Author Archives: jdingel

Who were trade skeptics in 1993?

Dan Drezner writes :

Go back to NAFTA. Kevin is right to point out that the agreement’s efonomic effects were not terribly large. On the other hand, even skeptics of trade liberalization — Dani Ro[d]rik, Paul Krugman, and Joseph Stiglitz — supported NAFTA because it locked Mexican economic reforms, promoted political reforms, and cemented a stronger bilateral relaionship.

What? Paul Krugman was a trade skeptic in 1994? And did Joe Stiglitz voice an opinion on NAFTA at the time?

Krugman: Not an ounce of economic skepticism in pieces like this one from November 1993.

Stiglitz: When did he talk about NAFTA before 1999?

The US-Colombian “free trade” agreement

Regular readers will notice that my coverage of PTAs has fallen off over the years. With respect to the US-Korea deal, this is completely excusable, as I can just claim to have yielded to Ben Muse’s dedicated effort. But I’ve been awfully silent on the US-Colombia deal. Why?

The US-Colombian free trade agreement is not a free trade agreement — it’s a preferential trade agreement. Calling it a PTA instead of an FTA will satisfy both Jagdish Bhagwati and Dean Baker.

But is it even a trade agreement? As Tim Lee notes, “there’s lots of other stuff in here that has nothing to do with free trade.” Sadly, this has characterised the state of American trade policy for a number of years. Back in 2003, Bernard Gordon wrote:

These cases highlight the problems of incorporating non-trade issues into trade agreements. Labor and environmental standards began the practice, but no clear end-points now exist. That recalls Jagdish Bhagwati’s famous warning that “the spaghetti bowl effect” (by which he meant overlapping rules of origin) would make FTAs hopelessly complex and impossible to administer. Today we would add the “Christmas Tree Effect,” the term used in Congress for the many items, each individually attractive though unrelated to a bill’s main purpose, that are added to satisfy special interests. Similar baubles and ornaments characterize today’s world of proliferating FTAs, and will be sought by powerful negotiating partners. Along with the profoundly dangerous capacity of FTAs to revive a world of blocs, they are among the best reasons to maintain instead the global trade system.

These kind of provisions really bother free trade purists (as they should). They fight to prevent mission creep at the WTO, and developing countries succeed in taking the Singapore issues off the table at Doha. But it’s a losing battle — TRIPS made it into the WTO and PTAs include numerous non-trade provisions.

The real questions about this trade deal is: Why is Colombia offering lots of promises on non-trade issues in negotiations? Recall one possible explanation: the US is a huge export market, and this gives it lots of leverage.

But it seems to me that the thing which we’ll have to face up to is that many of these bilaterals are used by lobbies in the West, to some extent your country, all the time in our country, to establish [inaudible]. You get a little country by itself in a bilateral negotiation, then you can ram anything down its throat. Those guys will sell both their grandmothers to be able to sign on to such an agreement because this is a big market, preferential, we also can give goodies on other dimensions or we can give punishments on other dimensions. We are the [inaudible] which can really procure that consensus very quickly with little doubt.

Now, our job intentionally is to say, “Look, you agree to this”—maybe labor standards, maybe intellectual property standards—which are way in excess of what can be negotiated in Geneva, when there are too many players and so on, who will fight a little bit anyway; then use of capital controls, which you ran through a little bit, with Singapore and Chile. The game goes on. But you see, that you can do one by one. It’s a sort of Leninist policy of divide and conquer all opposition.

Now, if you believe that our lobbies are always doing the right thing, that’s fine. Right? I mean, you can argue that. I don’t—I mean, there are good lobbies, bad lobbies, you can go in excess, but the rest of the world now sees that the bilateral is really an instrument of imposition of non-trade or weakly trade-related issues, and they’re beginning to see the game for what it is. And it’s not really a trade game, it’s a non-trade game.

But what possible market access gains could Colombia hope for? As Matt Yglesias notes:

As best I can tell (peruse the text if you’re interested) this actually involves very little changes on the US side at all. In essence, Colombian goods already flow very freely into the United States except for in our more famously protected sectors (agriculture, etc.) and what we’re offering Colombia here is a very solemn promise to keep it that way.

