Speech

A Perspective on U.S. International Trade LouisvilleSocietyofFinancialAnalysts Louisville,Kentucky November19,2003 PublishedintheFederalReserveBankofSt.LouisReview,March/April2004,86(2),pp.1-7 Iam very pleased to be back in Louisville policies?Second,whatarethereasonsforpublic again, to meet tomorrow with the board of opposition?Third,whatcanbedonetonarrow theLouisvillebranchoftheFederalReserve thegapbetweeneconomistsandthoseopposed BankofSt.Louisandtodaytodiscusstrade tofreetrade? issues with the Louisville Society of Financial Beforeproceeding,Iwanttoemphasizethat Analysts. Trade is an important issue for the theviewsIexpressherearemineanddonot United States and for the entire world. My pur- necessarilyreflectofficialpositionsoftheFederal pose is to review the fundamentals of the argu- ReserveSystem.Ithankmycolleaguesatthe ment for free trade in the hope that returning to FederalReserveBankofSt.Louisfortheircombasics will be helpful to public understanding ments—especiallyCletusCoughlin,vicepresident of trade issues. intheResearchDivision,whoprovidedspecial Awell-knownjokesaysthatyoucouldlay assistance.However,Iretainfullresponsibility alltheworld’seconomistsendtoendandthey forerrors. stillwouldn’treachaconclusion.AndHarry Truman’sfamouspleawasforaone-armedeconomist.Infact,thereisnoissueonwhichecono- THE OPINIONS OF ECONOMISTS mistsaremorecloselyinagreementthanthe AND THE GENERAL PUBLIC ON fundamentalcaseforfreetrade.Economistsend FREE TRADE toendseeeyetoeyeonthisissue,andthetwoarmedeconomistdoesnotgothroughtheusual A1990surveyofeconomistsemployedinthe dance“ontheonehand,ontheotherhand”when UnitedStatesfoundthatmorethan90percent discussingthefundamentalcaseforfreetrade. generallyagreedwiththepropositionthattheuse Therearespecialcasesandtemporaryexceptions oftariffsandimportquotasreducedtheaverage thatmodifythecaseforfreetrade,buttheydo standardofliving.1Theseresultsaremorethana notchallengethebasicargument. decadeold;however,feweconomistswoulddis- Despitethisconsensusamongeconomists, agreewiththefollowingstatementthatappeared substantialpublicoppositiontoreducingtrade in2001:“Theconsensusamongmainstreameconbarriersexists.Infact,oppositioncanbefound omistsonthedesirabilityoffreetraderemains atboththeleftandrightends—andthemiddle— almostuniversal.”2 ofthepoliticalspectrum. Ontheotherhand,thegeneralpublicismuch Inmyremarkstoday,Iwilladdressthreeques- morereluctanttoreducetradebarriersthanecontions.First,whydoeconomistssupportfreetrade omistsare.Well-publicizedprotestsagainstmeet- 1 SeeAlston,Kearl,andVaughan(1992). 2 SeeMaydaandRodrik(2001,p.1). 1

INTERNATIONALTRADEANDFINANCE ingstodiscussthereductionoftradebarriershave shipswiththerestoftheUnitedStates?Once becomecommon.Theconcernaboutfreetrade again,theanswerisno.Byspecializingincertain policiesisnotlimitedtotheprotestors.Ina1998 activities,regionsaswellasindividualsareable survey,only32percentofthegeneralpublicwas tomaximizethevalueofworkeffort.Byproducinfavorofeliminatingtariffsandotherimport ingmostgoodsandservicesforsaletoothers,we restrictionstoachievelowerpriceswhenthecost tradeouroutputforthegoodsandservicesthat wouldbethatcertainjobsinimport-competing wearenotespeciallyadeptatproducing. industrieswouldlikelybeeliminated.3Mean- Thewisdomofspecializationandexchange while,49percentweremoresympathetictothe thatholdsforindividualandinterregionaltrade argumentthattariffsarenecessarytoprotectjobs. holdsforinternationaltradeaswell.Nearly200 yearsago,theeconomistDavidRicardodemonstratedthegainsfromtrade.Toexplaintheprin- WHY