The Undercover Economist Part 9

In a more complex world the dollars and renminbi, drills and televisions, will not be directly exchanged for each other. We sell drills to the Saudis, the Saudis sell oil to the Japanese, the Japa-nese sell robots to the Chinese, and the Chinese sell televisions to us. We can borrow money temporarily-the United States is currently doing this-or we can produce assets like machine drill factories and sell the factories rather than the machine drills. But the circular flow of currencies will balance out completely in the end. The United States can afford imports only if we eventually produce exports to pay for them, and the same is true for every country.

A more extreme example may clarify things further. Think of a country whose government is very keen on self-sufficiency. "We need to encourage our local economy," says the Minister for Trade and Industry. So the government bans all imports and patrols the coast to prevent smuggling. One effect will be that a lot of effort will be devoted to producing locally what was once imported: this certainly is encouragement to the local economy. But another effect is that all of the export industries will quickly shrivel and die. Why? Because who would want to spend time and money exporting goods in exchange for foreign currency, if nobody is allowed to spend the foreign currency on imports? While one part of the local economy is encouraged, another is crippled. The "no imports" policy is also a "no exports" policy. And indeed, one of the most important theorems of trade theory, the Lerner theorem, named after the economist Abba Lerner, proved in 1936 that a tax on imports is exactly equivalent to a tax on exports.

Lerner's theorem tells us that restricting imports of Chinese televisions to protect American jobs in television manufacturing makes as much sense as restricting exports of American machine drills to protect American jobs in television manufacturing. In fact, the American television manufacturing industry is not re-ally competing against the Chinese television manufacturing in-dustry at all; it is competing against the American machine drill industry. If the machine drill industry is more efficient, the tele-vision manufacturing industry will not survive, just as surely as E. O. Wilson's promising career as an economic journalist never got off the ground in the face of his superior skills as scientist.

This certainly makes us look at trade barriers in a new light. But it doesn't prove that trade barriers cause any harm: after all, mightn't the benefit of trade barriers to the American television manufacturing industry outweigh the harm to the American machine drill industry? David Ricardo's theory of comparative advantage tells us that the answer is no. As we know, under free trade, both Chinese and American workers can quit work earlier than they could under restricted trade, having produced the same amount as before.

The commonsense answer based on practical experience is also no: compare North Korea with South Korea, or Austria with Hungary. To take a very rough guide to how much better it is to have an open, liberal economy than a closed one, simply note that in 1990, just after the fall of the Berlin wall, the average Aus-trian was between two and six times richer than the average Hungarian (depending on how you measure it). The average South Korean is wealthy while the average North Korean is starving. North Korea is so isolated that it's hard to get any measurement of quite how poor the country is.

Trade barriers will always cause more harm than good, not just to the country against which the barrier is erected but also the country that erects the barriers. No matter if other countries choose to inflict trade restrictions on themselves, we're better off without. The great economist Joan Robinson once quipped that just because others throw rocks into their harbor, that is no reason to throw rocks into our own. As the Zwin silted up, the citizens of Bruges were no doubt realizing the same truth centuries before.

None of this is to say that free trade is good for everybody. Com-petition from cheaper or better foreign products cannot put all of our domestic industries out of business, because otherwise we couldn't afford to buy the foreign products. But it can alter the balance of our economy. To go back to the example of machine drills and televisions, although in our example the Chinese are better at producing both machine drills and televisions, we still produce machine drills when trading with the Chinese. In fact, we produce twice as many machine drills as we did before, but our television manufacturing industry has been wiped out. Good for the machine drill industry, bad for the television manufactur-ing industry. People will lose their jobs. They will have to try to learn new skills and get reemployed in the machine drill sector, which may be easier said than done. Overall, the United States is better off, but some people will lose out, and the losers will curse free trade and demand restrictions on imported televisions, al-though we know now that they could equally demand restric-tions on exported machine drills.

Even the most casual historian will be reminded of the Luddite rebellion in Britain. Luddism began in 1811 in the English mid-lands, a desperate response by skilled textile workers to competi-tion from the latest technology: stocking and shearing frames. The Luddites were well-organized, destroying mills and machines ("frame-breaking") and protesting against the new economic sys-tem. Contrary to the modern stereotype of an unimaginative thug, the Luddites were responding to a real threat to their livelihoods.

So did technological change hurt some people? Without a doubt. Did it impoverish Britain as a whole? A ridiculous notion. Without minimizing the genuine suffering to those who lost their livelihoods along the way, it's obvious that technological progress made us far better off.