Right (although recall that a solemn promise does actually mean something: when Bush hiked up steel tariffs for a few years, our NAFTA partners were exempted). Is Colombia being strong armed to accept elements it dislikes to win market access? I highly doubt it. The US has very low MFN tariffs, except for sectors like agriculture, steel, and textiles, and Colombia has no hope of winning access in those areas.

The most plausible explanation I’ve encountered is that offered by Dan Drezner: PTAs are a political commitment device. They have “little to do with economics and everything to do with our bilateral and regional relationships.”

That’s why I’ve said so little about the US-Colombian preferential trade agreement. I study international economics, not international relations.

The US-Colombian "free trade" agreement

Regular readers will notice that my coverage of PTAs has fallen off over the years. With respect to the US-Korea deal, this is completely excusable, as I can just claim to have yielded to Ben Muse’s dedicated effort. But I’ve been awfully silent on the US-Colombia deal. Why?

The US-Colombian free trade agreement is not a free trade agreement — it’s a preferential trade agreement. Calling it a PTA instead of an FTA will satisfy both Jagdish Bhagwati and Dean Baker.

But is it even a trade agreement? As Tim Lee notes, “there’s lots of other stuff in here that has nothing to do with free trade.” Sadly, this has characterised the state of American trade policy for a number of years. Back in 2003, Bernard Gordon wrote:

These cases highlight the problems of incorporating non-trade issues into trade agreements. Labor and environmental standards began the practice, but no clear end-points now exist. That recalls Jagdish Bhagwati’s famous warning that “the spaghetti bowl effect” (by which he meant overlapping rules of origin) would make FTAs hopelessly complex and impossible to administer. Today we would add the “Christmas Tree Effect,” the term used in Congress for the many items, each individually attractive though unrelated to a bill’s main purpose, that are added to satisfy special interests. Similar baubles and ornaments characterize today’s world of proliferating FTAs, and will be sought by powerful negotiating partners. Along with the profoundly dangerous capacity of FTAs to revive a world of blocs, they are among the best reasons to maintain instead the global trade system.

These kind of provisions really bother free trade purists (as they should). They fight to prevent mission creep at the WTO, and developing countries succeed in taking the Singapore issues off the table at Doha. But it’s a losing battle — TRIPS made it into the WTO and PTAs include numerous non-trade provisions.

The real questions about this trade deal is: Why is Colombia offering lots of promises on non-trade issues in negotiations? Recall one possible explanation: the US is a huge export market, and this gives it lots of leverage.

But it seems to me that the thing which we’ll have to face up to is that many of these bilaterals are used by lobbies in the West, to some extent your country, all the time in our country, to establish [inaudible]. You get a little country by itself in a bilateral negotiation, then you can ram anything down its throat. Those guys will sell both their grandmothers to be able to sign on to such an agreement because this is a big market, preferential, we also can give goodies on other dimensions or we can give punishments on other dimensions. We are the [inaudible] which can really procure that consensus very quickly with little doubt.

Now, our job intentionally is to say, “Look, you agree to this”—maybe labor standards, maybe intellectual property standards—which are way in excess of what can be negotiated in Geneva, when there are too many players and so on, who will fight a little bit anyway; then use of capital controls, which you ran through a little bit, with Singapore and Chile. The game goes on. But you see, that you can do one by one. It’s a sort of Leninist policy of divide and conquer all opposition.

Now, if you believe that our lobbies are always doing the right thing, that’s fine. Right? I mean, you can argue that. I don’t—I mean, there are good lobbies, bad lobbies, you can go in excess, but the rest of the world now sees that the bilateral is really an instrument of imposition of non-trade or weakly trade-related issues, and they’re beginning to see the game for what it is. And it’s not really a trade game, it’s a non-trade game.

But what possible market access gains could Colombia hope for? As Matt Yglesias notes:

As best I can tell (peruse the text if you’re interested) this actually involves very little changes on the US side at all. In essence, Colombian goods already flow very freely into the United States except for in our more famously protected sectors (agriculture, etc.) and what we’re offering Colombia here is a very solemn promise to keep it that way.

Right (although recall that a solemn promise does actually mean something: when Bush hiked up steel tariffs for a few years, our NAFTA partners were exempted). Is Colombia being strong armed to accept elements it dislikes to win market access? I highly doubt it. The US has very low MFN tariffs, except for sectors like agriculture, steel, and textiles, and Colombia has no hope of winning access in those areas.

