Read this now: Clyde Prestowitz’s masterful history of the political economy of trade in the US

June 16th, 2016 at 8:42 am

In this election cycle, the politics of trade have surfaced as a major issue, and the usual establishment position—more “free” trade agreements are always in our interest—held by both sides, is seriously on the ropes. I’ve tried to tap this opportunity to explain the nuances as I see them:

–Do not conflate globalization and trade agreements. The former is a both here to stay and a potential force for good if it is shaped by smart policies representative of all stakeholders. The latter has been largely co-opted by a narrow, unrepresentative group of corporate stakeholders.

–The idea that more trade is always win-win for everybody is unquestionably wrong in theory and practice.

–Selling trade deals as job creators is a fabrication inconsistent with theory and evidence. Oftentimes, such tactics are just a stalking horse for geopolitical goals.

–The idea that the benefits of trade are diffuse and the costs narrow is also wrong. While some groups and communities feel the costs much more acutely, they are widespread among non-college educated workers.

–Expanded trade carries many potential benefits, both for consumers here and those in emerging economies who can raise their living standards through trade with wealthy economies. But the fact that the US has steadily run economically significant trade deficits since the 1970s is a symptom of imbalanced trade that hurts and distorts growth. Moreover, this imbalance is not benign but is the result of currency manipulation, mercantilist practices fueled by savings gluts, the dollar as the dominant reserve currency, and an unwillingness of US policymakers to do much about any of the above.

–It is essential that we develop a new set of trade policies that reflect all of these insights. Trump’s 45 percent tariffs ain’t it. An end to the current spate of trade agreements, like TPP, is a start, but it is only that. We must better manage globalization from the perspective of working people as opposed to corporate and political elites.

I’ve not read a better history of the evolution of all of the above than this one by Clyde Prestowitz, in the current issue of Washington Monthly. Prestowitz has a lot going for him: he’s a long-time DC insider on trade policy, having sat at many important negotiating tables over the years. He knows the economics and where the theories have gone right and wrong, and he’s got his feet solidly planted in the reality of how imbalanced trade has hurt real people.

Prestowitz covers every one of the issues I raise, including the folly of Trump’s “solutions” in this space. His ideas for a new set of policies involve a much more interventionist stance, pushing back on currency management, beggar-thy-neighbor export-led strategies, dumping of commodities (e.g., Chinese steel), and excessive trade surpluses, which are all sound. I thought he went off a bit here: “[The new trade policy agenda] needs to have as its central aim the replacement of the U.S.’s unilateral role as buyer of last resort with new arrangements that accomplish the same goal of providing demand, especially at moments when global recessions loom, but in a more equitable and sustainable way,” but only in that I don’t see a way to do that which doesn’t exacerbate the imbalances that have hurt us for decades.

That’s a minor critique in a must-read essay. We can’t prescribe the most effective cure without an accurate diagnosis, which is precisely what we have here.

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10 comments in reply to "Read this now: Clyde Prestowitz’s masterful history of the political economy of trade in the US"

  1. Smith says:

    You must simplify the ideas further.
    Trade imbalance is not addressed by the people who run our country because they benefit enormously. The people hurt by trade imbalance are the unemployed, officially 5%, expanded to underemployed, at most 10%. Thus 90% are fully employed, not a recipe for revolt. The other hurt of those not benefiting from trade imbalance is wage stagnation. America has been cowered and conditioned to just take it. Since the 1980s, corporate mantra has been to downsize, cut labor costs, outsource, move to Southern lower wage states, move to Mexico, import exploited foreign labor. Americans make up for it by becoming two wage earner families, borrowing, eating, taking prescription drugs and dying younger. There’s plenty of bread (McDonalds) and circuses (Cable TV, video games, NFL) too.
    Read the “The State of Working America”, the only profession experiencing pre-recession wage growth was in tech, averaging .3% per year for ten years (yup point three percent or $210 raise per year on $70,000 salary). That’s without the bogus Democratic immigration reform proposal that would double exploited tech workers, and largely replace family immigration with exploited high skills immigration. Nothing wrong with high skill immigrants except the process the U.S. uses, which drives down high skill wages and removes any incentive for Americans to pursue STEM careers (no labor rights, typically tied to one employer for 6 years, can not start a business). Flooding high skills also damages low skills as new college graduates take high school level jobs (40% do currently, with unemployment 6.8% among new college graduates). Whatever you do with STEM, affects all workers, because US labor market is very fluid, even with a four year degree time lag.
    Why no action? Even with no raise, U.S. is one of the richest countries in the world. Look at what people endured 100 years ago, or 50 years ago when manufacturing and mining was more significant. Look at what Spain and Greece are still going through. People endure hardship and stagnation because they are conditioned, they are relieved things aren’t worse (think of 2009 crisis), because they don’t have a legal way to rebel, because there are no leaders.
    You are not going to force China to reform. Nations exist for hundreds of years with a sustained lack of freedom, it’s the dominant form of government. Better an independent and free nation with much costlier flatscreens and iphones. Globalization is not here to stay except by choice. Trade with China 2015 (imports and exports) was $700 billion, which is less than 5% of our $18 trillion economy. China needs it, the 1% need it, the people (99%) don’t.

    • Smith says:

      Cost of Iphones if made in the USA?
      Back of the envelope worst case scenario, that $650 iphone with the 55% markup could cost another $250 based on upper bound of labor input of 17 hours at 1.78/hour, boosted to US living wage of $15/hour. That doesn’t account for lower bound estimates of 1/3 less actual hours input, or significant savings on shipping costs. However sunk costs, or fixed costs (building factory) are higher too. One would hope higher labor costs would provide incentive for increased productivity as robotics are increasingly employed (following the German model of keeping high wage manufacturing in the country). Instead, Apple will pay China and they will dominate robotics because Apple flush with cash has no incentive to spend it on this R&D.

