is very murky by comparison. China is already twice as integrated with our TPP partners as we are. TPP simply gives China 11 new portals to sell goods in our domestic market. It’s not at all clear the the “no war” argument applies to China.

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    • France and Germany wouldn’t go to war with each other today even if the EU were to dissolve. For that matter, they haven’t gone to war with other countries either. War is for the most part passe’ among the major powers, fortunately, and though trade may play a role there, I think WW II taught Europe the lesson it should have learned after WW I, trade or no trade.

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      • Good point. A similar realization came regarding expropriation or nationalization of foreign investments. That problem went away because countries realized it was a bad policy option. That realization occured decades before dispute settlement provisions (ISDS) started appearing in trade deals.

        In both cases, the changes were not related to trade deals.

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  6. What’s that old saying? “it’s hard to change a man’s point of view when his income depends on that point of view.” Sadly, that would apply to the chattering classes as well as a lot of economists. I won’t even bother to include politicians in this group, since that is a foregone conclusion.

    Liked by 1 person

    • Economists especially I have huge contempt for in this area. There is plenty of theory about the impact of increased supply (labor) on demand (salary, job availability). You never hear much, although George Borjas does do research which is sound and not in the liberal “immigration good for all” mode. Another area that is ignored is the impact of immigration on rents. Again, an obvious link, but you cannot find ANY research on it.

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  7. There’s a lot to digest here and responses can take many roads. On first pass, here’s what comes to my mind:

    Corporate and political greed, and corruption is everywhere. In third world countries it’s much more rampant and goes unchecked.

    I’m for global trade but not for ‘free trade agreements’ because as we’ve seen, these agreements benefit mostly the aristocrats and the bourgeoisie (contemporarily speaking), not the proletariat. Similar to our donor class (Sanders’ millionaires & billionaires) controlling the political class, where they place corporate interests above workers’ interests. I won’t go as far as saying public interest as low income people and people who are on a fixed income (seniors) do benefit from cheap foreign goods they can buy at Walmart.

    I’ve said this in my previous comments in your previous blog posts: bringing immigrants or foreign workers here or to offshore jobs to these countries to help them improve their lives or “reduce world poverty” is not the answer. Helping these countries lift themselves from third world status to second world status (or from second to first) is a better and more effective solution. The current solution is akin to pointing the fire extinguisher at the flames instead of the base of the fire.

    In these third world countries, the corruption in the upper class and the political class is blatant and mostly goes unchallenged. I remember reading many years ago about IMF money getting redirected into the coffers of the ruling political class (Pakistan, Brazil, etc) within hours of getting transferred into that country’s accounts.

    I’ve traveled all around the world – to over 45 countries – and pondered to myself what makes a country first-world, second-world, and third-world. I came to the conclusion that it’s a mix of that country’s law/regulation/rules, education, culture and tax policies. In first world countries, the rule of law is enforced, gov’t officials & politicians who are corrupt or ‘above the law’ are rarer and have a higher chance of being prosecuted by the law if caught (Obama and Hillary getting away with what they’ve gotten away with is a sign that America is slip-sliding out of first world status). In third world countries they get away with it – and at times literally with murder – which keeps the population from speaking out, because it’s useless or dangerous to do so. So in a way democracy works in first world countries while in third world countries not so much.

    In first world countries, education and innovation is high, and standards of quality are also high. And in first world countries, tax gets collected and these countries have an effective tax collection system.

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  8. I see that you are starting to understand what is going on.
    For more information, I suggest reading “Confessions of an Economic Hit Man”.
    Much of what you read in the Main-Stream Media is not true. Lies about H1-B are just the tip of the iceberg.

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    • I’ve been writing about H-1B and related issues for more than 20 years. As far as I know, I’m not saying anything different today than I was saying back then.

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  9. I don’t believe that “free trade” has made the lives of poor and marginalized people in developing countries any better.. In general the lives of the poor just shifted from one type of poverty to another type of poverty. . Now certainly some classes have developed and grown, but the poor remain. Any gains did not come from the natural workings of markets and trade, but because of social reform movements. For example, Nike was forced to stop the use of essentially near slave labor of their contractors because of the pressure of its customers in the West. Apple had to react to stories in the West of Apple contractors building nets to prevent the suicide of distraught workers.

    Just a note on trade as a way to reduce war. Seems it does effect country relationships. In the new Cold War started by this administration, it was only natural at a certain point that the United States has issued sanctions against Russia essentially to cut the economic ties between Russia and the EU. And those ties were not trivial. Farmers in alot of the EU countries have protested (even the anti-Russian Lithuanians) because Russia stopped all ag imports into Russia. When we “sanction” a country, more likely a prelude to conflict and war. On the other hand, compare how the US has reacted to the Chinese treatment of Tibet as compared to its treatment of Russia and Crimea. See the Walton family is bringing peace to the East.

