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.
Technorati Tags: trade protectionism,
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I too am a fan of Irwin’s writings. Here is pointing out what Jacob Viner said with his writing on trade creation v. trade diversion. On the politics side – let me just say THANK YOU. Yes my party (the Democrats) have more trade protectionists than I’d prefer but we have free traders too. The GOP? It’s a mix of protectionists and free traders as well. And as Dean Baker often notes – there is trade protection that benefits the working poor and then there are other forms of protections that benefit the well to do.
I’ve been stating that fears of a return to Fortress America are overblown; sure the Oman & CAFTA agreements were duds in the House, but the agreements with Singapore & Chile had broad bi-partisan support & as for the Bahrain & Australia agreements, more Democrats voted for them than didn’t. Heck, with Dems in control of Ways & Means, and more power negotiating the terms of these agreements, we may even see more trade!
Then I saw what happened over trade status for Vietnam & my hopes dashed. What’s more, apparantly this bill was endorsed by Charlie Rangel & Nancy Pelosi & a number of Democrats committed to YES’ing it through. Then the Organized Labor Mafia descended & started twisting arms and those Yes’s melted into NO’s.
As Long as the AFL-CIO is dictating our Trade Policy, don’t look for any further liberalization.
The whole argument misses the point. Throughout history the Democrats have been more free international trade than the Republicans. At one time our country raised its revenue through tariffs and so international trade was critical to the operation of the federal reserve.
Today international trade policies are all about social engineering of businesses. This leads to both sides of the aisle modifying their trade positions to benefit their constituents while punishing the constituents of the other side.
Believe it or not free trade actually means letting businesses trade freely and allowing markets to determine trade. What a novel idea!
Today there is a pox on both houses because neither is interested in what is best for the economy as a whole but only what is best for their constituents – defined as donors.
The result is that both Democrats and Republicans have extorted massive amounts of money from business. What an enormous destruction of wealth!
Just take a look at the Commerce Department. Does the US government really need to advertise for the richest companies in the world? Only in the world of political kickbacks.
Thanks for balancing the corruption Dick:
The result is that both Democrats and Republicans have extorted massive amounts of money from business.
We need that balancing to keep the participation rate where it is, yes?
Thanks DDR for putting your finger prints on the AFL-CIO Mafia and letting us know where you stand.
Could be we are not in the 60s with organized labor. Could be the AFL-CIO strength in terms of members is falling. Could be the number of unionized workers (AFL CIO or not) in this country as a percent of the work force has never been lower. Could be illegal aliens in the construction industry alone might inform anyone who was unable to read the literature.
Could be the politicians are just informed by their “unhappy” constituents.
Could be.
Yes I’m quite sure that if Organized Labor was stronger than it was, it would not use it’s excess power to put an even stronger arm on Congressional Democrats to do it’s bidding.
The AFL-CIO should not be dictating our trade policy. It’s the Democratic Party. Not the AFL-CIO party.
Why wouldn’t organized labor be opposed to some of these trade agreements? If economists were honest they would publicly state that the intention of trade agreements is to reduce the wages of American manufacturing workers. High manufacturing wages are inefficient if you can find workers in other countries willing to work for less. The fact that efficiency is raised, foreign workers benefit and some Americans may benefit means nothing to those American workers who lose their jobs. It is simply dishonest to say that we should be pleased with a net benefit when it is unclear who among all Americans enjoys those benefits.
Many economists seem to worship at the altar of market efficiency as if it is some irresistable process like the Second Law of Thermodynamics when we know that the devil is in the details.
And what is the deal with intellectual property? Many of these agreements have less to do with trade and a lot to do with bickering over intellectual property rights. What about governments enforcing monopolies for corporations has anything to do with free trade and free markets?
DRR: Do you mean to say if labor was not organized, there would be no opposition to trade liberalization?
In any case, my understanding is that we don’t know for certain why Vietnam PNTR renewal went down, under special rules. I believe it is still thought that it could pass under regular order.
Joseph: You state:
I think you should read a trade textbook, before you start characterizing what economists think. I highly recommend Krugman and Obstfeld’s text.
Regarding the protection of intellectual property rights (IPRs), there is a legitimate issue of how to internalize the externality that is associated with research and development, as well as the production of artistic and creative works. Are you against copyright protection, for instance? I’m not saying that the U.S. position is necessarily right in arguing for some protection (I think the issue is the extent of protection); nor am I saying they’re wrong. But I think IPRs are a legitimate point of negotiation in FTAs. Wholesale disregard of the argument seems to me a nonproductive way to conduct the debate.
