Turn to the leading US newspapers these days and you will read about the “loss of nerve”, even “loss of faith”, in free trade by economists. Many write about free trade in funereal overtones. Yet all this hype reminds me of the cartoon where two dervishes are idly sitting on the desert sands, next to their camels, and one is reading the Cairo newspaper, Al-Ahram, and telling the other: “It says that we are in ferment again.” The truth of the matter is that free trade is alive and well among economists.
This is best seen in historical perspective. Such media stories about the economists’ disappearing consensus on free trade have been recurrently written in the past 20 years. There have been three episodes in recent years when false notes of alarm were sounded over free trade.
The most striking dissent over free trade, the equivalent of a category five storm, came from Paul Krugman. He extended the theory of imperfect competition to international trade and began to argue in the late 1980s that “free trade was passé after all”. The effect on the media, and on the opponents of free trade, was electric, largely because the rise of Japan, and the allegations that it was protectionist while the US was a free trader, had fed the frenzy that called for a reputable economist to be an icon for “reactive” protectionists.
Robert Kuttner, now the editor of The American Prospect and long a skeptic on free trade, celebrated Mr. Krugman’s apparent heresy. Karen Pennar wrote in Business Week (February 27 1989), under the heading “The Gospel of Free Trade is Losing Its Apostles”, that: “Free trade is good for you… Now more and more economists aren’t so sure”.
Mr. Krugman was right at the level of theory. For two centuries, we had known that imperfect competition among producers could undermine the case for free trade: Mr. Krugman’s brilliant work had deepened that insight. But eventually Mr. Krugman and other trade economists came back to free trade, abandoning Mr. Kuttner et al to twist in the wind. Some returned to the fold by saying that “there was no beef” – that the product market imperfections were, on empirical investigation, not substantial enough to warrant departing from free trade. Others, Mr. Krugman among them, bought into the conservative argument that protection in practice would make matters worse, not better.
The protectionists who had celebrated Mr. Krugman as their icon were disappointed, even furious: Mr. Kuttner would write fierce critiques of Mr. Krugman for years. Moreover, even as these economists came back to the fold on free trade, with the consensus on free trade reinvigorated, Japan ceased to be a threat and protectionist demands against Japan subsided.
But then the rise of India and China would lead to another category five storm. This time, it came from the Nobel laureate, Paul Samuelson. Writing in the Journal of Economic Perspectives (summer 2004), he argued that the advocates of globalization were ignoring the reality that the rise of India and China would mean that the welfare of the US could take a hit. Thus, if Florida was hit by a hurricane, that could surely harm it. But, Mr. Samuelson was careful to note that this did not mean that Florida should respond by shutting off trade: that would only deepen the anguish.
Yet the protectionists thought that they had another icon, this time a truly great economist, in their camp. Mr. Kuttner was back in business; and there were numerous stories again in the media, such as Aaron Bernstein’s “Shaking Up Trade Theory” in Business Week (December 6 2004). As the truth of the matter became manifest in the media, with many trade economists challenging the self-serving distortions by protectionists, the free trade consensus was again seen to be robust and the protectionist buzz died down.
But then the US media went back to the well for a third time when the macroeconomist, Alan Blinder, published an essay in Foreign Affairs (April 2006) that bought into the line that outsourcing of services via the internet would increasingly export American jobs to other countries and imperil the US and its working and middle classes. So he was now the new icon for the protectionists.
But Mr. Blinder seemed unaware of the fact that outsourcing via the internet was the mode of service transactions that the US lobbies were keenest about in the Uruguay round of trade negotiations: they saw that they would be the big winners, as no doubt they are. They hugely dominate transactions in high-skill and high-value services in architecture, law, medicine, accounting and other professions.
Mr. Blinder, when challenged, shifted ground to arguing that, as services became tradeable online, the number of jobs that would become “vulnerable” would rise pari passu, requiring adjustment assistance. However, there is hardly any serious trade economist who has objected to providing adjustment assistance. The first adjustment assistance program in the US goes back to 1962. Virtually all trade legislation since has tried to improve on it. Many trade economists have written extensively on the subject.
Mr. Blinder, who started talking poetry, has therefore wound up talking prose. We free traders have no problem with him as he backs into our corner. But if he is to remain the new icon for those who oppose free trade, they have to be pretty desperate.
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