ECONOMISTS SUPPORT cipleofcomparativeadvantageheusedthe FREE TRADE POLICIES exampleofEnglandandPortugaltradingcloth andportwine.Thetrademadebothcountries Underlyingtheconsensusamongeconomists betteroff.HisworkwasageneralizationofAdam isthejudgmentthatnationsarebetteroffwith Smith’sgreatinsightsconcerningthegainsfrom freetradethanwithpoliciesrestrictingtrade. exchange. BeforeIbegindiscussingtheanalyticsofinter- Ricardo’stheoryofcomparativeadvantage nationaltrade,let’sbeginbythinkingaboutour showedthatnations,similartoindividuals,gain ownbehavior.Mostofushavejobs.Withthe fromtrade.Assumingthatrelativeprices,such incomefromourjobs,webuynumerousgoods asthepriceofanapplerelativetothepriceofa andservices—food,clothing,fuel,houses,entershirt,differacrosstwocountries,thenbothcountainment,andsoon.Oureconomicbehavior triescangainfromtradingwitheachother.An reflectsthefactthatweliveinahighlyinterimportantpointisthat,eveniftheaverageworker dependentworldinwhichjobsarespecialized. inonecountryismoreproductiveinproducing Atypicalhouseholdbuysgoodsandservicesproeachandeverygoodthantheaverageworkerin ducednotonlyinitshomestatebutalsothroughtheothercountry,gainsfromtradearepossible. outtheUnitedStatesandtherestoftheworld. Thegainsfromtradedependoncomparativeand Indeed,eachofusdirectlyconsumesonlyatiny proportionofourproduction—themostimportant notabsoluteadvantage. exceptionishouseholdservices,suchascleaning, IbelieveitwasPaulSamuelson,thefirst cooking,andyardcare.Wouldourlivesbebetter NobelLaureateintheUnitedStates,whogave ifeachofusindividuallygrewallofourfood, thisexample:Supposeaneconomistisabrilliant madeallourclothes,pumpedandrefinedall theoristandthebesttypistintheuniversity. ouroil,builtourownhousesandmademovies? Shouldtheeconomisttypeherownpapers? Obviously,theanswerisno.Eventheearlyset- Clearly,theeconomistwillbemoreproductive tlersontheAmericanfrontierreliedonothersto ifshehiresasecretarytodothetyping;she,the makemanyoftheirtools,forexample.Pureself- economist,hasacomparativeadvantageindevelsufficiencyisarecipeforaStoneAgestandard opingeconomictheoryandhe,thesecretary,has ofliving. acomparativeadvantageintyping. Broadeningthearenafortradejustalittle Thesameprincipleofcomparativeadvantage wouldhelpjustalittle.Wouldtheresidentsof holdsforacountry.IfPortugalcanproduceboth Kentuckybebetteroffiftheytradedonlywith portwineandclothwithfewerhoursoflabor othersinKentuckyandhadnoeconomicrelation- inputperunitofoutputthancanEngland,itwill 3 SeeReilly(1999). 2

APerspectiveonU.S.InternationalTrade stillpayPortugaltoproducewineandtrade Anotherrouteforeconomicgrowtharisesdue withEnglandforcloth,assumingthatEnglandis totheincreasedcompetitivepressuresassocicomparativelymoreefficientinproducingcloth atedwithinternationaltrade.Byreducingtrade thanwine.Thepropositiongeneralizestomany barriers,firmsthatwerepreviouslyprotectedare goodsandmanycountries.Aslongasresources nowfacedwithcompetitorsand,unlessthey moveintothoseactivitiesinwhichthecountry becomemoreefficientandresponsivetoconismostadvantagedorleastdisadvantaged,then sumers,theywillperish.Theresultisthatproalltradingpartnerscanbebetteroffbytrading ductiveresourceswillbeusedmoreefficiently someoftheoutputthattheyproduceatrelatively inproducinggoodsthatconsumersdesire. lowcostforsomeoftheoutputthattheyproduce Afinalroutearisesbecause,astradebarriers atrelativelyhighcost. arereduced,thesizeofthemarketthatafirm Sofarmydiscussionhasfocusedonwhat facesincreases.Insomecases,firmsmaybeable economiststermthe“staticgains”fromtrade. toexpandoutputatlowerper-unitcosts.The