The Open Economy and Its Enemies
America’s Free-Trade Abdication
Jagdish Bhagwati
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NEW YORK – The indifference and apathy that one finds in Washington from both the Congress and President Barack Obama on the Doha Round of world trade talks, and the alarm and concern expressed by statesmen elsewhere over the languishing negotiations, mark the end of the post-1945 era of American leadership on multilateral free trade.
Evidence of anxiety outside the US has been clear to everyone for almost a year. German Chancellor Angela Merkel and British Prime Minister David Cameron were concerned enough to join with Turkey’s President Abdullah Gül and Indonesia’s President Susilo Bambang Yudhoyono in appointing Peter Sutherland and me as Co-Chairs of a High-Level Trade Experts Group in November 2010. We held a prestigious Panel at Davos with these leaders in January 2011, where, on the occasion of our Interim Report, we gave full-throated support to concluding Doha. But there was no response from the US government.
In September, former British Prime Minister Gordon Brown, former Spanish Prime Minister Felipe González, and former Mexican President Ernesto Zedillo reminded G-20 leaders that in November 2009, at their first meeting in London, they had expressed “a commitment to …conclude the Round in 2010.” And, two weeks ago, the UN met again on the Millennium Development Goals (MDGs). Goal 8 is about instruments such as trade and aid, and MDG 8A commits the UN member nations to “[d]evelop further an open, rule-based, predictable, non-discriminatory trading and financial system.”
But, while practically every country today has embraced preferential Free Trade Agreements, the recent leader in this proliferation is the US. There, Congress and the president apparently have plenty of time to discuss bilateral FTAs with South Korea, Colombia, and Panama, as well as the regional Trans-Pacific Partnership (TPP), but none for negotiating the non-discriminatory Doha Round, which is languishing in its tenth year of talks.
Indeed, it is notable that, while Obama’s State of the Union address in January 2010 at least mentioned Doha, his address in January 2011 did not. Obama confined himself to promoting the pending bilateral agreements with Colombia and other emerging-market countries.
Obama’s regrettable retreat from support for the Doha Round is the result of many factors and fallacies. These were highlighted in an “Open Letter to Obama” that I organized and released, over the signatures of nearly 50 of today’s most influential trade experts worldwide, urging a presidential shift in policy towards Doha.
America’s president is captive to the country’s labor unions, who buy the false narrative that trade with poor countries is increasing the ranks of the poor in the US by driving down wages. In fact, however, there is plenty of evidence for the rival narrative that rapid and deep labor-saving technological change is what is putting pressure on wages, and that imports of cheap labor-intensive goods that US workers consume are actually offsetting that distress.
Again, Washington lobbyists have bought into the absurd claim of trade experts such as Fred Bergsten that the gain from Doha, as it stands now, is a paltry $7 billion or so annually. This ignores the far greater losses that a failed Doha Round would entail, for example, by undermining the World Trade Organization’s credibility as the principal guarantor of rules-based trade, and by leaving trade liberalization entirely to discriminatory liberalization under preferential bilateral agreements. Again, someone needs to tell Obama that imports create jobs, too, and that his emphasis on promoting US exports alone is bad economics.
Most of all, Obama is badly served on trade by his senior colleagues. Secretary of State Hillary Clinton, for example, was opposed to trade liberalization when she ran against Obama for president, and advocated a “pause” in free-trade negotiations. She also misinterpreted the great economist Paul Samuelson as a protectionist, when he said nothing of the kind. She has never recanted.
Likewise, now that Warren Buffett is considered to be Obama’s most trusted economic adviser, it is worth recalling that back in 2003 he produced the astonishing prescription that the best way to reduce the US trade deficit was to allow no more imports than it could finance from its export earnings. An amused and alarmed Samuelson drew my attention to this nutty idea. While Buffett’s prescription of higher taxes for America’s wealthy is entirely desirable, will Obama realize that a genius in one area may be a dunce in another?
What we need today is for the world’s leading statesmen to stop pussyfooting and to unite in nudging Obama towards a successful conclusion of the Doha Round. That alone would provide the counterweight to the forces that pull him in the wrong direction. It is still not too late.
Copyright: Project Syndicate, 2011.
www.project-syndicate.org
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pflanagan 07:22 29 Sep 11
If deep labor saving technolgical change is what is putting pressure on wages and not the legions of cheap labour in emerging economies aided and abetted by lax labour and environmental standards and blatant currency manipulation, then why are goods not being manufactured in America. The trade imbalance in the US is causing a myraid of economic and social problems which can longer be ignored or whitewashed with specious arguments such as yours.
VictorFB 07:42 29 Sep 11
Porfessor Bhagwati,
Technological change is rising unemployment, that is true. But it is also clearly true that free trade which means above anything: corporations producing in societies with cheap and without rights laboour, is the major cause of the unemployment in the West. Actually not only in the West but also in Africa and other parts of the world because China itself is already enough to produce most of what the whole world needs.
If you really think that free trade is not making move companies abroad searching cheap and controlled labour, then answert this: why is China, the country that hosts most of the western corporations production abroad, the emerging civilisation in the world? Why is China exporting so so so much? And why is the West suffering from such a high unemployment? Why are we not manufacturing anything anymore?
You really don't connect the facts?