Trade can be thought of as another form of technology. Economist David Friedman observes, for instance, that there are two ways for the United States to produce automobiles: they can build them in Detroit, or they can grow them in Iowa. Growing them in Iowa makes use of a special technology that turns wheat into Toyotas: simply put the wheat onto ships and send them out into the Pacific ocean. The ships come back a short while later with Toyotas on them. The technology used to turn wheat into Toyotas out in the Pacific is called "Japan," but it could just as easily be a futuristic biofactory floating off the coast of Hawaii. Either way, auto workers in Detroit are in direct competition with farmers in Iowa. Import restrictions on Japanese cars will help the auto workers and hurt the farmers: they are the modern-day equivalent of "frame breaking."

The solution, in a civilized but progressive society, is not to ban new technology or to restrict trade. Neither is it to ignore the plight of those people put out of work by technology, trade, or indeed anything else. It is to allow progress to continue while helping support and retrain those who have been hurt as a result.

Perhaps that sounds callous. After all, even one person who wants a job and cannot find one is suffering a personal tragedy. Yet the interest groups who oppose free trade for their own profit have vastly overblown the effects of trade. Between 1993 and 2002, almost 310 million jobs were lost in the United States. Over the same period, more than 327 million jobs were created. Nearly 18 million more people had jobs in 2002 than in 1993. Each of the 310 million times somebody lost a job, that person was en-titled to sympathy and to help, whether or not foreign competi-tion had anything to do with it. Trade or no trade, a healthy economy loses jobs all the time, and creates them as well.

But is globalization a good thing?

It is one thing to say that trade makes countries like the United States richer. It is quite another to say that globalization is a good thing. To do justice to all the arguments about globalization would take an entire book. In a short chapter there is time to address two common complaints about globalization. The first is that globalization is bad for the planet; the second is that globalization is bad for the world's poor.

We first need to be somewhat clearer about what globaliza-tion means, without becoming too technical. Even leaving aside noneconomic phenomena such as the spread of American televi-sion, Indian cooking, and Japanese martial arts, there is plenty to international economic integration besides trade. I would list at least five distinct issues: trade of goods and services; migration of people; the exchange of technical knowledge; "foreign direct investment," or building or buying factories and companies abroad; and cross-border investments in financial assets like shares and bonds.

Many discussions of globalization confuse all these. At the risk of oversimplification, let me set three to one side: migration, ex-change of technology, and cross-border investments in financial assets. This is not because they are unimportant, but because they are not what people tend to think of when they talk about global-ization. Migration is controversial for other reasons; generally, xenophobia and selfishness. On the other hand, few object to the spread of peaceful scientific and technical know-how. Cross-border investments in financial assets are the subject of consid-erable technical debate among economists; they are a great opportunity for both rich and poor but an opportunity that brings dangers. For the sake of space, we shall say no more about these three trends.

For most purposes, when people argue about globalization they are talking about the two trends that remain: more trade, and more direct investment by companies from rich countries, such as building factories in poor countries. A substantial proportion of foreign investment in poor countries is designed to produce goods for shipment back to rich countries; while this remains true, trade and foreign investment will be closely linked together. Foreign investment is widely recognized to be good for economic growth in poor countries: it is an excellent way for them to create jobs, learn cutting-edge techniques, and do so without having to invest their own scarce money. Unlike investments in shares, currency, or bonds, foreign direct investment cannot quickly be reversed in a panic. As economics journalist Martin Wolf puts it, "factories do not walk."

Although trade with and investment in poor countries has risen rapidly in recent years, we should be clear that both trade and foreign investment overwhelmingly takes place between the rich-est countries, not between rich and poor. People look at their Nike shoes and assume, perhaps, that everything is made in In-donesia and China. However, far more money is spent import-ing wine from Australia, pork from Denmark, beer from Belgium, insurance from Switzerland, computer games from Britain, cars from Japan, and computers from Taiwan, all carried on ships from South Korea. These rich countries are mostly trading with each other. Mighty China, with about a quarter of the world's population, produces less than 4 percent of the world's exports. Mexico, a country of over a hundred million people, in a free trade agreement with the world's largest economy, the United States, and in a situation of rapidly expanding trade as the US economy was red hot in 2000, exported less than gallant little Belgium. Meanwhile India is nowhere at all, with a billion people producing less than 1 percent of world exports. And these figures are for physical merchandise: if you look at trade in commercial services, fuss over "offshoring" notwithstanding, developing coun-tries participate even less.