Thesegainsarisefromthereallocationofexisting largermarketsizemightalsospurincreased productiveresourcesandthesubsequentinterresearchanddevelopmentspendingthatcould nationaltrade.Freetrademightalsogenerate spuradditionalgrowth. dynamicgainsbystimulatingeconomicgrowth. Howdoesthetheoryofinternationaltrade Economictheorysuggestsanumberofroutesby workinpractice?Specifically,doesinternational whichfreetradestimulateseconomicgrowthby tradeallowacountrytoachieveahigherreal increasingeitherproductiveresourcesortechincomethanitwouldhaveotherwiseachieved? nologicalchange.Inpractice,theseincreasesare Theshortanswerisyes,butitishardtopindown oftentriggeredbythespurofcompetitionwhen bypreciselyhowmuch.4Foracountryasawhole, countriesliberalizetrade.Therearemanysuccess thegainsareboundtobelessforalargecountry storiesofgrowththroughtrade,andnosuchstosuchastheUnitedStatesthanforasmallcountry riesofgrowththroughself-sufficiencyasfarasI suchasBelgium.Clearly,thecoststoBelgiumof know. cuttingoffalltradewiththoseoutsideitsborders Animportantgrowthmechanismariseswhen wouldbehuge,aswouldalsobetrueforastate traderaisesacountry’srealincome,someof withroughlysimilarpopulation,suchasOhio. whichissaved.Theincreasedsavingraisesthe Thereisanenormousprofessionalliterature availabilityoffundsforinvestmentspending, oncasesinwhichsomeprotectionmightbejuswhichaugmentsacountry’sproductivecapital tifiedorjustifiedforashortperiodoftime.My stock.Developingcountrieswithrelativelylibownjudgmentisthatfewoftheseargumentsreally eraltraderegimesalsocommonlyattractcapital standuptorigorousanalysis.Ibelievethatthe fromabroad,furtheraugmentingresources devotedtocapitalformation. correctstartingpointforanalysisisalwaysthat Freetradealsoincreasesthepossibilitythat traderestrictionimposesnetcostsonsociety. afirmimportingacapitalgoodwillbeableto Thatis,protectionproducesgainsforsomeand locateasupplierwhowillprovideagoodthat costsforothers,butthenetofgainsandcostsis morenearlymeetsitsspecifications.Thebetter negative. thematch,thelargeristheincreaseinthefirm’s Theprofessionalliteratureprovidesestimates productivity.Arelatedideaisthatinternational ofthecostofprotectingavarietyofindustries.It trademayspurthediffusionoftechnologyby isnotuncommontofindestimatesindicating increasingthecommercialcontactsbetween thatthecostperjobsavedismorethan$500,000 employeesinfirmsfromdifferentcountries. orinsomecasesevenaslargeas$1million. 4 SeeFrankelandRomer(1999)andIrwinandTerviö(2000). 3

INTERNATIONALTRADEANDFINANCE REASONS FOR PUBLIC tiondemandedit.Newjobsappearedinsouthern mills,liftingmanyworkersoutofruralpoverty. OPPOSITION Thesituationwasoneof“usagainstthem”but Ifthelogicandevidencesupportingfreetrade theusandthethemwereinthesamecountry, issoconvincingforeconomists,whyisthegen- thoughindifferentregions.Insomecases,governeralpublicreluctanttoembracefreetrade?I’ll mentaidsoftenedtheblowsufferedbynewly developthreethemesinattemptingtoanswerthis unemployedworkersinNewEngland,butfor question.Thefirstthemeisthatmanypeopledo themostparttheyandtheirfamiliesborethe notunderstandthebenefitsoffreetrade.I’llcall costsoftheindustrialtransformation. this“ThemeLU,”where“LU”standsfor“lackof Oncethetransformationwascomplete,both understanding.”Thesecondthemeisthatcertain NewEnglandandtheSouthgainedfromthe industrygroupsareabletoapplytheirpolitical newpatternsoftradewithintheUnitedStates. powertogainprotection,usuallybecausethose Theregionsasawholegained,butobviously whobearthecostsofprotectionareinadequately manyindividualsandindividualfirmsinNew