Look for a civil war among Democrats on trade

By Henry Banta
henrybanta@aol.com

In the not too distant future we are going to find ourselves tangled up in a very ugly fight over trade policy.  This week a group of Democrats in the House have begun organizing a Populist Caucus with trade issues high on their agenda. 

It is a fair bet that the quality and civility of this coming debate will be abysmal. It is unlikely that the media will do much to improve it. There is much about the issue that lends itself to invective, bumper-sticker slogans, and the “he-says-she-says” style of reporting. It will probably make the current coverage of the stimulus debate look like a graduate school seminar.

Three things will contribute to an exceptional nastiness. First it will come at a time when the nation, indeed the whole world, will have sunk even further into a very bad recession. Rationality is certain to suffer. Second, the entire process of globalization is under fierce attack, primarily from the less developed countries, but also from within the major economic powers. Third, unlike the debate over the stimulus plan, the trade debate will be a civil war among Democrats, calling into issue the most basic values of the party. 

At the risk of sounding hopelessly naive, there is a possibility – admittedly slight – that the media could actually help raise the level of this debate. This optimism is based on the fact that over the past several months we have seen some splendid reporting on the current financial crisis. Repeatedly very complex matters have been reported on with competence and technical sophistication. Of course, unfortunately for all of us, it was too late coming; most of it has been in the form of a post mortem. Nevertheless there is good possibility that this reporting will be of help when we get around to reforming financial regulation. It suggests the possibility that we might be on the edge of a new level of economic reporting.  Perhaps the lessons learned and skills developed will not be lost.

There is nothing new in the impending trade debate. The opposite parties have been at war for a long time. It is the context of the recession and the new Democratic administration that gives the matter its intensity. The Republicans had it easy. At least on the surface they bought into the notion that free trade was always good. Whether what they promoted was actually free trade is another matter; their rhetoric at least was consistent. The Democrats, on the other hand, have been deeply divided. Organized labor as well as a number of allied economists have been skeptical about the benefits of free trade. They have never forgiven President Clinton for his endorsement of NAFTA. On the other side, economists from the academic world – or at least associated with its intellectual traditions – including those most prominent in the Obama administration, are strong supporters of free trade.

It is almost impossible to overstate the depth of the division between these two factions. The academic economists invoke 200 years of analysis, debate, research and refinement. Moreover, there is a certain common sense logic that underlies even their most arcane arguments: trading is a voluntary activity; people do not enter into trades unless each side thinks that there is something to be gained. Some may gain more than others, but in the end each party gets something. Trading is simply not a zero-sum game. The sheer volume of scholarship on this side of the debate is overwhelming. It is as intimidating as the prestige of its authors who include virtually every great name in economics from David Ricardo to Paul Samuelson. Some in the academic world succumb to the temptation to sneer at the critics of free trade as undereducated and overly emotional moralists who cannot accept some economic progress as better than none at all.

The benefits of trade claimed for the U.S. are not small. Larry Summers, the newly appointed director of the National Economic Council, recently wrote:

“No responsible observer of the U.S. economy could suppose that the trade agreements we have entered into have had anything but positive overall economic effects. They have benefitted all of us as consumers able to purchase lower priced products. While there has been some economic disruption from trade agreements, the reality is that the jobs lost due to trade agreements account for only a negligible fraction of the job loss in the American economy.”

While Summers sees globalization, as opposed to trade agreements, threatening American wages at the lower end, he sees no hope that this threat can be effectively met with protectionism.

All this is not to say that there is no intellectually respectable argument on the other side. Doubts about the current pattern of globalization and trade have come from such eminent economists as the Nobel prize winner Joseph Stiglitz. These attacks have come from two directions. First is the charge that the current patterns of trade benefit the wealthier nations at the expense of the poorer. Second, there is the claim that trade affects the distribution of wealth and income within the trading nations. It is alleged that global trade has benefitted only a very small number of very wealthy and has disadvantaged the majority. 

In their more extreme form these attacks on free trade and globalization do take on a moral fervor. They dismiss the conventional economics as sophistry in support of greed and focus on the distributional effects of trade. Strident as these attacks may be, they are not without some basis. The more sophisticated critics acknowledge the theory of comparative advantage, but question its contemporary relevance. Jeff Faux of the Economic Policy Institute, notes that, even under the theory, every trade does not produce a “win-win” for every person or every firm, only every country wins. He then argues that,

“The lesson of NAFTA, reflecting economic common sense, is that globalization makes national economies inadequate as the sole or even primary measure of the international allocation of costs or even primary measure of the international of costs and benefits.”

