Free Trade and Its Discontents

Free Trade and its Discontents
by Edward Steiner

The following is a review of Edward Gresser's Freedom from Want: American Liberalism and the Global Economy. Nov. 2007. Washington DC: Soft Skull Press. ISBN: 1-933368-62-4.

“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy ... What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” --Adam Smith

There are three competitors in the Democratic primary election for president this year – Sen. Hillary Clinton, Sen. Barack Obama and Adam Smith. Smith may not be here to defend himself, but with his new book Freedom from Want, Edward Gresser is making up for his absence. Gresser recently spoke about the principles outlined in his book to a gathering of trade community members at ST&R's Washington, D.C., office.

Has trade ever been under such an attack? In a recent interview in the Financial Times, Senator Clinton raised questions about the applicability of Smith’s comparative advantage theory to the modern economy. Senator Obama maintains that while he is not anti-trade he opposes “un-fair” trade deals. Both have threatened to withdraw from NAFTA unless it is renegotiated to provide for additional worker and environmental protections.

To be fair, neither Clinton nor Obama is advocating a return to higher tariffs and economic isolation. But their calls for a “level playing field” and an expanded Trade Adjustment Assistance program imply that unfettered trade is naturally unfair and that its effects need to be mitigated in order for society to benefit from it. They further suggest that America cannot compete with countries like China where businesses can exploit lower-cost labor and weaker environmental standards to create cheap products for the U.S. market. Moreover, the two candidates are concerned with the effects of trade on the poor in other countries. Trade deals, they would argue, have hurt foreign as well as American workers because they’ve been oriented toward helping corporations doing business overseas.

In Freedom from Want, Gresser meets those criticisms head-on. He argues persuasively that not only is trade not bad for America and its trading partners, but it can lead (and has) to improvements in all these areas, from raising labor wages and standards to improving the environment to combating global poverty.

Gresser begins his book with a primer on the history of U.S. trade policy. The irony, he points out, is that many of the criticisms of trade that are being made by liberals or progressives today are the same arguments made by Whigs and Republicans in earlier eras. Indeed, Gresser provides the reader with the strong and long-standing pedigree of American liberals on more open trade. Beginning with Woodrow Wilson, they saw and used trade as a force for change and social progress. Franklin Roosevelt expanded on that vision by making trade a lynchpin of the post-war order, positing that increased trade would help reduce conflict between trading partners as well as ease global poverty by lowering the costs of production and opening up new markets for sales and production.

The power of Gresser’s book is not the rhetoric. We’ve heard before that “free trade is good,” but Gresser shows us how and why. Unlike many commentators who are following one orthodoxy or another, Gresser follows the numbers. The assertion that America can’t compete with cheap labor overseas and that’s why its manufacturing base is shrinking? Not true, he says. Since 1993, before the passage of NAFTA, the value-added of America’s factories has grown from 23 to 25 percent. In addition, domestic manufacturing has increased its share of GDP during the same period, from 12.9 to 13.6 percent. Gresser cites estimates that only about 5 percent of job losses in the U.S. are even remotely related to trade and that the remaining 95 percent come from “recessions, bad management, computers, and robots or superior nearby competitors,” This is, of course, cold comfort to those who actually have lost jobs due to trade, but Gresser’s numbers help put their plight in perspective.

What about the maxim that trade deals lead to a “race to the bottom” in environmental quality and standards? Also not true, says Gresser. In fact, it is trade and openness to the world that have put pressure on overseas producers to meet increasingly higher standards. First, Gresser argues, economic development in lesser-developed countries, and specifically their becoming suppliers for first world consumers, has brought first world demands for quality, safety and sustainability. Second, contrary to the prevailing liberal view, international trade organizations such as the WTO can be progressive forces for the environment. Gresser cites the specific example of the WTO upholding a U.S. law to protect turtles from shrimp harvesting. Perhaps more compelling, he points to how the WTO currently has the opportunity to approve an international agreement that could help reduce overfishing by lowering government subsidies, thus resolving this classic problem of the global commons.

