To trade or not to trade
by Dr. Mark Edelman and Dr. Barry Flinchbaugh
© Copyright Agri-Pulse Communications, Inc.
BF: I think it was Jefferson who said free trade is the greatest blessing a government can bestow upon its people, except that it is equally unpopular in every country. That is a perfect example of populist mythology. Sure there are winners and losers in the short run, but in the long run everybody wins from open trade. If governments will allow economics to decide who trades what with whom, resources are used at maximum efficiency, and in turn yield maximum returns. It is called comparative advantage.
ME: Professor, in the real world, all politicians--including dictators--protect their own constituencies, regardless of how inefficient they may be. The playing field is never level. Environmental and labor standards vary by country. Going to free trade, moves jobs to where the lowest wages, taxes, and weakest labor and environmental policies are. Adjustment costs are always high as wages equalize around the world. Free trade is a textbook “pipe dream.”
BF: So consumers get the shaft while politicians succumb to special interest protection.
ME: It is not that simple. The value of the dollar also acts like a tax or a subsidy on exports and imports. Take China, for example. They refuse to let their currency float which under current conditions subsidizes their exports and taxes their imports. With few exceptions, they are running huge monthly trade surpluses. American producers are deliberately put at a competitive disadvantage, regardless of efficiency.
BF: You are bordering on the abstract. China has given its people the pleasant taste of capitalism and they are demanding more consumer goods and a higher quality diet. As that continues, their trade surplus will narrow and pressure from the marketplace will force adjustment in their currency.
ME: Global trade policy is like playing 3 chess games at once each with different partners--trade, currency, and politics--it is hard to keep things straight. Over time under normal conditions, market forces often work pretty well on the trade imbalances. But trade can be impacted overnight by capital market shocks. We are in an age of multi-national computerized trading systems and debt crises being played out by some nations. In varying degrees, most nations have dual objectives of striving for competitiveness while managing the rules of trade and capital in a manner that avoids global economic collapse. Problems arise when some multi-nationals pursue greed or when some governments pursue provincial interests at the expense of all else. In 2007-2008, it took the largest coalition of nations yet to avert another Great Depression. We almost didn't get the job done.
BF: The most effective role governments can play is to insure a competitive economy, or in today's politically correct parlance, to insure no firm gets too big to fail. The World Trade Organization (WTO) is designed to move the world in that direction. The most effective way to protect the consumer and producer is to adopt a global set of standards and move towards a globally competitive economy. This may sound like two egghead economists having a philosophical argument, but this is important stuff to U.S. farmers who are exporting close to 30% of their production. Our ag trade balance is projected to be $135.5 billion. This is a big reason why we are at record net farm income. Now the WTO just ruled against COOL. Surprise! We argue for a level laying field and then Congress passes an archaic set of rules on Country Of Origin Labeling, which actually increases our costs and decreases our competitiveness. The rest of the world correctly views it as a barrier to entry. In a globally competitive economy, exporting requires importing.
ME: Agriculture has little choice but to work bilaterally and secure agreements with countries like Panama, Columbia and S. Korea. Fostering interdependence was a global strategy initiated by the U.S. and our Allies at the end of World War II to reduce the odds for another global war. As a result, we've seen 65 years of global economic growth, prosperity, and progress. But, if global population explodes faster than productivity, international tensions between the haves and have nots will increase. The WTO Doha Round keeps grinding on without much progress. Should we trade with countries that exploit the environment, child labor, and violate human rights? Can a level playing field be created and enforced globally, so rogue nations cannot avoid the rules or so multi-nationals cannot avoid taxes or become free-riders? That is the real political question and why extremes on the left and right tend to join forces against general trade agreements.
BF: I think you finally figured it out. Incremental progress globally is better than no progress. The Obama Administration keeps talking about how important these bilateral agreements are. They were negotiated by the Bush administration, but Speaker Pelosi refused to put them on the floor. The current administration keeps talking and they've had over two years to act. The President has called for doubling exports in 5 years. That is a tall order. The President and Speaker Boehner say they are on the same page on the three agreements. It may be the only bipartisan game in town. It is in our interest to act now. If we revert toward isolationism, that would really crimp the economic growth potential for the world economy as the theory of trade works in reverse.
ME: Speaker Boehner maybe in agreement, but will he accept the new versions that the Obama Administration negotiated or will the House only accept the old Republican agreements? The Administration is now requesting we pass trade assistance adjustment first. It is not as simple as you make it. Some are predicting these agreements will pass by the August recess. Time will tell.
BF: The bottom line is we need to get ag tariffs on our exports more in line with manufactured goods. Even though we are pikers compared to Japan and Europe, we get hammered because we protect our agriculture.
ME: There you go again. It will be a cold day in hell before we get politicians at home or abroad to ignore the special interests among their constituencies.
* Edelman is an Iowa State University economist and Flinchbaugh is an emeritus professor at Kansas State University.