September 16, 2016
Honesty goes out the door when a major trade deal is being debated. This means that politicians, academics, and major news outlets, like the NYT, discard normal standards to push the trade pact. The basic point is that lots of profits are on the line for the corporations for whom the deal was negotiated, and in that situation, truth is a luxury that can’t be afforded.
In this vein, we get the NYT Magazine piece by Nathaniel Popper asking in its title, “how much do we really know about trade?” The story in this piece is that opening the U.S. market to developing countries has led to huge reductions of poverty in the developing world. He gives the example of Vietnam:
“A young Canadian economist at Wilfrid Laurier University, Brian McCaig, studied what happened in Vietnam immediately after the United States slashed tariffs on goods from that country in 2001 — a bilateral trade agreement similar to many others before and since that have opened up the United States to manufactured goods from Asia. He found that over the next three years, as the value of apparel and clothing accessories going to the United States from Vietnam rose by 277 percent, the poverty level in Vietnam fell to 19.5 percent from 28.9 percent, twice as fast as it had fallen in the preceding four years and enough to lift about seven million people out of poverty. This wasn’t American food-stamp poverty those Vietnamese were escaping; it was malnourished, dollar-a-day poverty.”
Popper goes on to describe the enormous growth in China and the improvements in living standards it has meant for hundreds of millions of people. He then points out that opening to the developing world has also meant lower cost goods for moderate income people in the United States, but then we get back to the developing world:
“He [M.I.T. economist David Autor] told me that whatever the virtues or costs in the United States, they pale in comparison with the basic humanitarian benefits that people in places like China and Vietnam have experienced as a result of trade with the United States. ‘The gains to the people who benefited are so enormous — they were destitute, and now they were brought into the global middle class,’ Autor says. ‘The fact that there are adverse consequences in the United States should be taken seriously, but it doesn’t tilt the balance.'”
Okay, let’s get the story here straight. Developing countries owe their growth to the fact that they ran large trade surpluses with the United States. It’s great that so many economists will make this sort of assertion since it runs 180 degrees at odds with standard trade theory.
Capital is plentiful in rich countries, it is scarce in poor countries. This means that it is supposed to flow from slow growing rich countries, where it gets a low return, to fast-growing developing countries where it gets a high return. This means rich countries should run have a capital account deficit with developing countries as capital flows out. That would correspond to rich countries running trade surpluses with developing countries. Developing countries would be running trade deficits that would allow them to build up their capital stocks at the same time they maintain the living standards of their populations.
Now we have Mr. Popper and his crew of economists telling us that the opposite had to happen to allow the poor in developing world to escape poverty. It’s interesting that they think we have to throw away long established trade theory.
In fact, we don’t. Developing countries didn’t always run large trade surpluses with rich countries. Prior to the East Asian financial crisis in 1997, most developing countries were running trade deficits. In fact, the developing countries of East Asia were running very large trade deficits and, they were growing very rapidly. Here are the numbers from I.M.F.
In fact, growth in all of these countries slowed in the years after 1997 when they switched from running trade deficits to surpluses. The slowdown was less in Vietnam than in the other countries of the region, but even Vietnam had slower growth in the period touted by Popper than in the years from 1991 to 1997. In other words, the idea that manufacturing workers in the U.S. had to take a hit to allow people in the developing world to escape poverty is absurd on its face.
This argument is even more pernicious in the context of the Trans-Pacific Partnership (TPP), the trade deal currently on the agenda. The trade barriers to imports from the countries in the pact are already low, so the TPP would actually do little to open U.S. markets further to these countries. On the other hand, a major thrust of the pact is to strengthen and lengthen patent and copyright protections.
These forms of protectionism will have poor people in the developing countries in the pact paying more money for prescription drugs, fertilizer, and software than they would otherwise. This protectionism will make them poorer and increase poverty. It will also make it difficult for people in poor countries to have access to life-saving drugs.
Of course the TPP will increase the profits of companies like Pfizer, Merck, and Microsoft. This could explain the huge efforts to promote the TPP among the public. Certainly this push cannot be explained by a concern for the poor in the developing world.
Correction: An earlier version said rich countries should run capital account surpluses. In fact, they should be running deficits, which is what an outflow of capital means.
Note: These topics are addressed in more detail in my forthcoming book, “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer,” coming soon to a website near you.
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