Dick: While I agree that it would be better if we could conduct trade policy in a manner that would maximize national welfare, while compensating losers from the process of globalization, it is not enough to rail against reality. Rather, one has to think about ways in which to best harness and manage the forces associated with various constituencies in order to achieve the best results, given the constraints faced. And that is why I listed a couple suggestions for a way forward at the end of my post.
Minzie,
I had no intent of attacking the points you have made. They are valid. My point is that when we go to cast our ballot we must look beyond party affiliation and vote for those who support actual free trade.
There are a lot of people out these like Joseph who will vote for those who favor populist position because someone tells them that he will protect American jobs if only Joseph will give him the power. Then Joseph gives him the power and he lines his own pockets.
Too many have forgotten that in the US we have a unique situation where constitutional government was created to define the limits of a governmental power, from the state to the federal government. Too often today we desire to create government rules that will allow politicians to force our views on others, then realize too late that both sides can use those rules.
Are Democrats worried about trade diversion & stumbling blocks?
Dr. Menzie Chinn of Wisconsin-Madison hypothesizes that Democrats may have opposed FTAs not because they have protectionist sentiments, but because they prefer multilateralism: In the wake of the midterm elections, and the failure to renew Vietnamese P…
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.
Well, that is a different question than the party issue. Of course, NAFTA had well over two-thirds of Republicans voting for it, while most Democrats voted against. (And isn’t NAFTA a regional agreement, anyway?) Similarly, most Democrats in Congress criticized the steel tariffs for not going far enough, and criticized when they were dropped after the WTO ruling.
It is, however, interesting to make the point that only a free-trading Democrat like Clinton could muster some support among Democrats to vote for NAFTA (though still less than half did), and that the additional Democratic votes that a President Clinton could bring on board would exceed the additional Republican votes that a Republican President could get.
Of course, individual representatives are different. One thing is for sure: quite a few of the Democratic Senate gains this year were by candidates running on explicitly protectionist platforms, including a few who have a record in the House of voting against free trade. Senator-elect Rep. Sherrod Brown (D-OH) even has made it his primary focus, with a book and all.
I think it’s a rather weak straw to grasp at that most Democrats concentrated their fire on free trade agreements in particular rather than the Doha Round. After all, the Doha Round collapsed and no one in Congress had voted to implement any results from it or cut agricultural subsidies. One would think that that would reduce the amount of possible election attacks based on the Doha Round. Honestly, which is going to be an election ad: “My opponent theoretically supports a process which collapsed and probably would vote in favor of the thing, if it existed,” or “My opponent voted in favor of this particular agreement CAFTA and will likely vote to ratify this other particular agreement with Columbia?”
In any case, my understanding is that we don’t know for certain why Vietnam PNTR renewal went down, under special rules. I believe it is still thought that it could pass under regular order.
It failed largely because it wasn’t strongly whipped by the Republicans, unlike CAFTA. (Similarly, there was not as much concentrated union and other opposition pressuring Democrats to vote against.) Republicans had about 40 more Noes than for CAFTA, and about 25 more absentions, voting in the end by a two-thirds majority to favor PNTR for Vietnam (The 40 extra Republican Noes, as expected, consist of Republicans who represent fairly anti-trade districts and who had to be strongly leaned on for CAFTA.) Democrats had about 70 more Yeas than for CAFTA, and about 20 more absentions, but still split 90 Yea 94 Nay on it. There was an assumption that it could be done later, without the two-thirds majority, which probably prevented a lot of whipping.
So the Vietnam PNTR result was fairly similar to the NAFTA vote: two-thirds of Republicans pro-free trade, and a Democrats about split evenly. However, it’s hard to say how the new Representatives replacing the lame ducks will vote.
This Democratic-leaning blog bemoans that fact that lots of Republican lame ducks who were defeated in the election voted in favor of PNTR for Vietnam or abstained, including some (like Charles Taylor (R-NC)) who proabably lost their seat based on trade and were replaced by definite PNTR opponents, however.
Vietnam PNTR roll call
CAFTA roll call.
NAFTA roll call— actually, it seems that NAFTA had the Republicans 3:1 in favor and the Democrats 2:3 against.
“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.”
It really should be “do not similarly express skepticism of multilateral trade agreements”. This is the classic “I would vote for it if the committee passes it” dodge when you know that the committee won’t pass it. This is especially true for farm subsidies for example. A Congressman could easily say that he would support any agreement that came through Doha, because he knows that farm subsdies weren’t going to make it through. He could even work to make sure they don’t make it through, and say he was just trying to guarantee ‘fair’ trade. That is the political answer to being protectionist when you know that blatant protectionism is the wrong answer.