What about the very poor countries? Sadly for them, rich countries trade very little with them-and as trade expands elsewhere in the world, the poorest countries are being left behind. North American imports from the least developed countries were only 0.6 percent of total imports in 2000, down from 0.8 percent in 1980. But 0.5 percent of Western Europe's imports in 2000 were from the least developed countries, down from 1 percent in 1980. For Japan, the figure is 0.3 percent, down from 1 percent. And for all the major world traders put together, the percentage of their imports from the least developed countries is 0.6 percent, down from 0.9 percent twenty years before. For the really poor countries, their problem certainly isn't excessive participation in the world trading system. A similar story holds true for foreign investment.

The theory of comparative advantage, common sense, and ex-perience all tell us that trade is good for economic growth; for-eign direct investment is closely related to trade, and it, too, is good for growth. The poorest countries miss out on those ben-efits. This is a simplification but a fair one. In both cases, though, questions remain open: what is the effect of trade and foreign investment on the environment? And what is the effect of for-eign investment in poor countries on those who have to accept so-called sweatshop jobs, poorly paid jobs in awful conditions?

Globalization is green Take the environment first. We saw in chapter 4 that the economist's concept of externalities gives us a powerful tool to appreciate the risks of environmental damage, and externality charges give us a solution. Many-perhaps most-economists understand the risks of environmental damage and want action to preserve the environment.

But the link between trade and environmental damage just doesn't stand up to close scrutiny. There are three reasons for concern. The first concern is of a "race to the bottom": compa-nies rush overseas to produce goods under cheaper, more lenient environmental laws, while hapless governments oblige them by creating those lenient laws. The second is that physically moving goods around inevitably consumes resources and causes pollu-tion. The third worry is that if trade promotes economic growth, it must also harm the planet. While each has some initial plausi-bility, the idea that trade is bad for the environment is based on weak thinking and little evidence.

The first worry, that free trade causes environmental problems because goods produced overseas are subject to more lenient environmental standards, or no standards at all, should first be qualified by reminding ourselves that the overwhelming majority of trade is between rich countries, who have similar environmental standards. But what about investment in poor countries? The environmentalist Vandana Shiva speaks for many when she declares that "pollution moves from the rich to the poor. The result is a global environmental apartheid." Strong words-but are they true?

In theory, they might be true. Companies that can produce goods more cheaply will be at a competitive advantage. They can also move around more easily in a world of free trade. So the "race to the bottom" is a possibility.

Then again, there are reasons to suspect that it's a fantasy. Environmental regulations are not a major cost; labor is. If Ameri-can environmental standards are really so strict, why do the most pollution-intensive American firms spend only 2 percent of their revenues on dealing with pollution? Most spend much less. When companies move abroad they are seeking cheap labor, not a pol-lution haven. And companies do not pollute for fun; the latest manufacturing techniques are often cheaper and less polluting at the same time. Energy efficiency, for instance, saves money and reduces pollution. This is why many companies regard environ-mental performance as part of general quality control and good efficient manufacturing. Even if it was possible to save some costs by cutting environmental corners, many firms build factories everywhere in the world using the same latest, cleanest technol-ogy from the developed world, simply because that kind of stan-dardization itself saves costs. As an analogy: if ten-year-old computer chips were still produced in bulk, they would be sim-pler and cheaper to make than modern chips, but nobody both-ers any more. It's now hard to buy an old computer even if you want to. And these arguments leave aside the possibility that firms want to offer high environmental standards to please their work-ers and their customers.

So . . . a "race to the bottom" is possible in theory; but there are also good grounds for doubting its existence. So leaving theory to one side, what are the facts? First, that foreign investment in rich countries is far more likely to go into polluting industries than foreign investment in poor countries. Second, foreign in-vestment in polluting industries is the fastest growing segment of foreign investment coming into the United States. In con-trast, foreign investment in clean industries is the fastest grow-ing segment of American investments abroad. In other words, foreigners are bringing dirty industries to the United States, but American companies are bringing clean industries to the world.

You may have blinked a little when you read that last para-graph. To those brought up on a diet of environmentalist guilt, those statistics seem insane. They are not so insane when you consider that poor countries produce goods like clothes, children's toys, and coffee, while the seriously polluting industries like bulk chemical production require high levels of skill, reliable infra-structure, and-since a lot of capital investment is involved- political stability. Why jeopardize that by moving the plant to Ethiopia to save a few dollars on environmental costs?