The most plausible explanation I’ve encountered is that offered by Dan Drezner: PTAs are a political commitment device. They have “little to do with economics and everything to do with our bilateral and regional relationships.”

That’s why I’ve said so little about the US-Colombian preferential trade agreement. I study international economics, not international relations.

Two words for Thomas Friedman

This is a classic moment from a few years ago, but I couldn’t find it in my archives, so I’m posting it again.

Jagdish Bhagwati in 2005:

I often say that, you know, we should never use the phrase “FTA,” free trade agreement, because politicians cannot go beyond a sound bite, which means they can’t read more than two words one time. So if they read “free trade agreement,” they’ll read only “free trade,” and so they’ll think it’s the same thing.

Tom Friedman in 2006:

Asked at a speaking gig, “Mr. Friedman, is there any free-trade agreement you’d oppose?” Friedman replied, “No, absolutely not,” adding, “You know what, sir? I wrote a column supporting the CAFTA, the Caribbean Free Trade initiative. I didn’t even know what was in it. I just knew two words: ‘free trade.'” (Um, dude, you also didn’t know its name: It’s the Central American Free Trade Agreement.)

Two cents on Stiglitz

Emmanuel has spotted a howler in Joe Stiglitz’s 2006 book, Making Globalization Work:

Anderson and Cavanagh of the Institute of Policy Studies famously noted in 2000 that of the world’s 100 largest economic entities, 51 are now corporations and 49 are countries. Stiglitz recycles this idea in ch. 7 of his book on multinational corporations…

Before you do, I feel obligated as an educator to tell you that this argument comparing national output with corporate revenues is technically incorrect and fallacious. It is irksome that Stiglitz did not consult two books on globalization that came out earlier in 2004 that pointed out the flaws in this countries-companies comparison…

As I have previously discussed, the anti-globalization crowd often pumps up factual errors to taboid-ish proportions to make their points. If they are to be taken seriously, then they should start to make sensible arguments instead of bloopers and practical jokes like this one. It is unfortunate that those who should know better sometimes buy into this balderdash.

I would attribute it as an oversight if one of my undergraduate students made this sort of error, but it should absolutely not pass muster with a Nobel laureate in economics.

This one has indeed been around a while. In fact, I recall debunking it myself using the very same sources in 2004!

While we’re reading Stiglitz, let’s return to his first popular book on the topic, Globalization and Its Discontents (see my review from a few years ago). On pages 73–74, Stiglitz writes:

Behind the free market ideology there is a model, often attributed to Adam Smith, which argues that market forces – the profit motive – drive the economy to efficient outcomes as if by an invisible hand. One of the great achievements of modern economics is to show the sense in which, all the conditions under which, Smith’s conclusion is correct. It turns out that these conditions are highly restrictive…

The Washington Consensus policies, however, were based on a simplistic model of the market economy, the competitive equilibrium model, in which Adam Smith’s invisible hand works, and works perfectly. Because in this model there is no need for government – that is, free, unfettered, ‘liberal’ markets work perfectly – the Washington Consensus policies are sometimes referred to as ‘neo-liberal,’ based on ‘market fundamentalism,’ a resuscitation of the laissez-faire policies that were popular in some circles in the 19th century…

The theory says that an efficient market economy requires that all of the assumptions be satisfied.

As Alex Tabarrok reminded Dani Rodrik a while back, those conditions are sufficient but not necessary!

Hat tip to my friend Sabrina (who may or may not endorse my analysis) for the second Stiglitz story.

The cost of rhetoric

Lane Kenworthy has a great post on why Democrats should embrace economic change, including globalization. It’s a long post that’s worth reading, but for those already intimately familiar with the economics and politics of trade, this is the punchline:

But once managed trade is introduced as an option, it ends up crowding out discussion of other approaches…

Neither Obama nor Clinton is likely to press for serious restrictions on trade or offshoring if elected president. This holds for most Democrats running for Congress too. But that isn’t the point. Even if they did follow through on a managed trade agenda, it probably wouldn’t have much impact on actual import levels. Pacts such as NAFTA seldom dramatically alter the degree of cross-border trade; had it not passed, imports from Mexico would not be much lower than they are today. The problem isn’t that managed trade rhetoric might lead to actual trade restrictions; it’s that it distracts from efforts to advance the scope and generosity of adjustment and cushioning policies…

My argument rests on a hypothesis that Democratic leaders’ trade rhetoric has a significant effect on the political feasibility of more generous and extensive social policies. I could be wrong about this. But given that any trade restrictions they might actually put in place would probably do little to stem globalization, it seems to me the potential costs of abandoning managed trade rhetoric are likely small.

