There's a classic argument on the politics of trade that goes something like this: Free trade creates net wealth, but there are winners and losers. Unfortunately, the winners tend to be large, disorganized groups of people, each of whom gain just a little, while the losers are powerful, politically connected industries who face very serious disruption from overseas competition. Think of the automobile industry. International trade in automobiles has benefited consumers remarkably, but when the Japanese began to make inroads in the US market, domestic auto manufacturers put continual pressure on the government to keep foreign firms at a disadvantage. The public is easily misled — a consumer might like the fuel efficiency of her Corolla, but against thousands of autoworkers with families like hers, whose jobs are in jeopardy on her television, support at the ballot box for a large government subsidy to the local firm (what Chrysler got, in the form of below-market-rate credit) seems a small price to pay.
But arguments are not theorems. They must change with the times. Today, in the United States, who would be the biggest loser should, for example, the government enact restrictions designed to force trade towards overall balance? Diffuse, disorganized groups of consumers certainly would lose; imports would cost more and buyers could afford less. But do we know of anyone else who profits from consumers' enthusiasm for buying imported goods at "everyday low prices"? Walmart is, by any measure, a much larger company and much more powerful force in today's American economy than GM or any other import-competing titan.
Current patterns of trade have created huge trade surpluses in several export-focused economies, which in turn have been lent back to the United States on very favorable terms. The US financial industry is booming despite a tepid overall economy, thanks to leveraged private equity deals and a hedge-fund boom that churns out billionaires like butter. What's the secret sauce? Ask any player, they'll tell you: Liquidity, abundant easy credit on terms that seem to make no sense, from the lender's perspective. Where is all this easy money coming from? From overseas trade surpluses. Who would lose if this flow of capital were to be curtailed? Again, there'd be some diffuse harm: Many Americans' 401-Ks would take a hit. But are there are maybe some large, politically-connected actors profiting from this firehose of foreign capital? Where was it that the United States' current treasury secretary was plucked from? Walgreens? No, that's not quite right.
Wall Street. Wal-Mart and Wall Street. Those are the diffuse, weak, politically inept actors benefiting from current trade arrangements. We'd better be very careful to be sure someone stands up for them. Don't forget the little guy.
This harangue is inspired by Tyler Cowen, who was kind enough to give interfluidity a plug yesterday. Interfluidity has been flowing all over Tyler and Marginal Revolution for years, in a good way. (We hope that's not too gross). For more on how trade flows get recycled into capital flows, read Brad Setser until your head explodes. In a good way. (Okay, we admit that's just a little bit gross.)
|Steve Randy Waldman — Thursday May 3, 2007 at 12:02pm||permalink|