Another indicator of the environmental performance of for-eign investment in poor countries comes from measures of pol-lution in China, Brazil, and Mexico. Sixty percent of foreign investment in poor countries arrives in these countries. The first figure on page 217 shows how as the Chinese economy has de-veloped, urban air pollution in China has been reduced. At the same time, foreign investment has exploded as foreign firms build factories in China, either to cater to the Chinese market or to take advantage of cheaper labor and export to the rest of the world. Brazil and Mexico have very similar patterns.

This is not to give foreign investment all the credit. As China has grown richer, the government has imposed tighter envi-ronmental restrictions at the same time that foreign investment has arrived. All the same, it is hard to reconcile tales of a "race to the bottom" with this picture. Such tales are convenient scare-stories for protectionists looking for new ways to favor privi-leged industries at the expense of customers and the developing world alike.

Does globalization cause pollution?

China: Urban air quality and foreign investment

1987 1995 Source: Wheeler 2001.

The truth is that protectionism itself can have tremendous environmental costs. The most obvious case: the splendidly "mul-tifunctional" Common Agricultural Policy in the European Union, a package of trade barriers and subsidies designed to pro-tect European farmers. To its defenders, multifunctionality is supposed to convey self-sufficiency, security, environmental per-formance, and a fair deal for poor farmers. But instead, the policy subsidizes farmers in the European Union to the tune of almost half the Union budget, with the largest quarter of the farms Protected agriculture is intensive Agricultural protection and use of fertilizers in agriculture Percent of Subsidy 70 Switzerland Korea Japan European Union Canada United States 0 0 Australia Fertilizer use Kilograms/hectare 500

Source: FAO 1998; OECD 2000.

getting over two-thirds of this-the richest man in England, the Duke of Westminster, received 448,000 (nearly $900,000) in subsidies in 20034. The policy encourages intensive farming with the obvious results of poor food quality and high use of pesti-cides and fertilizers, and all the while dumps food on the devel-oping world and depresses the prices received by farmers in poor countries. Into the bargain it is helping to derail the current round of world trade liberalization. As Martin Wolf commented in the Financial Times: "This is a multifunctional policy indeed: regres-sive, wasteful, damaging to food quality and the environment and an obstacle to trade liberalization everywhere."

Other rich nations, especially Japan and Korea, privilege their farmers the same way as the European Union: a third of the typi-cal OECD farm's revenue comes from government support, and as the second figure on page 217 shows, the more agriculture is subsidized, the more fertilizers it consumes. If the Common Agri-cultural Policy and other examples of agricultural protectionism were abolished, there is little doubt that the world's environment would be substantially improved as the intensity of farming could be reduced. At the same time, both European consumers and third-world farmers would get a much better deal.

The United States provides less subsidy for its farmers, but it can still lay on trade protection and cause environmental damage when it has to. In 1998, domestic sugar producers enjoyed a $1bil-lion subsidy, half of which went to just seventeen farms. (Because of the distortions caused by protection, this cost consumers nearly $2 billion, half of which was pure waste.) The protection has dam-aged sugar producers in Colombia, who have turned to produc-ing cocaine instead. Of course, the environmental lobby might still approve if the environment was benefiting, but it is not: chemical runoff from the intensive farms in South Florida is dam-aging the Everglades.

Intensive farming is an unusually clear-cut case. Not all environmental problems will be automatically solved by free trade. One example is the tendency to monoculture: growing only rice, only coffee, or only wheat. This lack of biodiversity renders crops more vulnerable to pests and to fluctuations in the weather.

That might seem like an argument against free trade, since increased trade encourages countries to specialize in single crops for which they have a competitive advantage. But trade barriers are a terrible way to deal with the problem of intensive farming. First, local biodiversity and global biodiversity are both impor-tant, but national biodiversity is irrelevant: environmental prob-lems do not notice political boundaries. To the extent that lack of biodiversity is a problem, the solution is direct environmental regulation: the keyhole economics of chapter 5. Hoping that a trade barrier will fix the problem is ludicrous.

This is a special case of another important piece of trade theory. There will always (in theory) and usually (in practice) be an alter-native policy, which will fix the environmental problem more directly and efficiently than any trade barrier. Jagdish Bhagwati, an eminent trade theorist, comments in this context that "You cannot kill two birds with one stone." Trade barriers are a clumsy and damaging way to pursue worthwhile objectives, like a healthy environment.