representedinthepoliticalprocess.I’llcallthis Englanddidnot.Tradedoescreatelosers,even “ThemePP,”where“PP”standsfor“political thoughregionsasawholegain. power.”Mythirdthemeisthatprotectioncan Thegainsfrominternationaltradeareharder resultfromafullyreasonedpreferencetopaythe tounderstandthanthegainsfrominterregional coststoprovideprotectionbecausethecostsare trade.Withinacountry,itiseasytoseethattrade spreadacrossawidenumberofpeopleand createsjobsinsomeregionsanddestroysjobsin becausethosewhoareprotectedwouldbeseverely otherregions.Someoftheadjustmentsfrominterimpactedbyfreetrade.I’llcallthis“ThemeRP,” nationaltradeinvolvejobcreationabroadand where“RP”standsfor“reasonedpreference.” joblossesathome.Thegainsfromsuchtradeare Agoodplacetobegindevelopingthese muchhardertounderstand.Thislackofunderthemesistoreflectfirstonthecaseforfreetrade standing—myThemeLU—hasalottodowith withintheUnitedStates.Oneofthegreatachieve- supportforrestrictionsoninternationaltrade. mentsoftheU.S.Constitutionwastobantrade Letmetrytodispelsomeofthepoorunderrestrictions,withminorexceptions,acrossstate standingofthisissue.I’llfocusonjobgainsand lines.SincetheearlydaysoftheUnitedStates, losses.Onthesurface,inanygivencountryit tradewithinthecountryhasbeenagreatsource appearsthatexportsaddjobsandimportscost ofeconomicgrowth.Someofthetransitionshave jobswhenworkersinthehomecountryfindthat beenpainfulforregionslosingjobs,andyetpub- theycannotcompetewithlow-costgoodsfrom licsupportforfreetradewithintheUnitedStates abroad.So,itappearsthatacountrycouldadd hasneverbeenshaken.NewEngland,especially, jobsintotalbysubsidizingexportsandblocking hasseenmanyofitsmanufacturingindustries imports.Let’sfollowthelogicofjustsuchapolicy, movetootherpartsofthecountryandoutside andlet’sassumethatnocountriesabroadretaliate. theUnitedStatesaswell.Themovementofthe Let’salsoassumethatthehomecountryiscapable textileindustrytotheSouthisthemostfamous ofproducingallthegoodsthathadbeenimported, example.Tothisday,atravelerinNewEngland sothatblockingallimportsdoesnotcreateany canseenumeroustextilemillsbuiltinthe19th untenableshortagesofparticularcommodities. centurystillstanding,butconvertedtootheruses. Supposeexportersinsistonpaymentindol- ThejoblossesinNewEnglandwerepainful, larsforthegoodstheysell.Howwillforeigners andittookmanyyearstorestorefullemployment obtaindollarsoncealltheirexportstotheUnited there.Workershadtoretrain,andsomefound Statesarecutoff?WillU.S.bankslendthedollars, thattheycouldneverrestoretheirpreviouslevel eventhoughforeignfirmshavenopossibilityof ofincome.Yetthenationsupportedtheindustrial sellinggoodsintheUnitedStatestoobtaindollars transformation,andnotjustbecausetheConstitu- torepayloans?Theanswerisobvious. 4

APerspectiveonU.S.InternationalTrade OrperhapsU.S.exporterswillacceptforeign so.Industriessufferingahandfulofjoblosses,and currencyinpaymentforthegoodssoldabroad. consumerspayingafewpenniesmoreforthe Whatwilltheydowiththeforeigncurrencies? goodstheybuy,maynotevennoticethelosses. Thecurrenciescannotbeusedtobuygoodsto Inanyevent,becausethelossesareindividually importintotheUnitedStatesbecauseallimports small,thosebearingthelosseshavenoincentive areblocked.Theforeigncurrenciescannotbe toorganizepoliticallytofightprotection.Butkeep soldabroadfordollarsbecauseforeignershave inmindthatajoblosshere,andtwoorthree nodollarstosellasaconsequenceofnotbeing there,canadduptomanyjoblossesperjobsaved abletoearndollarsthroughsaleofgoodstothe inaprotectedindustry. UnitedStates.Exporterscouldusetheforeign