Finally, Gresser makes a compelling case that trade tends to raise more boats around the world than it sinks. He highlights the case of a young girl working in the Cambodian garment sector. “As a first-year factory worker, Srei earned $45 a month,” he writes. “She received a five-dollar monthly bonus for good attendance, and overtime pay of two dollars an hour when orders were heavy.” He compares her earnings with the policeman making $20 a month and the doctor who brings in $60. Across the board, Srei is making about twice what any other Cambodian worker is making, never mind those still laboring on family farms. Gresser continually reminds us that this is always a question of choices. If we close down the factory because it doesn’t meet Western standards, will Srei be better off then?

Where Freedom From Want may come up short is in sympathizing with the condition of U.S. workers who, whether as a result of trade, technology, domestic competition or just bad management, are now looking at a very uncertain future. Gresser rightly points out that trade policy is not the appropriate tool to remedy the social ill of unemployment and that education and re-training are the keys to producing a flexible and successful workforce. He also usefully argues that too much of the social safety net is dependent on work. If there were more support for workers outside their work – in the form of health insurance, pension plans, etc. – then losing a job would not be such a terrifying prospect. But the prospects of a free university education and universal health care are, at best, on the distant horizon; the solutions Gresser offers are in the aggregate and in the future. Something must be done now to address the current condition of the American workforce. As Keynes noted, “in the long run we’re all dead.” For good or for ill, the fate of American trade policy is dependent on the well-being of the American worker.

Gresser also does not fully discuss the stubbornness of global poverty, which has not been eradicated despite years of trade. He argues instead that more trade is needed to bring opportunity to stagnant parts of the world, such as the Middle East. While that may be true, it must be acknowledged that the benefits of trade are shared very unequally around the globe. It must also be recognized that economic opportunity brings with it economic disruption. To return to Gresser’s example of the Cambodian garment worker, it may indeed be a better life to work in a factory than on a farm, but the depopulation of the countryside, in Cambodia and elsewhere, has serious economic implications and consequences. The story is not just about the young Cambodian girl but about the society in which she lives.

Gresser also does not address the fact that trade and economic development can pose serious risks of environmental damage. New markets increase the value of natural resources and therefore the incentive to exploit them. For example, there has been a huge depletion of trees in tropical hardwood forests because of the developed world’s insatiable demand for furniture and construction materials.

These are serious issues, and if one of the objectives of trade policy is to reduce global poverty they must be taken into consideration. However, we must also factor in our varying abilities to control economic development. We can open up markets and promote development, but we can’t necessarily control the resulting effects. Moreover, knowing about the dangers of social dislocation and environmental degradation, do we then decide not to invest because of the potential negative consequences? If so, is our moral position stronger because we’ve prevented development and preserved the farm economy? Gresser would argue, I believe, that the emphasis should be on mitigating, but not avoiding, the negative externalities of trade. Not engaging in trade out of fear of its potential harm to the public good is bad policy and ultimately futile. Those denied the opportunity to participate in the legitimate global marketplace will often find more unsavory means of getting by.

Gresser finishes his book with some policy prescriptions. He advocates increasing the TAA program, noting that while there are approximately 15-20 million American workers laid off every year only a few hundred thousand of them receive TAA benefits. He recommends spending $4 billion to expand TAA, a figure thatHouse Ways and Means Committee Chairman Charles Rangel and Senate Finance Committee Chairman Max Baucus both support. Gresser also calls for more incentives to save and more investment in scientific research and international education programs. He also encourages Congress to pass the Affordable Footwear Act, a bill that would reduce tariffs on inexpensive footwear and thus help lower-income Americans who spend a disproportionate amount of their income on shoes and clothes.

As useful as these prescriptions are, the greatest utility of Freedom from Want is that it reminds the reader, and particularly the progressive reader, that U.S. trade policy was built with peace and prosperity as its principal objectives and that it has made great progress toward those goals. There remains much work to be done, but the solutions lie in the future and not in returning to previous, failed policy. It’s an important and timely message and the progressive movement should thank Gresser for it.

Review submitted by:

Edward G. Steiner

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