NZ-China PTA

The Australiasian noodle bowl is heating up! China has signed a bilateral PTA with an OECD member.

New Zealand signed a comprehensive trade agreement with China on Monday, the first developed nation to seal such a deal with the world’s largest developing economy.

Helen Clark, New Zealand’s prime minister, and Wen Jiabao, the Chinese premier, attended a signing ceremony in Beijing to mark the agreement, completed after three years and more than 15 rounds of negotiations.

Phil Goff, New Zealand’s trade minister, has claimed China’s maiden trade agreement with a developed nation as a coup for his country and a potential framework for others.

“Just about every country in the world wants a trade agreement with China. New Zealand was important because we set the basis for the future negotiations and we have tried to come up with a high quality and comprehensive deal,” he said.

Food prices & Doha

Robert Zoellick spoke at CGD a few days ago. Dani Rodrik summarizes:

So challenge number one is that world food prices are too high, but challenge number two is the need to get rid of developed country policies so that food prices can rise even more? …

The truth, I fear, is that Zoellick’s faith in trade agreements has little to do with the underlying economics and like many ideological free traders he is willing to latch on to the economic arguments only when they serve the cause (and to discard them just as easily when they no longer do).

As for the real impact of food prices on poverty, we can avoid much confusion by recognizing the diverse and heterogeneous effects that food prices have on poverty around the world.

Might high food prices make Doha round liberalisation more feasible? Some think so. Zoellick can’t have it both ways.

Reason magazine repeatedly misleads readers on NAFTA

Dave Weigel comes dangerously close to saying things we know are untrue in this Reason story:

The main selling point of Hillary Clinton’s campaign, ratcheted up after Barack Obama started scaring her up a ladder, had been her “35 years of experience,” along with a certain nostalgia for the 1990s, which both Hillary and Bill smugly described on the campaign trail as having been “pretty good.” The linchpin of that claim was the economic boom of the Bill years. Yet last fall Hillary began to soft-pedal or sweep under the carpet the very policies that made the boom possible…

It’s not a mystery how NAFTA is working, actually. America’s GDP and industrial production have grown about 50 percent since the trade pact took effect. Total U.S. unemployment was 6.9 percent in 1993, before NAFTA went into effect; today it’s 4.9 percent. Hillary Clinton once considered this an accomplishment.

The correct way to write that paragraph would have been:

But it’s hard to believe the doom and gloom. America’s GDP and industrial production have grown about 50 percent since the trade pact took effect. Total U.S. unemployment was 6.9 percent in 1993, before NAFTA went into effect; today it’s 4.9 percent. How much damage could NAFTA have done?

But Weigel didn’t write the paragraph to deny the claims of NAFTA opponents; he wrote it in a way that implies a causal relationship between NAFTA and overall US economic performance. Are we meant to believe that NAFTA is one of the policies that made the productivity boom possible? That an agreement that barely lowered trade barriers and was phased in over 15 years reduced unemployment by two percent?

THESE CLAIMS ARE NOT TRUE AND NO RESPECTABLE ECONOMIST HAS DEFENDED THEM. Paul Krugman has been debunking them since 1993: “NAFTA will have virtually no effect on the U.S. economy, good or bad.” Repeat after me: Trade affects the composition, not the number, of jobs. In theory, this is because trade economists very frequently assume perfectly competitive factor markets. In practice, this is because the Fed controls employment via monetary policy.

NAFTA opponents aren’t pretending that the agreement affects total employment, but Reason has printed three articles in the last seven months (Weigel in September, Steve Chapman in December) that imply that NAFTA had significant macroeconomic effects. Why is the magazine running stories about international trade that will mislead readers who don’t follow the issue?