Mythirdthemeisthatfullyinformedvoters currenciestobuyassetsabroad,suchasland, mightrationallypreferprotectioninsomecases. butpresumablyatsomepointtheywilltireof Beingunemployed,regardlessofitslength,isa exchangingalltheirgoodsforforeignassets. noteworthycostthatgeneratesoppositiontopro- Thisargumentmakesclearthattheheartof posedtradepolicychangesfromboththoselikely theargumentagainstrestrictingimportsisthat tobeadverselyaffectedandthosewhoempathize doingsorestrictsexports.Everyexportingfirm withthem. andeveryworkeremployedbysuchafirmought Considerthepolicychoicesavailableto tohaveanintenseinterestinmaintainingfree policymakerswhoaretryingtoprotectjobs.There trade.Theconnectionmayseemremote,butitis arereallyonlythreeoptions.Oneistoswallow real:everydollarofblockedimportsisalso,atleast hardanddonothing.Thisoptionmaysound eventually,adollarofblockedexports.Topoint cruel,butthefactisthatthegovernmentleaves outthefollyoftheviewthatexportsaregoodand familyandmarketstohandlemanytypesofmisimportsbad,a19thcenturyeconomistsatirically fortunesthatbefallus.Asecondistoprovide wonderedwhetherthebestoutcomewouldbe adjustmentassistancetohelpworkersmakethe forshipstransportinggoodsbetweencountries transitionfromindustriessufferingintenseimport tosinksothatallcountriescouldhaveexports competitiontonewindustries. withoutimports. Athirdoptionistoimposeimportrestrictions. Itisclearthatimportsandexportsarecon- AsIhavealreadyemphasized,theserestrictions nectedinafundamentalway.Nevertheless—and imposecostsontherestofsociety.Anaturalquesthisisakeypoint—adollarofblockedimports tioniswhyindividuals,includingthosewith hasconcentratedpositiveeffectsfortheprotected relativelylowincomes,shouldbearthecostsof industrybutdiffusenegativeeffectsacrossall maintainingjobsinotherindustries.Thequestion exportindustries,amountingtopenniesperitem isparticularlypointedwhenworkersinprotected foranygivenexportindustry.Intermsofjobs, industriesareearningwagesabovethenational blockingimportshasobviousjobbenefitsforthe average. protectedindustry,whereasthejoblossesfrom Insomecases,certainly,protectionimproves reducedexportsarespreadwidelyacrossmany thejobandincomeprospectsoflow-income industries.Traderestrictionproducesconcen- workers.Manyvotersdoappearwillingtosuptratedbenefitsandextremelydiffuseandhardto porttraderestrictionstoprotectsuchworkers. understandcosts.Thecostsarebornebyexport Protectioninthesecircumstancesseemstofit firmsandtheirworkersandbyconsumerswho myThemeRP—thatvotershaveareasonedprefpayhigherprices. erencetobearthecostsofprotectinglow-income Thisfact,thatprotectionproducesconcen- workers.Thewillingness,therefore,tosupport tratedgainsanddiffuselosses,isthesourceof traderestrictionsmayinsomecasessimplyreflect ThemePP.Industriessufferingfromimportshave aconcernforothers. agreatincentivetoseekredressthroughthepoliti- Thissenseofcommunitymayextendbeyond calprocess,andtheyareoftensuccessfulindoing U.S.borders.ManyU.S.consumersappearwill- 5

INTERNATIONALTRADEANDFINANCE ingtopayhigherpricesforitemsproducedunder grossdomesticproductareassociatedwith betterworkingconditionsindevelopingcountries. improvingenvironmentalconditions;wealthier Moreover,mostAmericansfavorlinkinglabor societiescananddospendmoreonpollution standardstotrade.Forexample,the1999Program control.Theturningpointvariesforthespecific onInternationalAttitudessurveyfoundthat93 pollutant,butinalmosteverycasetheturning percentofrespondentsfeltthataspartofinterpointoccursatapercapitaincomeof$8,000or nationaltradeagreementscountriesshouldbe lessin1985dollars.Thus,raisingtheincomeof