How can anyone not support free trade?

My cousin asked me that today, by happy coincidence the very day I prepare to lay the foundation so my micro principles students can understand why the vast majority of economists do support free trade. I responded to him, in part (and from a US-centric standpoint): 


But you ask me why other people don't think the way we do, so this is my attempt to give them a fair shake. I actually had to write a paper once on why some people don't support free trade. The short answers are:

• They don't understand free trade. (#1 reason)
• If they understand free trade is good in general, they may not understand what is really meant by "strong" and "weak" currencies or where trade deficits come from. Those we aren't going to cover in micro principles, but they are important parts of understanding free trade.
• They understand that free trade maximizes total utility, but they are concerned about the distribution of the gains and losses. The ethics behind free trade says that the winners could compensate the losers of a change to free trade, but in general they don't - no more than the winners of protection compensate the losers. If you think most of the losses will hit poor people, there is a reasonable ethical ground for wanting to discourage some trade. Now, we could do things better by still allowing trade and doing something else for poor people, but I can understand the argument anyway. This analysis also usually forgets the much poorer people in another country who gain a job that allows them to survive.
• As a rich country, the US can afford little luxuries like high labor and environmental standards that other countries may not. If you are categorically opposed to child labor in sweatshops or unsustainable fishing and air pollution, you might be concerned about more production moving to areas that don't regulate those items as much. There are arguments that go the other way, but again I can understand why someone who places a high value on the environment might not want production to move away from where we can regulate it.
• If there are any externalities (like air pollution) you can also make the argument that the market price does not reflect the true costs and benefits, so markets will oversupply goods. Moving to somewhere that has a larger disparity between private and social costs (either because the firm will be more polluting there and increase the social costs, or different regulations lower private costs, or whatnot) will tend to exacerbate that problem.
• It's a colonialist/egalitarian thing. If the rules of free trade agreements favor countries that are already wealthy (and they do), it is possible for a government to harm its citizens by opening to freer trade. The rules of accession to the WTO, for instance, allow current members to exact concessions from new members that either nullify WTO rules (WTO-) or require higher standards for entry (WTO+) so that the "rules-based" system becomes a power-based system. For egalitarian reasons, someone might not like that arrangement even if they like free trade per se. 

Now these aren't actually the arguments most people make. But if they had more sophisticated economic reasoning, these are the types of arguments they would make and they are the points brought up by the 2% of economists who don't care as much for free trade (e.g. Stiglitz). This is also ignoring the infant industries argument (favored by Rodrik), the national defence argument, or most arguments that point out that we may have more goals than efficiency and freedom (like food self-sufficiency). I'm also missing the anti-corporatist element and the more blatant self-serving protectionist arguments [made in particular by the corporatist element, right].

Development in China: many facets

China may have already surpassed the US in terms of total GDP, though that will always be open to quibbling as Sumner reports:

Arpit Gupta sent me an article by Arvind Subramanian that suggests China did pass the US at some point in 2010.  I find his argument quite plausible, although I certainly wouldn’t claim it is “True,” as there is no fact of the matter.  The US and China produce a vastly different set of goods.  China produces much more “stuff” and we produce much better “stuff” (on average.)  Who produces more RGDP?  That depends on how one defines RGDP, and I’ve never seen an even half-way plausible definition.  Have you?

The Chinese government has decided to invest heavily in clean energy - on the kinds of scale only China manages - and the Obama administration's response is to praise them for joining his vision of a greener world. Psyche. Obama is filing a case against China at the WTO for subsidizing green Chinese companies unfairly. So apparently it's not that the US is in favor green technology so much as we're in favor of greenback technology.

A new paper by Wang and Gunderson analyzes the effects of a minimum wage hike in China from 2000-2007 and finds very different effects depending on where they look.

Five Second ... Age of Declining Turbulence

I discovered a book in my mailbox a few months ago: The Age of Declining Turbulence: Are Alan Greenspan's Projections Wrong? by Douglas N. Thompson. There was no explanatory note attached, no information, just a thin, blue book. At the time, there was precious little information about it online, though now it has an Amazon page. One Amazon reviewer tells me why I find so little: "This 92-year old retired Professor of Economics from University of Utah..." aha. I just got around to it and since I can only assume I'm being asked for a review, here it is:

The main purpose of the book is to refute Alan Greenspan's prediction that we are entering an Age of Turbulence. I haven't read Mr. Greenspan's book, so I'm unable to judge whether Thompson addresses specific points from Greenspan's arguments. I came away agreeing that lower turbulence (economically and militarily) is one possible outcome, but far from convinced it must be so. It was an interesting read; I'm glad I read it; but it's not one I'm going to return to again.

An odd thing stood out to me from the close to chapter 1. He claimed to "demonstrate that Greenspan's two main worries will not likely be realized." The book is not about proving or demonstrating anything. It's an argument for an alternative version of what will happen, based largely on the optimistic assumptions that 1) the US government has learned from the recessions and macroeconomic shocks of the past how to deal with problems in the future; and 2) the lure of capitalism's abundance will continue inexorably to pull other countries into market or state-market institutions. He then follows these assumptions to show how a better long-term future is ahead of us. His arguments are plausible and his scenario holds together well. I like a good portion of what he says, but he does far more sketching out how events will eventually play out than defending why they will more probably follow his assumptions than Greenspan's.