Transport costs are another instance of Bhagwati's principle. Again, it seems superficially attractive to restrict international trade to cut down on the pollution caused by container ships and freight airplanes. Yet again, direct regulation in the form of an externality charge is the solution. Trade barriers attack the trans-port of goods across borders: but there is nothing especially en-vironmentally damaging about crossing a border. The transport costs of moving a CD player from Osaka harbor to the port of Los Angeles are less than the transport costs of moving it from the port of Los Angeles across to Arizona, or even into a branch of Best Buy in Los Angeles itself. The transport costs of some-body then driving to Best Buy and back home with the CD player are often higher yet, when the true environmental costs of con-gestion and pollution are figured in. Just because goods are moved within countries, or even quite locally, doesn't mean that the environmental costs of transporting them are small. Again, the Undercover Economist has to recommend policies that attack the problem directly: an externality charge would encourage the use of cleaner methods of transportation, whether within or between countries.

The final concern, then, is that trade is not bad in its own right but because it leads to environmentally damaging economic growth: that is, trade makes people richer, and this will damage the environment. This claim is worth some attention.

The most deadly and certain environmental problems of today- and possibly the most serious of the future, even given the threat of climate change-are also those that afflict the very poorest people in the world. One example is domestic pollution from wood-burning stoves, which causes blindness and fatal respira-tory conditions. Another example is unsafe drinking water, which kills millions. The cure for these environmental problems is eco-nomic growth, and trade can help.

Other pollutants, such as airborne particulates emitted from cars, do get worse as people get richer-for a while. Typically, this pollution becomes less serious after people earn around $5,000 a head (as in Mexico), because at this point they are rich enough to afford improved environmental standards, and they will de-mand them. Trade helps both indirectly, by boosting growth, and directly, because free trade in poorer countries has been as-sociated with the end of subsidies to heavily polluting prestige industries such as petrochemicals and steel as well as the import of new, cleaner technologies.

It is true that energy consumption, and with it carbon dioxide emissions and the threat of climate change, do increase long af-ter people reach $5,000 a head. It seems likely, although we do not know for sure, that the richest countries in the world are just reaching the point where even energy consumption per head is about to stop rising. After all, our cars and domestic appliances get more efficient every year, and when we all have two cars and a large air-conditioned house, it's hard to see where extra energy demand will come from.

If we are honest, then, the argument that trade leads to economic growth, which leads to climate change, leads us then to a stark conclusion: we should cut our trade links to make sure that the Chinese, Indians, and Africans stay poor. The question is whether any environmental catastrophe, even severe climate change, could possibly inflict the same terrible human cost as keeping three or four billion people in poverty. To ask that question is to answer it.

Does this mean that we are doomed to choose between mass starvation and environmental Armageddon? Not at all. There is plenty we can do to aid the environment without using the coun-terproductive method of restricting trade. Externality taxes have already cut sulfur emissions in the United States (and will do so in China, too). They could also be used to cut carbon dioxide emissions and fight climate change; if we demanded the commit-ment from our leaders, this could be done. It might not even be that expensive. We could make a start by stopping outright sub-sidies of fossil fuels; Germany, a country fond of its green cre-dentials and a firm supporter of the Kyoto protocol on climate change, spends $86,000 per coal miner protecting its coal indus-try from international competition.

What, really, are we to make of the environmentalist attack on free trade? We've seen that the race to the bottom is nonexist-ent; that polluting industries are still based in rich countries, rather than poor countries; that environmental standards are rising in China, Brazil, and Mexico, the major destinations for foreign investment into poor countries; that protectionist measures such as those on farming, steel, and coal, which sometimes claim envi-ronmental justifications in fact are tremendously harmful to the environment; that taxes on transportation fuels are consistent with free trade and much better for the environment than trade re-strictions; and that the worst environmental problems, at least of today, are caused by poverty not wealth. The environmentalist movement should be manning the barricades to demand global free trade immediately. One day, perhaps they will.

Sweatshops, or, is trade good for the poor?

Nice running shoes! But don't they make you feel a little, well, guilty?

A number of multinational companies have been accused of subjecting workers in developing countries to poor working con-ditions. Nike is very frequently named and is the target of a num-ber of campaigns. To consider just one particularly splendid example, an enterprising student at MIT named Jonah Peretti took advantage of Nike's offer to create customized shoes. In his own words: Confronted with Nike's celebration of freedom and their statement that if you want it done right, build it yourself, I could not help but think of the people in crowded factories in Asia and South America who actually build Nike shoes. As a challenge to Nike, I ordered a pair of shoes customized with the word "sweatshop."