requiredtomaintainminimumstandardsfor poorcountries,adirectresultofincreasedinterworkingconditions.5However,thislinkagemay nationaltrade,maybethemostimportantfactor insteadreflectself-interest.Byeffectivelyraising inimprovingenvironmentalconditionsinlowthecostofitscompetitors,higherlaborstandards incomecountries. wouldservetheinterestsofthosebeingharmed Despitetheinsightsfrommysecondandthird bytheimportsfromlow-costcompetitors. Similartolinkinglaborstandardstotrade, themes,IreturntoThemeLU—thatattitudes somesentimentexistsforlinkingenvironmental towardtradeareheavilyinfluencedbyalackof standardstotrade.Underlyingthissentimentis understanding.Quitegenerally,thepublicfails abeliefthatbystimulatinggrowth,tradecon- toseeanybroad-basedgainsfromtrade.Forexamtributestoenvironmentalproblems.Someofthe ple,the1999ProgramonInternationalAttitudes concernabouttheenvironmentcanbelinkedto surveyfoundthatAmericansviewedthebenefits U.S.jobs.Oneargumentisthatlowerenviron- oftradeasflowingtobusiness,ratherthanto mentalstandardsabroadmaketheU.S.aless- themselvesortoAmericanworkersingeneral. competitivelocationandinducefirmstorelocate. Althoughthesurveydidnotaskrespondents Thus,byharmonizingenvironmentalstandards, whethertheythoughtgainsfromtradewentto thedisadvantagesofproductionintheUnited foreigners,I’mguessingthatmanyAmericansdo Statesduetoenvironmentalcontrolswouldbe believethatforeignersharvestthegainsandthe eliminated. UnitedStateslosesfromtrade. Manyeconomists,however,wouldargue Thedifficultyofenvisioningbroad-based thatenvironmentalproblemsshouldbehandled gainsfortheUnitedStatesisunderstandable.It nationallyandthatinternationaldifferencesin isdifficultforthegeneralpublictoperceivethat environmentalstandardsarenatural.Moreover, reducingimportbarrierslowersprices,raises economicgrowthprovidesboththeresourcesand averagewages,andimprovesjobsacrossawide thedemandtoraiseacountry’senvironmental rangeofU.S.industries.Itisalsodifficultforthe standards.Infact,theidealtradeoffsbetween generalpublictoenvisionhowfreertradewill economicgrowthandenvironmentalqualitythat spureconomicgrowththatwillimproveitswellacountrymightmakearelikelytodependonits being.BecauseU.S.internationaltradeisalready levelofeconomicdevelopment.Forexample, largelyfree,thegainsforanaverageU.S.indiresearchbyeconomistsGeneGrossmanandAlan vidualoffosteringfreetradearesmall.Inother KruegerfindsaninvertedU-shapedrelationship words,thegainsfromevenfreertradeasashare betweenpollutionandeconomicdevelopment.6 oftotaleconomicactivityintheUnitedStates Forverypoorcountries,increasesinpercapita arerelativelysmall;however,thetotalgainsare grossdomesticproductareassociatedwithwors- substantial. eningenvironmentalconditions.Beyondsome Thegeneralpublicisalsoconcernedabout incomelevel,however,increasesinpercapita thelargeandincreasingU.S.tradedeficit.Some 5 SeetheUniversityofMaryland,ProgramonInternationalPolicyAttitudes(PIPA). 6 SeeGrossmanandKrueger(1995). 6

APerspectiveonU.S.InternationalTrade oftheconcernreflectsaviewthatU.S.exports theeducationalchallengeislargebecausethe shouldequalU.S.imports.Thisviewfailsto majorityofthegeneralpublicwillnotbesitting appreciatethatacountry’stradebalanceandits throughaninternationaltradecourse.These capitalaccountareverycloselyrelated.Ina communicationissuesareespeciallyimportant speechNovember14,2003,attheTucsonchap- becauseeconomists’argumentsareoftenfocused teroftheAssociationforInvestmentManage- onissuesthatthegeneralpublictendstoignore mentResearch,Iexaminedthisrelationship.Ido