      • CBCal says:

        There are two facts to possibly consider concerning returning manufacturing to the U.S. as concerns Corporate Profits and Cash Flow.

        First, companies can only charge what people are willing to pay, otherwise their product’s prices end up being substantially discounted and available at the various web sites and store locations that acquire them at a discounted rate and then sell them at a discounted rate.

        Second, by manufacturing primarily in Asia, or in other low cost locations, American Corporations have substantially increased their Operating Profits by radically reducing their COGS (in all three major cost categories). These same companies generated sufficient (albeit lower) Operating Profit and Positive Cash Flow from Operations when previously manufacturing in the U.S. — prior to 2001 (the start of the exodus to the Orient).

        Much of the increased costs they would incur by returning production to the U.S. would be absorbed by a reduction in their Operating Profit and a reduction in their Positive Cash Flow From Operations.

        One can locate / purchase Reverse Engineering Specs with associated cost data per COGS Accounting Category for most items made in Asia — including phones. They also include comparative COGS costs for the major and lower included accounting categories should that product be Made In America.

        The manufacturing companies would seethe resulting Net Profit they achieve by keeping their production in Asia reduced, but they would more than just survive. They would generate enough cash for needed reinvestment and enough profits for stock dividends — if desired on their part.
        And, in all seriousness,of course, they wouldn’t be able to pay the rather large CEO salaries they now pay as compared to the average worker wage, They would have to return to the (albeit) rather comfortable salary levels of the pre-2001 era.

    • Smith says:

      Trade with China is 5% of GDP, but that’s import and exports, eliminating both eliminates a 2 1/2 % trade imbalance which is a net win for the economy long term (the imbalance must some day be paid in some form), and half of the value from goods imported from China comes from other countries (see link below)
      Now we’re down to 1.25 percent of the economy so the 1% gain. What shall it profit a company executive gaining Chinese market share if he loses his soul? The 1.25% is easily lost due to the trade imbalance and poor performing economy. The point is the US can do without globalization as practiced by greedy corporations because even China is not critical to the US. Globalization is not a given and doesn’t have to stay except under fair terms. Otherwise toss the whole baby.

      “Emboldened by the size and breadth of its economy, China is stepping up its demands, pressuring companies to lower their prices, hand over proprietary technology and help advance the country’s development goals, even if that means financing the growth of local rivals.”

      “Mr. Eisner apologized for “Kundun,” calling it a “stupid mistake,” according to a transcript of the meeting.”

      “IBM has promised to share technology with China. LinkedIn has agreed to censor content inside the country. “

  2. Jon says:

    Can someone please explain something to an amateur like me? At the end of his long article against the trade policies of the last half century Clyde Prestowitz says:

    “No doubt the variety of goods available to consumers is greater, the quality better, and the prices lower as a result of increased trade and globalization. On the other hand, it may be the case that average wages and incomes are also lower. Whether free trade has resulted in a net loss of jobs and incomes is a matter of long and continuing debate.”

    In order for Clyde’s article to have any merit, doesn’t it HAVE to be true that the advantages gained by consumers is less than the cost to workers and, if so, why isn’t Clyde willing say that this is indeed the case? Thanks.

    • Jared Bernstein says:

      “doesn’t it HAVE to be true that the advantages gained by consumers is less than the cost to workers”

      Good question. My answer is no, it has to be true trade is a net loss to SOME workers, not all. Which it is. In fact, one reason we often hear “globalization” cited as a cause of inequality is because trade–more precisely, imbalanced trade (large, persistent trade deficits)–raising some incomes and lower others.

      If “some” were trivially small, that would be one thing. But various analyses show that some is more than half the workforce (where “net loss” means a loss relative to a situation where we don’t have years of unbalanced trade with low-wage countries.

  3. Robert Salzberg says:

    In the 21st century, we need global rules for currency, carbon emissions, and FTT. None of those has been truly addressed in any of the trade agreements.

  4. Jon says:

    Thanks for the link to your article Jared. There seemed no attempt to analyze there the costs to workers vs. the benefits to consumers (including to those workers, who are of course consumers too), which seems like something you would want to do before bringing back some manufacturing to the U.S. at a higher cost, or discouraging the moving of manufacturing overseas at a lower cost.

    You said “more than half the workforce” has experienced a net loss due to trade. Do you mean by this that the net effect of their job/wage losses and increased consumer buying power is a negative? If so, I could not detect that in either your article or Clyde’s article, and your response to my question seemed only interested in “income”. What am I missing?

  5. spencer says:

    The Prestowit article is very good, but I do have to point out that it leaves out the impact of capital flows.

    The current account deficit has to equal the domestic savings-investment gap and that changed sharply under the Reagan presidency. From WWII to the 1980s domestic savings and investment were roughly in balance so the current account deficit was also very small.. But Reagan created a large structural deficit between domestic savings and investments that was financed by a massive inflow of foreign capital. As a consequence the current account and trade balance increased sharply. The increased federal deficit did create crowding out, but the crowding out worked through the strong dollar rather than through high interest rates. Without this capital inflow the trade deficit would have remained minor and the US could probably lived with it without meaningful negative consequences. So the problems of a large trade deficit show up as the consequence of the issues Prestowit describes rather than the real reason, the large republican tax cuts.