NBER Research Asserts Free Trade’s Bonafides, Congress\Senate Unimpressed by Facts
For good news – we have more research helping to confirm what true free trade advocates have always believed. We don’t see a decrease in wages or living standards by trading with developing countries. Via NBER here:
Concerns that (1) growth in developing countries could worsen the US terms of trade and (2) that increased US trade with developing countries will increase US wage inequality both implicitly reflect the assumption that goods produced in the United States and developing countries are close substitutes and that specialization is incomplete. In this paper we show on the contrary that there are distinctive patterns of international specialization and that developed and developing countries export fundamentally different products, especially those classified as high tech….
Which translated means, the US, one of their main agents in their research, has an economic dynamism (here & here)which results in the US never directly competing with other countries’ lower paid labor:
…Judged by export shares, the United States and developing countries specialize in quite different product
categories that, for the most part, do not overlap. Moreover, even when exports are classified in the
same category, there are large and systematic differences in unit values that suggest the products made
by developed and developing countries are not very close substitutes—developed country products
are far more sophisticated….
& this of course isn’t the only research making such conclusions (here & here).
But that’s not all. We’ve seen historically that creating obstacles to free trade can hurt us severely (here):
One of the major causes of the Depression was Congress’s passage of the Smoot-Hawley Tariff, which was signed into law on June 17, 1930. Smoot-Hawley placed tariffs on more than 20,000 imported goods. It halted the recovery from the 1929 downturn and resulted in retaliatory tariffs from U.S. trading partners and a decline in U.S. imports and exports of more than 50 percent….
Though not all would say cause (here):
“The best estimates are that the multiplier is roughly 2. In that case, real GDP would have declined by about 3.4% between 1929 and 1931 as a result of the decline in real exports. Real GDP actually declined by about 16.5% between 1929 and 1931, so the decline in real exports can account for only about 21% of the total decline in real GDP.”
Irregardless, the research and economist communities agree on the benefits of free trade (here):
A 1990 survey of economists employed in the United States found that more than 90 percent generally agreed with the proposition that the use of tariffs and import quotas reduced the average standard of living….
Congress’ answer to all of this? A trade war with China (here):
The Democrat-backed bill passed by 348 to 79, and targets countries that hold down the value of their currencies, as many accuse China of doing….
The Senate’s answer? A trade war with China (here):
The chairman of the Senate Finance Committee said Wednesday that the upper chamber is “poised” to legislation meant to hammer China for its currency policies…
To paraphrase an axiom: With economic heavy weights like this as friends, who need enemies… but I’m sure there’s no way they’ll screw up health care, right?
The President? A trade war with China…. sort of no. While he’s pushing China just as other presidents have (here):
The Obama Administration believes that China needs to take steps on rectifying its currency value, White House Press Secretary Robert Gibbs said….
He hasn’t stated he would sign anything and other administration officials are pushing different views (here):
Treasury Department Secretary Timothy Geithner said there was “no risk” of a global currency war during a wide ranging interview with Charlie Rose Tuesday evening….
Intelligently, he’s keeping his options open in this very way. Though I’m not sure I want to bet that he continues down the road of economics considering his approval ratings., but a smart move overall.
October 19, 2010
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Posted by Michael S. Langston
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