or,atleast,downplay. nothavetimetodaytodevelopthepointsImade Economistsoftenfocusonconsumption inthatspeech,soIwillsummarizesomekey aspectsofinternationaltrade.Theystressthat points. freetradeallowsforincreasesinwell-being Viabasicaccounting,acountry’scapital becauseconsumerscanbuymoreandvaried accountsurplusisequaltoitscurrentaccount goodsatlowerprices.Publicdiscussions,howdeficit.Forsimplicity,let’sviewthecurrent ever,usuallyfocusonjobsandproduction. accountdeficitasthetradedeficit.Acommon Thestatementthatimportsdestroysomejobs mistakeistotreatinternationalcapitalflowsas iscertainlycorrect;however,thekeypointisthat thoughtheyarepassivelyrespondingtowhatis tradecausesachangeinthedistributionofjobs happeninginthetradeaccount.Infact,investors andnomajorchangeinthenumberofjobs,once abroadbuyU.S.assetsnotforthepurposeof adjustmentstochangingtradepatternsarecomfinancingtheU.S.tradedeficitbutbecausethey plete.Thenatureofthepopulardiscussionhighbelievetheseassetsaresoundinvestments,prom- lightsthejobdestructionaspectsoftradeand isingagoodcombinationofsafetyandreturn.On downplaysthejobcreationaspectsoftrade.Itis apersonallevel,everyoneherehastheoption fareasiertoidentifyaclosedplantorlaid-off ofmovingfundsabroad,forexample,through factoryworkersthanitistofindtheneweconomic mutualfundsthatinvestinforeignstocksand activity,whichisoftenwidelydispersed,resultbonds.Whyisthenetcapitalflowintoratherthan ingfromareductionintradebarriers. outoftheUnitedStates?Thereasonisthatfor Itiseasytoseewhyworkerslosingtheirjobs mostinvestorstheUnitedStatesisthecapital wouldbepassionatelyopposedtointernational marketofchoice.Thereisnobetterplaceinthe trade.Conversely,thediffusebeneficiariesoffree worldtoinvest. trademaynotevenrealizethattheirgoodfortune Insum,theUnitedStateshascreatedforitself arisesfromfreetrade.Tomaintainsupportfor acomparativeadvantageincapitalmarkets,and freetradepolicies,therefore,itisimportantto weshouldnotbesurprisedthatinvestorsallover identifyexportsuccessstoriesandtostressthe theworldcometobuytheproduct.Asinvestors broad-basedgainstoconsumersstemmingfrom exploittheopportunitiesprovidedbyU.S.finan- lowerprices. cialmarkets,tradedeficitscanarise.Thus,my Inlightofthecostsimposedonsomebytrade, viewisthatourcurrenttradedeficitsarenota anargumentcanbemadethatprogramsshould causeforalarmbecauseonthewholetheyreflect beavailabletoreducethecostforthoseharmed. extremelypositiveforcesdrivingtheU.S.capital Thetradeadjustmentassistanceprogram,which account. isadministeredbytheU.S.DepartmentofLabor, allowsthosewholosetheirjobsbecauseof increasedimportstoreceiveunemploymentcom- NARROWING THE GAP pensationforanadditionalperiodbeyondthat Nowletmeturntotheissueofhowtonarrowthe receivedbyotherdisplacedworkers.Inaddition, gapbetweentheopinionsofeconomistsandthe tradeadjustmentassistancerecipientscanalso generalpublic.Thefirstresponseofeconomists participateinretrainingprogramsplusreceive tonarrowingthegapinvolveseducation.Thatis out-of-areajobsearchallowancesandmoving theobviousimplicationofThemeLU.However, expenses. 7