From the paper you linked, there’s this for example from new Sen. Claire McCaskill (D-MO), who replaced pro-trade Sen. Talent:
There are plenty of other examples too from the new members.
Nuking the Economy
By PAUL CRAIG ROBERTS
US manufacturing lost 2.9 million jobs, almost 17% of the manufacturing work force. The wipeout is across the board. Not a single manufacturing payroll classification created a single new job.
[edited by JDH for length]
Let me again remind our readers to please keep your remarks brief and incisive. If you would like to call attention to a longer argument detailed elsewhere, feel free to provide a link, but we can not allow complete articles to be reproduced in the comments section of Econbrowser.
Once again we are debating the same issue from two sides: is it better for Democrats to distort the markets or for the Republicans to distort the markets.
How many actually read NAFTA? Are you pleased with a three man panel making trade policy that will supercede laws passed by congress?
Are you pleased that the sugar lobby has been so successful that it has driven entire lines of candy production out of our country?
Until we begin to hold politicians accountable for their preferential treatment of businesses they will continue to abuse the system no matter what color we paint their state.
I think you make some subtle points, Menzie, and in the last decade or two it seems that in practice free-trade Dem presidents have done better on this than (supposedly) free-trade Republican presidents, perhaps for obvious political reasons. It is also true, of course, that regional interests dominate, so that Republicans from South Carolina and Michigan are protectionist while Dems from Great Plains states or Nothern California are free traders.
Nevertheless, there is a matter of ideological orientation and history. Historically Dems were more free trade, presumably reflecting originally the cotton exporters of the South, against the infant industrializers of the Northeast. While our unionized industries were strong exporters earlier in the 20th century, the unions and the Dems also tended to be pro-free trade against the Smoot-Hawley Republicans (think FDR, from whom Ronald Reagan got his free trade views as a Dem and kept them as a GOPster).
The shift probably came in the late 1970s and especially the early 1980s, when such unionized industries as autos and steel became import-competing, and not very successful at it. I remember 1984 as the first year the AFL-CIO was pressuring Dem prez candidates to be protectionist, with Mondale getting their support, although he remained officially pro-free trade. In 1988 Gephardt was the first Dem to openly support protectionism. By 2004, commentators were viewing him as representing “the traditional Democratic position.” Today indeed, the influence of the now wholly protectionist AFL-CIO means that protectionism, at least ideologically, has become the default position of Dems, unless they are “old free traders” or from exporting regions of the country
Sorry, JDH, if this is too long…
John Thacker: You are right. Nafta is a regional agreement. Still, I wonder if we looked at other items which aren’t usually lumped into the protectionist camp, but turn out to be mercantilist, how the numbers would turn out (so here I’m relying upon you to do the research). For instance, who voted in what numbers for continued funding of the ExIm bank? Who voted for the Byrd Amendment? Maybe it was all Democrats, but — if I know my specific factors model — I’ll bet there are some Republicans in there.
Barkley Rosser: Yes, I largely agree with your analysis, although it strikes me that the Democratic Party now counts among its supporters many in high tech industries (either capital or labor) that, in a standard Hecksher-Ohlin model such as that used to analyze the political economy of protection, would support free trade measures. In general, then, it’s an empirical question, with competing hypotheses being provided by Hecksher-Ohlin versus specific factors models of trade.
Dick: In spirit I agree. However, the mechanisms to make politicians equally accountable to voters (with dispersed interests) versus business or unions (with concentrated interests) are still not known. As a technocrat at heart, I would want to insulate the trade policy agencies as much as possible from political influences, much as we insulate the Fed. But that is not as far as I can tell practicable, or sustainable, in a democratic republic. Hence, we are left searching for a way to manage the horse-trading in a way that gets the most “liberal” (in a classical sense) trading regime. That to me is the challenge we face.
Are the Democrats Truly More Protectionist?
[Source: Econbrowser] quoted: 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 actual…
Who voted for the Byrd Amendment? Maybe it was all Democrats, but — if I know my specific factors model — I’ll bet there are some Republicans in there.
It’s never all Democrats, as there are regional variations. At the same time, in every identical constituency, the Democratic Party candidate tends to be more protectionist than the Republican. The original Byrd Amendment was, I believe, inserted in conference, as I can’t find a roll call vote. There was a amendment prohibiting its repeal, here:
“To prohibit weakening any law that provides safeguards from unfair foreign trade practices.”