He asserts that the real winner is a “cross-border corporate investor class” that is organized globally. This class is composed of “stateless CEOs, investment funds managers, and rich investors.” The intent of this class is to create a global economic system outside of politics, beyond the control of democracies and unanswerable to any electorate. From this perspective, the losers in the current system of trade are the workers in all countries. While in a narrow technical sense each nation benefits from trade, the benefits are captured exclusively by the very small corporate investor class.

These arguments have a strong appeal to organized labor and its political allies which have developed a deep hostility to free trade in general and NAFTA in particular. They see the free trade policies of the Bush administration as a major cause of the loss of domestic jobs – particularly high-paying manufacturing jobs. They also see the free trade policy as a major contributor to the dramatic growth in income inequality over the last few decades.

Globalization and free trade have enemies beyond the U.S. For several decades free trade has been a central component of the so-called “Washington consensus.” It has been relentlessly pursued as a key element of US foreign policy directly and through the World Bank and the IMF. Ha-Joon Chang of Cambridge accuses this policy of being hypocritical from the perspective of less developed countries. He argues that the developed nations used protectionist devices to give their industries a head start. Now, in the name of free trade, they would deny the use of such devices to the poorer nations. He accuses the major economic powers of “pulling the ladder up” with the effect of leaving the poorer nations in a state of permanent disadvantage.

President Obama during his campaign dealt with the issue with great caution. To the extent he talked about it at all it was with a vague promise to revisit the terms of NAFTA and to eliminate the tax benefits that encourage the export of jobs by multinational corporations.  Recently he rejected the inclusion of protectionist measures in the stimulus legislation. But the broader aspects of the issue are yet to be addressed by the new Administration. The recession will raise the intensity on both sides of the debate. The staggering job losses will fuel the demand for some kind of protection. On the other side are those who believe that the rise of protectionism and the contraction of trade were a major factor contributing to, if not actually causing, the devastating effects of the Great Depression. If there is a lesson from the 1930s it is that global systems of finance and trade become very fragile in an era of strong economic contraction.

In short, the economics of the trade issue are complex, the political passions are intense and the stakes are enormous. In view of all this, is it really possible that the media could actually raise the level of the argument, much less add a little civility? Could the media actually help the public and its elected representatives grapple with the question in a rational and civilized way? I’m skeptical, of course, for this is like asking for a referee in food fight. But the one certainty is that if the media do their usual job of letting the debate drop to the level of the simplistic cliches, the public will be badly served.  

There are several fairly modest things that would contribute greatly to the debate and help keep it from being a contest between sound bites:

1) Understand the economic theory. The economics of international trade are not simple, but there is no substitute for understanding the basics. For example, it is essential to understand the concept of comparative advantage, how it differs from absolute advantage, and why the difference is important. Understanding the theory is not the same thing as being trapped inside the ideology that often accompanies it.

2) Try to sort out ideology from economics. It is unlikely that anyone can approach the trade issues without some ideological predisposition.  That is not a problem; what is a problem is an unwillingness to objectively assess the evidence. It is like playing chess; one must always be able to see the board from the other side. Pay attention to those economists who demonstrate a real passion for evidence.

2) Do not get carried away by the usual political rhetoric about competition between nations. One should understand why most economists dismiss any talk about competition between nations as ignorant and uninformed. It takes a lot of imagination to conjure up a situation where the increase in productivity in one nation is harmful to any other.

3) Insist on data. As in all reporting, it’s never wrong to ask: “How do you know that?” Not everything can be quantified, but if something is big enough to be important we ought to have some idea of how big it is.

4) Don’t trust the data. All data on a subject as vast as international trade have weaknesses, limitations and are subject to misuse. It is important to know how and why they were collected, and by whom.

5) Be especially distrustful of claims about cause and effect. Trade debates on all sides are rife with after-therefore-because arguments.

6) Be skeptical of conventional wisdom. Opinion leaders tend to be wretchedly uninformed on complex economic issues (as if anyone needs to be reminded of that now). It is not just what we don’t know that gets us into trouble, it’s what we think we do know.

7) Above all, test all conclusions against the best arguments on the other side. As Aquinas once observed, it is useless to prove a man wrong on your terms; you must do it on his.
 
Is all this hopelessly optimistic? Of course. 

Henry M. Banta is a partner in the Washington, DC, law firm of Lobel, Novins & Lamont. E-mail: henrybanta@aol.com

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