INTERNATIONALTRADEANDFINANCE Totheextentthatthisprogramissufficiently theyhadbeenappliedformanyyearsunder fundedandsuccessful,itispossiblethatthis WTO’spredecessororganization,theGeneral programwouldreduceworkers’lobbyingefforts AgreementonTariffsandTrade,ortheGATT. againsttradeliberalization.Evenifvotersare motivatedbytheirperceptionsofcollectivewell beingandnotsimplytheirownindividualwell CONCLUSION being,tradeadjustmentassistancemightincrease Icansummarizemyperspectiveoninternasupportbythosewhogainandthosewholose. tionaltradeinafewwords.Freetradeisapolicy Athirdwaytobridgethegapbetweensupthatincreaseseconomicwellbeingforacountry portersanddetractorsoftradeliberalizationisto asawhole.Specializationandexchangearethe increasethetopicsinvolvedintradenegotiations. routesthatgeneratethebenefits.Specialization Sentimentisstrongforlinkinglaborandenvironallowsforincreasedproductivityandhigher mentalissueswithtradenegotiations.Sentiment wages,whileopenmarketsaremorecompetitive alsoexistsformultilateraltradenegotiationsto andyieldlowerpricesforconsumers. dealwithinvestmentpolicy,competitionpolicy, I’vesuggestedthreethemesastowhyfreeelectroniccommerce,andbetterenforcementof tradepolicycontinuestobeamatterofcontrointellectualpropertyrights.Whatisunclearis versy:first,thatmanytradeissuesarepoorly whethersuchchangeswouldultimatelyincrease understood;second,theconcentratednatureof theprospectsforliberalizingtrade.Expanding adversetradeeffectscombinedwiththediffuse theagendamightprovidenegotiatorswithmore natureoftradegainscreatesapoliticaldynamic opportunitiesforcompromise;however,expandfavoringprotectioninsomecases;and,third,in ingtheagendamightalsobogdownnegotiations somecasesvotersmayprefertopaythecostsof byintroducingissuesuponwhichcompromise protectionforthepurposeofshelteringvulneraisverydifficult. blegroupsfromthefullrigorsofopeninterna- Negotiationstoreducetradebarriersare tionalmarkets. motivatedbythedesiretoreapthebenefitsfrom Thechallengeforeducators,economists,and freertrade.Negotiations—whethertheyaremultipolicymakersistofindwaystoincreasepolitical lateral,regional,orbilateral—arealwayscontensupportforfreetrade.Itisclearthatthereismuch tious.Themultilateralagreementsunderpinning worklefttobedone. theWorldTradeOrganizationattempttocounteractprotectionistpressures.Asalastresort,the disputesettlementprocessallowscountriesto REFERENCES retaliateagainstamemberfoundinviolationof anagreement. Alston,RichardM.;Kearl,J.R.andVaughan,Michael Retaliationprovidesamechanismtoenforce B.“IsThereaConsensusAmongEconomistsinthe thetreaty.Wemightalsothinkoftargetedretalia- 1990’s?”AmericanEconomicReview,May1992, tionasawaytomakehighlyvisiblethejoblosses 82(2),pp.203-9. inexportindustrieswhenacountryimposes Frankel,JeffreyA.andRomer,David.“DoesTrade importrestrictions.Asarguedearlier,inthe CauseGrowth?”AmericanEconomicReview,June absenceoftargetedretaliation,joblossesin 1999,89(3),pp.379-99. exportindustriesarewidelyscatteredanddifficulttoidentify.Targetedretaliation,however, Grossman,GeneM.andKrueger,AlanB.“Economic cancreatevisible,concentratedcostsoncertain GrowthandtheEnvironment.”QuarterlyJournal exportindustries—coststhataredesignedtocreofEconomics,May1995,110(2),pp.353-77. atepoliticaloppositiontoimportrestrictions.I mightnotethatnationsratifyingtheWTOtreaty Irwin,DouglasandTerviö,Marko.“DoesTradeRaise wereveryfamiliarwiththeretaliationrules,as Income?EvidencefromtheTwentiethCentury.” 8

APerspectiveonU.S.InternationalTrade NBERWorkingPaper7745,NationalBureauof EconomicResearch,June2000. Mayda,AnnaMariaandRodrik,Dani.“WhyAre SomePeople(andCountries)MoreProtectionist thanOthers?”NBERWorkingPaper8461,National BureauofEconomicResearch,September2001. Ricardo,David.OnThePrinciplesofPolitical EconomyandTaxation.NewYork:Penguin,1971. Reilly,JohnE.,ed.AmericanPublicOpinionand U.S.ForeignPolicy1999.Chicago:ChicagoCouncil onForeignRelations,1999. UniversityofMaryland,ProgramonInternational PolicyAttitudes.AmericansonGlobalization: AStudyofPublicAttitudes.CollegePark,MD: March2000. 9