While this is clearly a love poem to capitalism, his argument is not ideologically against governments: he argues for fiscal and monetary (mostly fiscal) response to the current recession, for some form of carbon tax, and for government programs of various levels to promote "the basic social service": full employment, with "nanny state" welfare and prison programs also having an important role to fill for those who cannot or choose not to be responsible citizens. These programs (promoting full employment on down) will be part of preventing the social tensions Greenspan foresees causing increasing strife because of economic inequality.

There is little discussion of the validity of his assumptions and he is sometimes not as careful as he claims to be. For instance, while he is usually content to say that the long-run trends are in his favor even if individuals or groups running governments sometimes make mistakes, he actually claims that "stock, credit, foreign exchange, and other markets will likely force Mr. Putin back onto the path toward capitalism and peace fairly soon." Like much of the book, it's a bald assertion (no slight to Mr. Putin's hair) with no facts brought forward to support it.

Some of his other interesting arguments (many of which I debate, but that's what makes them interesting to me. The stuff I already agree with was less interesting!) are below the fold:

Small Bag of Blog Links and some thoughts on Independence Days

AidMart

Three on trust and Africa: US corporations - against "knee-jerk prejudice and the willingness to write off an entire continent of people as liars and cheaters"; aid workers meeting corruption everywhere vs. in everyone; trusting the media to report on good news in eastern DRC.

From the first day of Congolese Independence, compared to 50 years later. A grand vision with which I cannot help but entering into sympathy that is lacking in completion. (Hat tip: Texas in Africa)

Speaking of 50 years later, July 4, 1826 was when both John Adams and Thomas Jefferson passed away. John Quincy Adams was president at the time, merely our sixth president. He had spent most of his time working as our ambassador to various nations and spent 8 years as Pres. Monroe's Secretary of State, drafting the Monroe Doctrine. If the election of 1824 had been held today, his opponents would have been saying he stole the election, which was decided by the House of Representatives. He spent most of his presidency building canals, roadways, and treaties. He said, "America does not go abroad in search of monsters to destroy." He also passed protectionist tariff laws that would not be allowed by today's WTO.

At that time, Missouri had been a state for 5 years, giving us 24 states. The nation was deeply divided at the time over slavery and states rights, though it would take almost another 40 years before the rest of the world shook their heads as our country was riven apart by civil war (We knew they could never handle independent government! Maybe it would be for the best if England took charge again.). Also in 1826, Maryland decreed that public office could be held by a Jew. Previously a belief in Christianity was required of office holders

Going back to John Adams (Quincy's dad, another family that stayed in politics a while) for a moment, aside from his work promoting the concept of independence and his pivotal efforts in Congress and the Presidency, one of the things which I think alone makes him worthy of remembrance is that when he was defeated in election by the other party (Tom Jefferson), he willingly stepped down. No election funny business, no military protections, no recounts. He stepped down.

So has Somaliland's President. Good show. Roving Bandit asks "Would somebody please recognise Somaliland?! They have bi-o-met-ric pass-ports" and just passed this major democratic hurdle few African governments have managed. "Let the people vote for what they want."

Five Second ... Bottom Billion

I finished Paul Collier's The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It last week.

The thing I value most in the book is the different mindset he proposes for considering "poor countries." Rather than dividing the world into 1 billion rich and 5 billion poor people, he further subdivides the poor into two groups: those in countries whose economies are growing regularly, so who - if we do nothing - are expected to become rich eventually; and those in countries that have seen essentially no growth for decades. He avoids making a list of the specific countries, though throughout the book a few names do keep creeping up. He is also careful to point out that this is not "Africa" and "Everyone else," because there are countries in Africa that have made and are making significant progress and countries in other regions that are real trouble.

He proposes four traps that go a bit beyond the typical poverty trap discussion (which even its proponents demonstrate is circular reasoning, see right) by identifying specific features other than poverty that make it a trap. His top four traps are conflict, abundant natural resources, landlocked with bad neighbors, and poor governance. When combined with deep poverty, these factors make it much more difficult for individuals to work their way out of poverty. There is a significant amount of research - much of it his own - behind his descriptions of each trap.

He also presents four policy options that would support countries' exit from these traps in particular circumstances: modest aid policies; invited, committed, long-term military interventions; international laws and standards; and differently-unfair trade practices. Each of them is fun for a long debate by itself.

He does not advocate applying any of these indiscriminately even in the bottom billion. For countries locked in conflict, he recommends using most of them: invited military interventions where donors are committed to having a presence for a decade (but not much more) and to engage rebel groups to reduce the risk of future conflict and reduce payments to domestic military services to prevent coups; aid to competitively fund reconstruction projects; and standards that would dictate the roles of the countries sending support so that it's all less ad hoc.