Even economists think this is pretty funny. Nike did not; Jonah Peretti did not get his customized shoes.

Jonah Peretti and his sympathizers have rightly drawn atten-tion to the fact that in developing countries, workers endure ter-rible working conditions. Hours are long. Wages are pitiful. But sweatshops are the symptom, not the cause, of shocking global poverty. Workers go there voluntarily, which means-hard as it is to believe-that whatever their alternatives are, they are worse. They stay there, too; turnover rates of multinational-owned fac-tories are low, because conditions and pay, while bad, are better than those in factories run by local firms. And even a local com-pany is likely to pay better than trying to earn money without a job: running an illegal street stall, working as a prostitute, or comb-ing reeking landfills in cities like Manila to find recyclable goods. Manila's most famous landfill, Smokey Mountain, was closed down in the 1990s because it had become such an embarrassing symbol of poverty. But other garbage dumps continue to support scavengers who can earn up to five dollars a day. Over 130 people were killed in a landslide at Payatas, another dump in Manila, in July of 2000. Even those ways of eking out an urban living are attractive compared with scraping an existence in rural areas. In Latin America, for instance, while extreme poverty is relatively rare in cities, it is commonplace in the countryside. Anybody with a scrap of concern for other human beings should be disgusted at the situation, but they should also recognize that Nike and other multinational companies are not its cause.

The solution to this poverty is not going to come by boycott-ing shoes and clothes made in developing countries. On the contrary, as countries like South Korea have opened up to multi-national companies, slowly but surely they have become richer. As more multinational companies have set up factories, they have competed with each other for workers with the best skills. Wages have risen, not because the companies are generous but because they have no choice if they want to attract good workers. Local firms learn the latest production techniques and become big employers, too. It becomes more and more attractive for people to work in a factory and to acquire the necessary skills: education improves. People move away from the countryside, raising rural earnings for those who remain to a more tolerable level. Formal employment is easier to tax, so government revenues rise and infrastructure, health clinics, and schools improve. Poverty falls, and wages inexorably rise. After adjusting for inflation, the typi-cal Korean worker earns four times more than his father did twenty-five years ago. Korea is now a world technology leader and rich enough to subsidize the hell out of its agriculture like the rest of the rich countries in the world. The sweatshops have moved elsewhere.

It is difficult to be unmoved by conditions in sweatshops. The question is how to get rid of them. Most economists believe that sweatshops are good news in two ways: they are a step up from the immediate alternatives, and they are also a rung on the ladder to something better.

But plenty of people think otherwise. William Greider, a left-of-center political commentator, praised New York's city coun-cil for passing a resolution in 2001 requiring that the city refuse to buy uniforms for police and firefighters unless they were pro-duced under "decent wages and factory conditions." Such a reso-lution can only harm sweatshop laborers: they'll be out of a job and-literally, for those in Manila-back on the trash heap. Of course, it will be good news for textile workers in rich countries, who'll get the business instead. I doubt it is a coincidence that the city council resolution was drafted by UNITE, the Union of Needletrades, Industrial, and Textile Employees, exactly the people who would benefit if imports of textile goods decreased. (If you find my story unconvincing and want a clear conscience when buying clothes, why not visit UNITE's website and order "union-made, sweat-free clothing" at

The power of special interest groups Harry Truman is credited with the request for a one-handed economist, who would be unable to give advice and then say, "on the other hand"; Ronald Reagan, who always had better speech-writers, once said that there should be a version of trivial pursuit for economists "with one hundred questions and three thousand answers."

True enough, economists don't always agree. But it is a rare economist who will not be enthusiastic about the merits of free trade. The near universal opinion among economists is that glo-bal free trade would be a great advance, and that even if other countries refuse to lower trade barriers we would be idiots not to lower our own.

Economists estimate that the benefits of free trade are enor-mous. For example, when Japan was forced by the United States to open its ports to trade in the 1850s, following decades of isola-tion, it began to export silk and tea to an eager world market, in exchange for cotton and woolen clothes, which were cheap in-ternationally but expensive in Japan. As a result its national income increased by two-thirds.

