Tuesday, October 18, 2016

Free Trade Is Not The Problem

Near the end of his 1817 treatise, “On the Principles of Political Economy and Taxation,” David Ricardo advanced the “law of comparative advantage,” the idea that each country—not to mention the world that countries add up to—would be better off if each specialized in the thing it did most efficiently. Portugal may be more productive than Britain in both clothmaking and winemaking; but if Portugal is comparatively more productive in winemaking than clothmaking, and Britain the other way around, Portugal should make the wine, Britain the cloth, and they should trade freely with one another. The math will work, even if Portuguese weavers will not, at least for a while—and even if each country’s countryside will come to seem less pleasingly variegated. The worker, in the long run, would be compensated, owing to “a fall in the value of the necessaries on which his wages are expended.” Accordingly, Ricardo argued in Parliament for the abolition of Britain’s “corn laws,” tariffs on imported grain, which protected the remnants of the landed aristocracy, along with their rural retainers. Those tariffs were eventually lifted in 1846, a generation after his death; bread got cheaper, and lords got quainter.

The case for free trade, embodied in deals like the North American Free Trade Agreement, the Permanent Normal Trade Relations with China, and the proposed Trans-Pacific Partnership, remains at bottom Ricardo’s. And the long run is still working out pretty much as he assumed. The McKinsey Global Institute, or M.G.I., reported in 2014 that some twenty-six trillion dollars in goods, services, and financial investments crossed borders in 2012, representing about thirty-six percent of global G.D.P. The report, looking country by country, reckoned that burgeoning trade added fifteen to twenty-five per cent to global G.D.P. growth—as much as four hundred and fifty billion dollars. “Countries with a larger number of connections in the global network of flows increase their GDP growth by up to 40 percent more than less connected countries do,” the M.G.I. said.

But the case against free trade seems also to be based on Ricardo’s premises, albeit with heightened compassion for the Portuguese weavers and British wheat farmers. American critics—Bernie Sanders, earnestly; Donald Trump, cannily—argue that trade decimated U.S. manufacturing by forcing American products into competition with countries where wages, labor, and environmental standards are not nearly as strong as those in America, or by ignoring how some countries, especially China, manipulate their currency to encourage exports. Sanders launched his post-primary movement, “Our Revolution,” in late August, with an e-mail to potential donors. The most conspicuous demand to rally the troops was opposition to the T.P.P. “Since 2001, nearly 60,000 manufacturing plants in this country have been shut down,” the e-mail said, “and we have lost almost 5 million decent-paying manufacturing jobs. nafta alone led to the loss of almost three-quarters of a million jobs—the Permanent Normalized Trade Agreement with China cost America four times that number: almost 3 million jobs.” These agreements “are not the only reason” why manufacturing in the United States has declined, the e-mail goes on, but “they are important factors.”

Such evidence for why the T.P.P. should be thrown out is hard to dispute, since the e-mail doesn’t say what jobs were gained because of past deals, or explore what other “factors” may be important. President Obama, the champion of the T.P.P., may grant that certain provisions of the deal might be strengthened in favor of American standards without agreeing with “Our Revolution” on what’s bathwater and what’s baby. What’s clearer is that the anti-trade message is hitting home, especially among the hundred and fifty million Americans, about sixty-one per cent of the adult population, with no post-high-school degree of any kind.

The investor Jeremy Grantham in July wrote an op-ed in Barron’s noting that some ten million net new jobs were created in the U.S. since the lows of 2009 (the actual number being fifteen million), while “a remarkable 99 percent” excluded people without a university degree. That’s a crisis, not of unemployment but of unemployability, which backshadows skepticism about the T.P.P. and trade as a whole. Trump’s lead over Hillary Clinton among less-well-educated white voters remains solid, in spite of his alleged sexual predations; a large number of voters remain drawn to his grousing about the balance-of-trade deficit—which he presents as if it were a losing football score. Clinton has apparently decided to pass up the teachable moment, pretty much adopting Sanders’s anti-trade line, though her private views almost certainly remain more nuanced. In an e-mail exposed by the WikiLeaks hack, purporting to detail a conversation between Clinton aides, she allegedly told Banco Itau, a Brazilian bank, in 2013, that she favored, at “some time in the future,” a “hemispheric common market, with open trade and open borders”—a curious case of a leak embarrassing a candidate by showing her to be more visionary and expert than she wants to appear.

The anxiety is understandable, but the focus on trade deals seriously underestimates the changes that have reshaped global corporations over the past generation. Trade, increasingly, is mostly not in finished goods like Portuguese wine. It is, rather, in components moving within corporate networks—that is, from federated sources toward final assembly, then on to sales channels, in complex supply chains. An estimated sixty per cent of international trade happens within, rather than between, global corporations: that is, across national boundaries but within the same corporate group. It is hard to shake the image of global corporations as versions of post-Second World War U.S. multinationals: huge command-and-control pyramids, replicating their operations in places where, say, customers are particularly eager or labor is particularly cheap. This is wrong. Corporations are hierarchies of product teams, which live in a global cloud. “Made in America” is an idealization.

Read on at The New Yorker