This protectionist amendment failed, 39-60 with one not voting. The Democrats were 31-12 with one abstaining in favor of protectionism/anti-dumping, the Republicans were 47-8 in favor of free trade, and independent Jeffords was in favor of free trade.
The Senate provides an interesting test because there are two members with identical constituencies for each state. I’ll characterize the states where the senators voted differently:
States where the Republican voted for free trade (to allow the Byrd Amendment to be repealed) where the Democrat voted protectionist (forbidding its repeal):
Colorado (Allard (R) repeal, Salazar (D) maintain Byrd Amendment)
Florida (Martinez (R) repeal, Nelson (D) maintain)
Indiana (Lugar (R) repeal, Bayh (D) maintain)
Iowa (Grassley (R) repeal, Harkin (D) maintain)
Louisiana (Vitter (R) repeal, Landrieu (D) maintain)
Minnesota (Coleman (R) repeal, Dayton (D) maintain)
Nevada (Ensign (R) repeal, Reid (D) maintain)
New Mexico (Domenici (R) repeal, Bingaman (D) maintain)
South Dakota (Thune (R) repeal, Johnson (D) maintain)
That’s nine states.
States that went the other way, with the Republican voting to maintain the Byrd Amendment and the Democrat supporting its repeal:
NONE
There are several other states where two members of the same party voted differently. In essentially every case, the “more conservative” of two Republican voted to repeal the Byrd Amendment or the “more moderate/less liberal” of two Democrats.
Alabama– Jeff Sessions (R) voted for free trade, and is more conservative than former Democrat Richard Shelby (R)
Arkansas– Blanche Lincoln (D) voted for free trade, and is a consistent free trader and well known as a moderate Democrat. Mark Pryor (D) voted for antidumping, and is a social conservative/fiscal liberal
California– Boxer (D) protectionist is more liberals than Feinstein (D) free-trade
Connecticut– Dodd (D) voted anti-dumping, while more moderate Lieberman (D) voted free trade
Delaware– Thomas Carper (D) voted free trade and is a well-known moderate, more conservative than protectionist-voting Biden (D)
Pennsylvania– Santorum (R) voted for repeal, whereas Specter (R) voted to maintain the Byrd Amendment
South Carolina– DeMint (R) voted for repeal, is more conservative than Lindsay Graham, who voted to maintain
So that’s the Democrats 31-12 in favor of the Byrd Amendment, with the Republicans 47-8 opposed. And again, in every case where two members from the same state voted differently, the more conservative voted against the Byrd Amendment and the more liberal in favor of it.
The key point in Menzie Chinn’s post is that building long run support for more open trade means recognizing the big losers and providing some support during the transition particularly for older workers. However, as a practical matter and as as a matter of equity the support needs to be neutral as to the source of the job loss. Distinguishing between workers who lost work due to trade and those that lost work due to for example increased productivity is often problematic. Relative to their education and skill manufacturing workers probably earned a premium compared to workers in the service sector. This premium is erroding due to many factors not limited to trade and institutions need to be developed to help families adjust to mobility.
Of course, there are differences between Democrats and Democrats, and Republicans and Republicans. If the Democratic gains were all Senators like Blanche Lincoln, there would be little concern. The concern is more that a huge percentage of the new Democratic Senators ran on being explicitly anti-free trade, notably Sherrod Brown, who has a book about it, Claire McCaskill, who actively campaigned against the WTO, the Doha round, and any cuts to agricultural subsidies, and Jim Webb, who is a quite socially conservative Democrat whose most notable distinction (on substantive positions) from George Allen may be his opposition to free trade and globalization.
In the House as well, quite a few of the Democratic gains were those running on social conservative, fiscally liberal, anti-trade platforms.
The Vietnam + Haiti stuff managed to pass the House 212-184. Republicans were 120-87 in favor, 23 not voting. Democrats 92-96 against, 14 not voting. Socialist Bernie Sanders was against.
In Mike DeWine, the Senate loses a big advocate for free trade with Haiti, replacing him with avowed protectionist Sherrod Brown. Sen. DeWine was very much responsible for making sure that the Haiti bill got done over the objections of textile state senators.
The Senate vote, of course, was both more lopsided for free trade and Republicans made up a significant part of the opposition, largely because opposition to the Haiti trade deal was concentrated among textile states, largely in the South and represented by Republicans. 67-27-12 in a vote that required 60 votes. Even there there are disquieting signs, since several new Democratic Senators– Sen. Brown, Sen. Webb, and Sen. McCaskill opposed the bill and are replacing supporters of trade with Haiti and Vietnam. (Sen. Brown is a sure thing to oppose, since he voted against it in the House.)