More recently, the Uruguay round of trade negotiations, which reduced trade barriers across the world from 1994, is estimated to have increased world income by roughly $100 billion. If tariffs on agricultural and industrial goods, and services, were reduced by a third, there would be a further gain of $600 billion-about 2 percent of world income. Removal of all trade barriers would deliver over 6 percent of world income. These are surely under-estimates of the benefits, because they include only the most straightforward gains of bringing cheaper goods from world markets into protected markets: ergo, the straightforward appli-cation of David Ricardo's theory of comparative advantage. Other advantages are likely, since, contrary to popular belief that trade is the friend of the multinational, free trade also destroys the scarcity power of big firms by subjecting them to international competition. It encourages the use of new ways of working and better technology. Some people even think it promotes peace by giving trading nations powerful reasons not to go to war with each other.

If free trade really has so many benefits, why does the world still have so many trade barriers? Why don't politicians grab easy votes by lowering trade barriers? Why did the Japanese have to be forced to implement a policy that almost doubled the country's income? Unfortunately, in most countries, rich and poor, special interest groups with disproportionate influence have reasons to oppose free trade.

Tariffs tend to impose a small and disguised cost on most of the country, in the form of higher prices, and a further cost on foreigners, who do not have a vote. The benefits of the tariffs are substantial for a narrowly concentrated group of people, often sectors with organized unions and large businesses. If voters are well informed and fully understand economic theory, then in a democracy the protectionists will be voted down. But if people are not well informed about the costs of tariffs imposed on them, then given the small effect on any particular voter of any particular tariff, the tariff may not even enter their thoughts-especially if the campaign for trade restrictions is disguised as a campaign about sweatshops. Reform efforts may also be stymied by inertia and nervousness on the part of these poorly informed voters, while the special interest groups are well aware that they stand to gain from protection and find it worthwhile to devote substantial funds and lobbying effort to defend their narrow interests.

In a healthy democracy special interests should have less power than in a fragile democracy or an undemocratic country, like Cameroon. If special interest groups are part of the explanation behind trade barriers, we might expect countries with better-established democracies to have lower trade barriers.

The numbers tell us exactly that. In 1999, the United States had average tariffs of 2.8 percent. In the European Union, aver-age tariffs were 2.7 percent. In the emerging tiger, Korea, 5.9 percent. In Argentina, allegedly a paragon of economic reform, 10.7 percent. In the giant economies of China and India, 15.7 percent and 29.5 percent respectively. We have already heard that the poverty and corruption of sad little Cameroon is not being relieved by staggering tariffs averaging 61.4 percent.

It seems that even if we are able to pressure our politicians to do the right thing for everyone by reducing tariffs, an equal re-sponsibility lies with the governments of these poor countries. Why do they maintain tariffs, which harm their citizens? Per-haps because international isolation is good for political stability. The world's longest-serving political leader is Fidel Castro, surely president-for-life as a result of sanctions from the United States, which have had the opposite effect to that desired. Saddam Hussein's rule seemed stronger than ever after a decade of sanc-tions: it was external force, not internal change that removed him. Myanmar and North Korea are international pariahs with frustratingly stable governments.

This explains why the Japanese had to be forced to liberalize and vastly increase the country's income. The policy of isolation was not designed for the good of the Japanese people but for the good of their rulers, the Tokugawa clan. Historian Janet Hunter concludes: Mechanisms of political control were backed up by a harsh system of regulation, which attempted to minimize all so-cial, political and economic change among the population at large. . . . Potentially damaging foreign influences were minimized after 1640 by cutting off the country from virtu-ally all contact with the outside world.

While these careful measures succeeded in preserving Tokugawa rule for some two and a half centuries, they could never hope to prevent all social, economic and political change. . . . The reopening of foreign contacts with the United States and the imperialist powers of Europe rapidly brought matters to crisis point. . . . From 1853 [during] the crisis over US demands for formal relations . . . Tokugawa authority went rapidly downhill.

Special interest groups have tried to define the trade policy of the United States, with varying success. Tariff barriers have to be approved by Congress, and congressional representatives de-fend the interests of their own constituents, demanding protec-tion of farming in Iowa, steel in Pennsylvania, sugar in Florida, or auto-manufacturing in Michigan. By trading votes with each other they could get tariff after tariff passed, and if the president came back from some trade negotiation with a treaty in his hand reducing trade barriers, they would refuse to ratify it.

Presidents tend to be more enthusiastic supporters of free trade because they need votes from the whole nation, and so would be relatively less likely to favor locally concentrated protectionism. Sure enough, after 1934, when President Roosevelt persuaded Congress to grant him and future presidents rolling preapproval for trade treaties, tariff rates in the United States fell from about 45 percent to about 10 percent in two decades. Now that the president has responsibility for trade policy, they have been falling ever since.