    I read Paul Krugman a number of years ago where he defended NAFTA. His odd defense was that essentially it was the moral duty of liberals to accept NAFTA to benefit the poor of the third world while knowing it could hurt Americans. It was strangely sorta like an economic version of taking one for the Gipper. This just shows how disconnected even the liberal elites are from the experiences of everyday Americans.

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    • Good point about Paul Krugman.

      The Nike and Apple examples again argue for tightening trade policy. In those cases, the consumers, not the government, threatened the tightening.

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    • > I read Paul Krugman a number of years ago where he defended NAFTA. His odd defense was that essentially it was the moral duty of liberals to accept NAFTA to benefit the poor of the third world while knowing it could hurt Americans. It was strangely sorta like an economic version of taking one for the Gipper.

      I would have more sympathy for that view if there was something to ensure that it was shared sacrifice. Instead, it seems more like the following:

      “Dear me, look at that poor person. Let’s give him your job. I and my fellow CEOs will contribute by accepting higher company profits and higher compensation for us and other Americans will contribute but putting up with lower prices. We’ll do this as a team!”

      Regarding Krugman, George Borjas has a blog post about him at https://gborjas.org/2016/03/10/channeling-krugman/ . He gives the following excerpts from Krugman’s blog:

      Much of the elite defense of globalization is basically dishonest: false claims of inevitability, scare tactics (protectionism causes depressions!), vastly exaggerated claims for the benefits of trade liberalization…, hand-waving away the large distributional effects that are what standard models actually predict…The conventional case for trade liberalization relies on the assertion that the government could redistribute income to ensure that everyone wins…But it is fair to say that the case for more trade agreements…is very, very weak.

      You can read Krugman’s full column at http://krugman.blogs.nytimes.com/2016/03/09/a-protectionist-moment/?_r=0 .

      Liked by 1 person

  10. Great posts from both you and Alan Tonelson.

    With respect to the failure of common people to share in the benefits that free trade should have given around the world I recommend reading “Why Nations Fail The Origins of Power Prosperity and Poverty” by MIT Professor of Economics Daron Acemoglu and Harvard Professor of Government James A. Robinson. The paperback is available on Amazon Prime for $10.44 (http://www.amazon.com/Why-Nations-Fail-Origins-Prosperity/dp/0307719227/ref=sr_1_1?ie=UTF8&qid=1462995529&sr=8-1&keywords=Why+Nations+Fail).

    The book takes you around the world explaining why economies are what they are today and how they got that way. It starts off at the fence separating Nogales, Arizona from Nogales, Sonora noting that the people north and south are very similar but have very different economies. The history of how they got that way is fascinating and will not leave you surprised that crooked politicians have stolen so much today as the have been doing since Cortes showed up.

    With respect to so few economists seeing problems with free trade consider the quote from Upton Sinclair, the last man before Bernie Sanders, to run statewide in California proudly proclaiming his liberalism.

    “It is difficult to get a man to understand something when his salary depends upon his not understanding it.”

    Most economists work for organization that benefit from free trade. That includes academic organizations. Could they publicly be against free trade and hold their current jobs? I think most could not.

    With respect to the benefit of lower consumer prices no free trade advocate addresses the net of lower prices and lower wages. Economists making the argument of lower prices almost always add the phrase “on imported goods” and with good reason. Free trade impacts the consumer price of goods other than imported goods.

    First, American consumers pay higher prices for domestic consumption of the goods exported. Opening up new markets creates higher demand for those products exported. Higher demand leads to higher prices. American consumers pay that higher price.

    Second, we are trying to stimulate export growth by devaluing the dollar. A devalued dollar means that American consumers pay higher prices for all imported goods. The major impact of this in the price we pay for gasoline as oil is priced in dollars.

    Third, how much of the cost reduction do outsourcing companies really share with consumers? Greed having caused them to outsource in the first place it is unlikely they suddenly turned generous with their price. Their increased profits suggest they retained much of the cost savings for their own profit limiting any benefit to consumers. Consumer price is going to be set by supply and demand and cost of production is an indirect player in that process.

    The real (inflation adjusted) wages of blue workers peaked in 1972. Lower prices from imported goods would tend to push real wages up (the dollar buys more) and yet they have gone down meaning the any benefit from lower import prices has been more than wiped out with lower wages.

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