For natural resource trapped countries, though, his only recommendation is international standards for good governance and resource management practices; and landlocked countries with bad neighbors are likely to have problems for a very long time to come, so just accept that aid will be a long-term factor until outside conditions improve and provide promises of military support to reduce coups.

I am fascinated that nowhere in his matching up of traps and solutions does he mention his trade proposition, which is to give Africa a better deal than Asia. It's not about 'justice' or 'fairness' or other catchy slogans, but would give them a temporary advantage in trade that they currently don't have and won't be able to have in a few years' time once Asia has done more catch up. He would also like to see the WTO add a branch specifically to arrange trade grants for developing countries before each trade round, much as the World Bank added a poverty/grant element to its loaning business.

And for ordinary people?

"The left needs to move on from the West's self-flagellation and idealized notions of developing countries. Poverty is not romantic. The countries of the bottom billion are not there to pioneer experiments in socialism ... The international financial institutions are not part of a conspiracy against poor countries... The left has to learn to love growth. ... Much as I agree with Sachs' passionate call to action, I think he has overplayed the importance of aid. ...

"The right needs to move on from the notion of aid as part of the problem - as welfare payments to scroungers and crooks. ... It has to face up to the fact that these countries are stuck, that competing with China and India is going to be difficult. Indeed, it has to recognize that private activity in the global market can sometimes generate problems for the poorest countries that need public solutions. ... We are not as impotent and ignorant as Easterly seems to think. ...

"Electorates tend to get the politicians they deserve."

Banana Wars: The Final Chapter (?)

The BBC reports:

The European Union has agreed a deal to cut tariffs on banana imports, signalling the end of the world's longest-running trade dispute. ...
The price of bananas could fall by 12% as a result. The formal agreement will be signed in six to nine months' time.
Duty on imported bananas will be cut from 176 euros (£158; $256) per tonne to an initial 148 euros (£133; $215). Further cuts will be made on an annual basis over the next seven years to 114 euros per tonne. ...
The move is likely to disadvantage the banana industries in Africa, the Caribbean and the Pacific (known as the ACP countries), who do not pay tariffs on imports to the EU. ...

Errol Emmanuel, acting manager of Dominica Banana Growers Limited, told the BBC World Service the agreement would hit poor farmers in the Windward Islands hardest: "These small farms are family owned. You have husband and wife and maybe one or two helpers... they don't have the resources to compete with the Doles and the Del Montes, who own vast tracts of land."
A compensation package for Dominica and the other ACP countries, worth 200m euros, is included in the deal.

Lit in Review: Livestock

One of the things I have looked forward to in starting a work blog was writing up brief summaries of some of the research others' have done with comments. In part I hope to provide a service for others, bringing you a summary of recent research. In part though it's a convenient place for me to keep my notes about research I've read so when I scratch my head trying to remember who said what, I've got my notes most readily available and searchable for my own benefit. Please feel free to debate particular papers or to bring more on a particular topic to my attention.

Review of Agricultural Economics Fall 2009: Livestock articles

"The Economics of Dairy Anaerobic Digestion with Coproduct Marketing" by Bishop and Shumway. Descriptive, single firm. One of the solutions to the pollution livestock produce is to install some machines to turn methane into electricity (anaerobic digestion technology). But is this economical? The authors find that the main private benefits in the first two years of operation for dairy farms in Washington state come from producing and selling electricity to public utilities and in receiving payments for turning other people's organic waste [salmon carcasses, cheese whey, inedible eggs] into electricity. Average profits for running these machines were $75k and $140k in year 1 and 2, but they cost $1.1mil to set up. The authors emphasize that location - proximity to coproduct markets - matters. Regulations would need to be changed to synch up the incentives of farm-energy-producers and public utilities. - Note for Chapter 8. (picture: CalPoly anaerobic lagoon, from Wiki)

"Agricultural Trade among NAFTA Countries: A Case Study of US Meat Exports" by Henneberry and Mutondo. Demand analysis, 1995-2005. US meat exports doubled to both Canada and Mexico since NAFTA [correlation is not causation] and account for 40% of beef, 35% of pork, and 17% of US poultry exports 2002-05. This is despite the 2003 BSE outbreak and increased competition from other countries. Poultry and beef from your own country are substitutes if you don't account for country of origin and complements if you do (Yang and Koo, 1994), so the distinction matters in demand analysis. Canadian meat buyers are not very price sensitive to US meat prices, so increasing meat prices likely means increasing revenues from Canada, but the opposite is true for Mexico. - Meatpacking book

"Costs of Adopting a [HACCP] system: Case Study of a Chinese Poultry Processing Firm" by Wang, Yuan, and Gale. Descriptive, single firm - Beijing Dafa. As part of its accession to the WTO, China has pushed to improve exported meat quality since Dec 2001. Setup cost the firm $4.2mil or 2% of gross income, with ongoing monthly costs of $0.3mil - half of that is sanitation. Benefits were characterized as long-term, strategic, and intangible [reduced inferior and adulterated products, improved reputation, consumer loyalty, and product consistency, and increased exports]. The authors are concerned that the costs may be very difficult for small, domestic producers to recoup, who would likely face higher costs and less ability to increase prices to make up for it. - Meatpacking book