In the wake of the midterm elections, and the failure to renew Vietnamese PNTR, there has been a lot of talk about how more protectionist Democratic lawmakers are. See WaPo, The Economist (pre-election) [sub.req.], WSJ [sub.req.] and here. Greg Mankiw also steps in the fray.
While the rhetoric from some quarters of the Democratic Party is more protectionist than from the Republican Party, I think the story is a little more complicated than initially appears to be the case, although I will not claim to have the answer to the question.
The nub of my argument rests on the issue of whether the preferential trading arrangements (PTAs) pursued by the Bush Administration — e.g., the Free Trade Agreements with Morocco, Chile, Oman and the Central American countries — really constitute substantive increments to free trade (and by the way, what do those capital control prohibitions in the U.S.-Chile FTA have to do with trade…). Far too often one sees arguments such as this WSJ article [sub.req.]:
“This does not mean that all, or even most, Congressional Democrats are truly protectionist. Democrats are split regionally, as are Republicans, between free traders on the coasts and in the farm belt and protectionists in the industrial Midwest and Southeast. However, in their recent years in the minority, most House Democrats began to side with the protectionists. Only 22 voted for freer trade with tiny Oman this year, and only 15 for the Central American agreement in 2005.”
However, it’s wrong to equate all FTAs with freer trade. Indeed, the proliferation of FTAs poses a number of well-known problems for the global economy. First, goods may no longer be exported from the lowest cost producer if that producer lies outside of the relevant FTA. This is a particularly important concern if, as it often appears, countries choose partners who will not compete with their uncompetitive sectors (think U.S.-Singapore). This is the issue of “trade diversion”, which may exceed in magnitude the “trade creation” effect. Second, overlapping FTAs and their “rules of origin” (ROOs) may create major regulatory burdens, as different rules govern trade with different partners.
Doug Irwin writes in his entry on FTAs and Customs Unions in the Concise Library of Economics:
“The advantage of such bilateral or regional arrangements is that they promote greater trade among the parties to the agreement. They may also hasten global trade liberalization if multilateral negotiations run into difficulties. Recalcitrant countries excluded from bilateral agreements, and hence not sharing in the increased trade they bring, may then be induced to join and reduce their own barriers to trade. But these advantages must be offset against a disadvantage: by excluding certain countries these agreements may shift the composition of trade from low-cost countries that are not party to the agreement to high-cost countries that are.
Suppose, for example, that Japan sells bicycles for $50, Mexico sells them for $60, and both face a $20 U.S. tariff. If tariffs are eliminated on Mexican goods, U.S. consumers will shift their purchases from Japanese to Mexican bicycles. The result is that Americans will purchase from a higher-cost source, and the U.S. government receives no tariff revenue. Consumers save $10 per bicycle, but the government loses $20. If a country enters such a “trade-diverting” customs union, economists have shown that the cost of this trade diversion may exceed the benefits of increased trade with the other members of the customs union. The net result is that the customs union could make the country worse off.”
See also Chapter 7 in Irwin’s Free Trade under Fire (Princeton, 2005).
On the second point of rules of origin, Anne O. Krueger (nominated by the Bush Administration to serve as Deputy Managing Director of the IMF) noted:
“…[T]here is an important protectionist bias inherent in free trade agreements which is not present in customs unions. In any customs union or free trade agreement, one of the critical issues concerns “rules of origin.” In a free trade agreement rules of origin hae an important function because,without one, each imported commodity would enter through the country with th elowest tariff on each commodity. The criterion for duty-free treatment is important in determining the economic effects of the rule of origin. It is shown that rules of origin in fact extend the protection accorded by each country to producers in other free trade agreement member countries. As such, rules of origin can constitute a source of bias toward economic inefficiency in free trade agreements in a way they cannot do with customs unions.” (NBER WP No. 4352).
(See also her article in the Fall 1999 issue of the Journal of Economic Perspectives.)
So, just because American business interests favor these pacts, while labor often opposes, it’s not clear free trade is enhanced by such initiatives; in other words, one should not confuse export-oriented mercantilism with support for free trade. Sometimes, the objectives coincide, sometimes they don’t. Hence, while it is true that the Bush Administration and Congressional Republicans have supported free trade agreements, it is not clear to me that these free trade agreements are structured to effectively promote free trade, and/or create more trade than divert. That’s why economists typically prefer multilateral over bilateral or regional trading arrangements.
In this context, it’s of interest to note a paper by Evenett and Meier; they document that many of the pro-bilateral trade agreement incumbents that lost their seats were replaced by skeptics of such agreements. However, interestingly, such skeptics were not similarly skeptical of multilateral trade agreements, such as the Doha Round.
So, the question comes down to (i) whether the FTAs the United States are pursuing are more trade creating than trade diverting, taking into account the ROOs and other restrictive aspects of the FTAs related to the intellectual property and bilateral foreign direct investment, and (ii) whether FTAs have a catalyzing — or inhibiting — effect on the negotiation of other preferential trade arrangements and multilateral agreements such as Doha (for a technical examination, see Aghion, Antras and Helpman). I think these are open questions.
More broadly, one will have to ask whether the Administration and Congress that brought us the steel safeguard, the Ag bill, and softwood lumber countervailing and anti-dumping duties (CVDs and ADs, respectively) is actually less protectionist that the Administration and Congress that passed Nafta and WTO. And await to see if the Congress extend trade promotion authority and the renewal of the Information Technology Agreement.
On a more speculative note, I would argue that the old-fashioned protectionist/free trade labels are becoming ever more misleading. It’s not enough to promote the trade agreements in order to be pro-free trade. One has to implement measures that will sustain an interest-group coalition that will continue to support globalization into the future. Such coalitions must be more durable than the ephemeral political coalition constructed, say, by trading off (steel) protection for TPA; rather, it needs to be one where support for globalization is built upon a recognition of gains — and a safety net that reduces the risk to labor of losses — arising from increasing trade. The Kletzer-Litan wage insurance approach is one such measure.
For a longer discussion of yet another alternative approach (not necessarily one I fully agree with), see Dan Drezner’s CFR piece U.S. Trade Strategy: Free versus Fair.