Factified 09:40 29 Sep 11
The U.S. has a $650 billion goods trade deficit, which by conservative estimates is a net 10-15 million jobs overseas making goods we consume here. Our economy has only grown about 1% annually for the past decade if you take out the housing bubble and enormous stimulus; we need 3% to employ our folks.
No, I think we've had about all the free trade we can handle. The developed countries have sacrified their job creation and wage growth, to the benefit of the developing countries.
Extremes of anything are dangerous, and we've taken free trade to an extreme. We should immediately implement tariffs to offset both currency manipulation and wage differentials.
Once the U.S. trade deficit is back to zero and our budget is balanced, let's talk about more free trade agreements.
gamesmith94134 07:44 30 Sep 11
gamesmith94134 10:46 20 Sep 11
Gamesmith94134: The Fear Factor by Roger E. A. Farmer
I fully agree with bluebear that his views on the quantitative easing that is the cause of its volatile market; since the valuation is questionable based on how investors see of our economy. I apply my half empty and half full valuation that what balances what price and value is.
However, The fear factor may applies if some economists spoke like the flat earth society that give the delusion of the sun rises from the east and our earth is not rotating around the sun; and surprise everyone the sun is actually move according to the stationary earth. It is confusing just because it sounds so real that I see the sun comes up at the east.
Why there isn’t a real economist talk of my 30K custodian is worth more of two RMB110000 MBAs financial planners I can hired in Shanghai; and I must pay my custodian’s health care $6000 more just to keep him working in US? It is my Fear Factor in operating in United States.
Do all economists agree inflation is the only exit of the deficits? They should fear on the consumers of American have their way to fight inflation already; they just cut more on consumption; and the deflation cut to profit margin. There is no inflation if price inflated products are not consumed. What stimulus programs, they only add more deficits. This is deleveraging.
May the Buddha bless you?
ShowMe 04:14 01 Oct 11
the Lesser Depression has disproved two great myths of economics:
1) that markets are efficient---the efficient market theory
2) that trade or globalization is a good thing for a society (it is not)---its has pretty much destroyed the USA. The only people who profit from trader are the traitors---eveyrone else looses
an overwhelming iron rule of economics is about to grip the world--the old saw location, location, location. Suppliers must be as near as possible to their markets and we are rapidly tipping to where the only market that matters is China.
gamesmith94134 07:07 02 Oct 11
Gamesmith94134: Business schools and globalisation
MasahikoF,
What Mr Ghemawat’s question was, “if there is some impulse to get them to pay attention to local realities? Wouldn’t you want some differentiation on that basis?”
This situation will continue until there is real competition from emerging-market schools, which can teach globalization from their own viewpoints. So, the present school of economics teaches macro and micro economics based on the data and theorems of the western culture which the basis of marketing is not integrated to the standard of Globalization. So, the advanced students must understand the burgernomics statistics; that what your burger values different to mine; in competitive labor markets, currencies, commodities that regions of local and foreign make its own stands to both micro and macro economics.
It is not how the students of foreigner to integrate in a school that called international or globalization. It is not just international laws on trade or treaties either; perhaps, the present approach toward globalization is to understand many competitive markets with different angles.
“Why there isn’t a real economist talk of my 30K custodian is worth more of two RMB110000 MBAs financial planners I can hire in Shanghai; and I must pay my custodian’s health care $6000 more just to keep him working in US? It is my Fear Factor in operating in United States.”
From the recent loss of the oil contracts to Nigeria, Angola, Iraq and more, our American flied back in secret private airplane; and locals welcome Chinese, who sent them their medical and technical team with olive branches. What is about trade? Or how did American attempt to purchase their politicians to cut their deals? What advantage of trade and purchase in a specific culture?
Everyone study Globalization must acknowledge the clientele of the Starbuck in Shanghai is different to ones in California. A cup of coffee, worth $4 in California with the equal value of a RMB35 in Shanghai have made the divisions of businessmen with Jeans and suits, and ones with computers and the other with financial newspapers. What do they order after Coffee?
How do Japanese, German or Brazilian drink theirs? To-day, our macroeconomic became their microeconomic, since emerging market produced 60% more of American or Developed nations. It is a great opening to all knowledge and not all students of kinds; languages of economic do not make the category of Globalization. It is the culture, competition, market, currencies, resources and more to combine. Integrate is a half baked.
May the Buddha Bless you?
Pmcdonald 01:17 02 Nov 11
Bhagwati is typical of those sub-continental economists with a narrow technical and strongly ideological background who were heavily influenced by 1980s laissez faire arguments and never moved on to develop a more sophisticated position.
Reading Bhagwati is like listening to an old ideological uncle at a family get together. You realise he doesn't see the whole picture and is holding onto some snippet of half truth from thirty years ago. And you hope he will not be at the next get together. When is he retiring?
tcolgan001 06:35 29 Sep 11
Down with free trade! Up with fair trade! Implement import certificates (Buffett’s “nutty” idea):
http://en.wikipedia.org/wiki/Import_Certificates
Thirty years of so-called “free trade” (codeword for screw the American worker) has produced nothing but trade deficits:
http://4.bp.blogspot.com/_pMscxxELHEg/SXu-IBM6k3I/AAAAAAAAEXE/Q2KYO8ce_9Q/s1600-h/TradeDeficitGDP.jpg
The current economic crisis and destruction of our manufacturing base is the result.