Of course, presidents are not totally immune from special-interest politics: the importance of Florida's vote in recent presidential elections guarantees protection of sugar producers at the expense of the nation. No political system is perfect, but democracies tend to favor trade more than others, because lowering trade barriers is good for the ordinary person.

How can we make things better for the poor?

You will have gathered by now that I am a big fan of both coffee and beer. My favorite coffee comes from Timor. My favorite beer comes from Belgium. My life is much happier because of the Timorese coffee pickers and the Belgian brewers. I hope that I have done enough to persuade you that their lives are happier because of me. A fundamental characteristic of the kinds of social interactions that economists usually study is that . . . everybody wins.

Unfortunately, some win much more than others. I am doing well, and so are the Belgians. The Timorese are not. They would be doing worse if it were not for trade, but that is not enough for us to relax and forget about them.

Coffee growers are poor because they have no scarcity power. There are many places where coffee can be grown. Growing mass-market coffee requires hard work but little skill. No individual coffee grower has any power to affect the market price. Even if countries can act in unison, they have no scarcity power: when the top coffee producers attempted to set up a cartel controlling two-thirds of world coffee production, the Association of Coffee Producing Countries, it failed and shut down. Whenever the cartel succeeded in raising prices, new farmers in new countries quickly found it attractive to start growing coffee. Vietnam is a great example. A few years ago, coffee was hardly grown in the country at all, but now it is the world's second-largest producer of coffee. A cartel designed to exploit scarcity power can work only if new producers cannot easily enter the market.

We should not forget that one of the reasons it is so easy for poor farmers to produce coffee is that coffee does not grow in France or Florida, and so rich farmers are not interested in agi-tating for high tariffs. Unprocessed coffee is relatively free of trade barriers, so one further effect of trade barriers on beef and rice and grain is that farmers in poor countries are forced into niches like coffee, which cannot sustain all of them.

Because coffee is such an easy business to get into, I am willing to make a prediction: coffee farmers will never be rich until most people are rich. If coffee farmers became rich but other farmers or workers in sweatshops were poor, the others would switch to farming coffee. High coffee prices will always collapse, until work-ers in sweatshops become well-paid blue-collar workers in skilled manufacturing jobs, who don't find the idea of being even a pros-perous coffee farmer attractive.

We need to understand that narrowly focused initiatives on "fair trade coffee" or "sweatshop-free clothes" will never make a substantial improvement to the lives of millions. Some, like the campaign to prevent New York City from buying uniforms from poor countries, will actively cause damage. Others, like the nu-merous brands of fair trade coffee, are likely to improve the in-come of a few coffee producers without causing a great deal of harm. But they cannot fix the basic problem: too much coffee is being produced. At the slightest hint that coffee farming will become an attractive profession, it will always be swamped with desperate people who have no alternative. The truth of the mat-ter is that only broad-based development of poor countries will ever lift the living standards of the very poor, increase coffee prices, and improve wages and labor standards in shoe factories.

Can such broad-based development happen? Undoubtedly. Billions of people in the developing world are much richer than their parents were. Life expectancy and education is rising, even in countries that are not getting richer. This is only partly because of free trade; there is far more to the story. For a developing economy to grow strongly, many different reforms have to be put in place. There is one country in the world that has done this for more people, more quickly, and from a worse starting point than any in history. It is where we shall finish our journey.


How China Grew Rich

"My God," I said.

I was standing with my wife in the "Renmin Gongyuan," the People's Park, in the middle of Shanghai. Renmin Gongyuan is the Central Park of the twenty-first century. It gave me the same dizzying rush as my first visit to Manhattan. Walking out into the space of the park allowed us to feel the full visual impact of Shanghai's skyscrapers. One was a modern-day Chrysler build-ing, with a striking crown of four mirrored tines meeting at a perfect point; the entire tower was rotated forty-five degrees around its axis so that the top forty floors sat at a diagonal to the bottom forty. Another building boasted a vast glass atrium hang-ing suspended sixty floors above the city. Not every design was in the best of taste: one had a domed penthouse that looked like it had been stolen from the set of a fifties flying-saucer movie. There must have been thirty skyscrapers, half a dozen of which were on an incredible scale. All of them were brand new.

"My God," said Fran.

"When were you last in Shanghai?"

"Ten years ago."

"How many of these buildings were up ten years ago?" She thought for a moment.

"You see that one?"

"The boxy forty-story office building over there?"

"No. That one just beneath it." She was pointing to a twelve-story red-brick building, dwarfed on every side by more modern constructions.

Chapter end

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