June 25, 2007
Free Trade and Inequality IV Posted by John Steele Gordon at 09:55 AM EST First, I think we have a bit of a semantic problem here. By globalization I do not mean simply free trade—trade without the taxes we call tariffs or artificial barriers such as quotas. It is perhaps true that the world had more free trade in 1914 than in 1990. But it had less globalization in 1914 than it had in 1990 and a lot less than it has now. In 1914 the developed world exported manufactured goods to the undeveloped world (much of which the developed world had sovereignty over) and imported mostly raw materials and agricultural products in exchange. The United States by that time had become a major exporter of manufactured goods while remaining a major exporter of raw materials (such as petroleum and copper) and agricultural products (such as cotton and wheat). As has so often been the case in recent economic history, the United States had the best of both worlds. For a history of American foreign trade see here. But it was much rarer for one developed country to export significant amounts of manufactured goods to another developed country. That’s why the word imported had commercial cachet well into my adulthood: English marmalade, Italian leather, Swiss watches, and so forth. Today, however, it has none, for the simple reason that every developed country (and many not so developed) exports massive amounts of manufactured goods to other developed countries. It’s hard to imagine a shopper at Wal-Mart saying to her friend, “Oh, look, Ethel. Bangladeshi T-shirts. How chic!” Even more, we import and export parts in huge amounts. I own a Subaru. That’s a Japanese car, right? Well the corporate headquarters are in Japan. But the car was assembled in Ohio, out of parts that were manufactured in heaven knows how many countries. Were a misguided American government to put a prohibitive tariff on importing auto parts in order to protect the American market in automobiles for American automobile manufacturers, the result would be the almost instant collapse of the American automobile industry itself, for lack of parts. Ford and General Motors as much as Toyota and Audi manufacture them in many countries. By globalization I mean integrated markets and globalized manufacturing. The gold standard that ruled the world’s currencies in 1914 is long gone, but the international currency market, which operates around the clock and around the globe, has replaced it, trading trillions of dollars worth of currencies in a single day. Any country that adopts what the gnomes of Zurich (and New York, Hong Kong, Tokyo, Bonn, Paris, London, Grand Cayman, Sydney, Mumbai, etc., etc.) perceive as bad economic policies will find its currency headed south and fast. That puts severe constraints on just how dumb the economic policies of governments can be. This new and irreversible world came about for three reasons. (1) Led by the United States, the world has been reducing trade barriers since the end of World War II to the point where they are a mere ghost of what they once were. (2) Ocean transportation costs have declined by orders of magnitude. Just as the collapse of overland freight transportation costs, thanks to the railroads, made national markets possible in the nineteenth century, containerization and much cheaper air freight have created global markets that were impossible before. Chilean fruit can now be profitably sold in American markets that are thousands of miles away in the middle of the American winter. Sweet cherries in January are sweet indeed. (3) International communications costs have virtually disappeared. A company located all over the world can be as tightly integrated as one located entirely in one city. So, while individual industries might resist globalization by getting their friends in government to tilt the playing field in their favor (such as subsidizing ethanol from Iowa but slapping a high tariff on ethanol from Brazil), whole economies can’t now reverse course by such means as a latter-day Smoot-Hawley tariff. Why? The price of nearly everything would go through the roof (T-shirts, six for 12 bucks at Costco? Try six for 25 bucks). This would set off an epic inflation and therefore a nosedive by the country’s currency. All political hell would break loose. Even the individual industrial policies that have adverse long-term consequences probably can’t last for long. People are beginning to notice that the reason chicken is no longer 89 cents a pound, even on special, is because chicken feed is being converted, at high cost and low efficiency, into fuel for automobiles when we could be importing cheap Brazilian ethanol made from sugarcane waste instead. As for democracies making bad political decisions, of course they do. But they make fewer of them and usually correct them sooner than other forms of government. There are several reasons for this. First, short-term national interests often conflict with long-term interests, just as they do for individuals. The short-term need to get the nicotine monkey off the smoker’s back right now trumps his long-term interest in avoiding health problems, no matter how severe, that are 10 or 20 years down the road. Equally, the short-term interest in getting reelected or elected to higher office trumps almost everything else in politics. Politicians are in the reelection business, not the good government business. Ethanol made from corn is a truly stupid idea economically. (The energy in a gallon of ethanol is only about 10 percent more than the energy required to produce it, for one thing; for others see here.) But the first battle of presidential campaigns is fought in Iowa, which is one vast cornfield. Result: mandated ethanol use with tariffs to prevent its importation. As things stand now, one third of the nation’s corn crop will be used to produce ethanol by 2012. That’s going to have very unpleasant consequences for food prices. Second, “what is” is always more powerful than “what might be.” The declining industry has lobbyists by the score in Washington seeking help. The emerging industry usually does not. So the political pressure to impede the “creative destruction” of capitalism can be intense. A third reason, I think, is that the media often does a truly terrible job of informing people about the entirely predictable economic consequences of political policies. And it does an even worse job of asking politicians tough economic questions about their proposed policies. Political reporters, like the people they cover, are interested in politics, not the long-term real-world consequences of political decisions. As with those they cover, the next election is what they are concerned with. Worse, many political reporters are entirely incapable of thinking in economic terms for they have no understanding of the subject at all. In the late 1970s and early 1980s, there were numerous stories about how sky-high interest rates were hurting people who couldn’t afford mortgages and car payments, etc., etc. In the late 1980s there were numerous stories about how very low interest rates were hurting people who depended on investment incomes to meet expenses. I never saw a story about how these two stories might be related. Also, the media, with its inevitable focus on bad news, does a terrible job of telling the people about the good news of globalization, which would increase support for it. The supposed horrors of “outsourcing” are endlessly retailed (while the near record-low unemployment rate in the United States that refutes the dangers of outsourcing is relegated to the business section). But the fall in prices that has resulted from globalization goes unreported. Nearly all the necessities of life, such as food, clothing, and household equipment, cost less as a percentage of income today than they did in the 1950s, often much less. We spend about 10 percent of household income on food today; it was 20 percent half a century ago. Telephone service costs only a small fraction of what it did when I was a kid. Globalization is no small part of the reasons for this.
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