DeLong argues that the beneficiaries of trade – both of the conventional goods for goods trade and the new goods for IOUs trade – are diffuse, and often don’t even realize how much they are benefiting from various forms of trade. DeLong (in Martin Wolf’s forum via Mark Thoma):
In the United States, at least, the problem is that most beneficiaries from globalization don't really know that they are beneficiaries, or how much they benefit. Feckless congressmen and congresswomen don't understand that the American economy is cushioned from their fiscal policy stupidities by the ability of the U.S.government to sell bonds internationally on a jaw-droppingly unbelievable scale. Home sellers in California don't realize that they got such a good price because of financing from across the Pacific. Walmart shoppers see the "made in China" stickers, but don't understand what a good deal they are getting because the rulers of the PRC are desperate to sell the products that their workers make at always low prices in order to stay as close as possible to full employment.
DeLong is making the classic political economy argument – the winners from trade are diffuse and unorganized, and the losers are concentrated and organized. Hence, there ends up being less trade than there should be.
I only half agree.
Many winners of the goods for IOU trade are diffuse and unorganized. They sometimes are even unaware of that they are among the winners. DeLong is right: Most folks with big capital gains on their home – capital gains that came at a time when a widening structural fiscal deficit should have pushed up interest rates and pushed down home values – don’t thank China and the world’s oil exporters for their good fortune.
But I suspect the Wall Street firms now snapping up mortgage brokers (verticle integration?) are very aware who buys the repackaged mortgages they are putting together. And those Wall Street firms aren’t exactly an unorganized constituency.
The same holds even more strongly for actual trade in goods.
Walmart’s customers are diffuse and unorganized. Walmart itself is not.
The customers of US electronics firms that source production in China are diffuse. But the US firms that make money off the China trade, and benefit from China’s willingness to sell its “assembly services” on the cheap, are a rather concentrated interest.
And when it comes to the politics of trade, it seems to me like the customer – represented by the firms that organize global supply chains – usually win, at least on the big issues of real importance to global firms (liberalizing agricultural trade isn’t one of them). Those firms are looking out for their shareholders (and their CEOs) but in the process, they effectively represent their customers as well. Relatively unrestrained trade with China hasn’t come up for a vote recently. But when it did come up for a vote frequently (the renewal of MFN status), the firms that control the global supply chain got the outcome they wanted. Same with the vote on China joining the WTO.
Over the past four years, global markets have remained open even as Chinese exports basically tripled, going from a bit over $300b in 2002 to a bit under $900b (on current trends) in 2006. Judged by outcomes, the “losers” from the China trade haven’t dominated the politics of trade.
Indeed, what has been striking – at least to me – is that the winners from this trade haven’t really had to even compensate the losers. I wouldn’t want to take bets if that trend would hold if Schumer-Graham comes up for a vote this fall though ...
At the same time, it isn’t obvious to me that all the losers from trade – particularly trade with countries that artificially maintain undervalued exchange rates – are concentrated and organized.
Look at the Grossman and Rossi-Hansberg paper again. It effectively argues that many low-skilled workers in the manufacturing sector are among the losers. Why – the price their output commands in the market has fallen, as the global price of many manufactured goods has trended down. The terms of the manufactured goods for commodities trade – and the manufactured goods for housing services trade – have moved against them. Yes, there are other effects which help to mitigate the adverse shift in the terms of trade for this group of workers. But that is the one that dominates.
Are those workers a concentrated and organized group? Or a diffuse and organized group? I would argue increasingly a diffuse and unorganized group … at least relative to the firms that benefit from global supply chains.
DeLong argues that the US taxpayers are among the biggest beneficiaries of the current US-China trade. And given that the US exports far more securities than goods to China (the ratio is probably about 3: 1 right now) it is hard to challenge his argument. And taxpayers generally are a diffuse interest.
But then again, I could argue that US taxpayers – at least future taxpayers -- are actually among the losers, as China’s current willingness to subsidize the US Treasury masks the real costs of running up the US debt stock. The long-term cost of servicing the debt issued now will likely be higher than its current cost.
And what of China? The usual argument is that the gains from the central bank’s de facto subsidy of Chinese exports to the US are widely shared among workers in China’s export sector.
I would frame it a big differently though. There are a lot of concentrated interests in China –including foreign firms that use China as an export base – that benefit very directly from China’s dollar peg. There are also diffuse gains among various workers now employed in China’s export sector. The internal politics of China are hard to decipher, but my sense is that the ministries that represent China’s exporters have played a big role in the internal Chinese debate. The PBoC clearly wanted to do more than just let the RMB appreciate by 2.1% last summer …
And the costs of this de facto export subsidy? They are both hidden and diffuse.
Hidden because very few understand the risks associated with lending to the US in dollars (effectively overpaying for US treasuries), and the likely capital loss that China will incur when the RMB eventually rises in value against the dollar. Those loses are further hidden because they do not need to be incurred so long as the central bank runs up its future losses by intervening heavily to keep the RMB from appreciating. And the cost of this subsidy will ultimately be born by a very diffuse group – China’s future taxpayers.
And those losses may never even show up as a line item. They may just show up in the form of smaller central bank profits than would otherwise be the case (Chinese citizens hold lots of cash, so the business of issuing cash against interest-paying bonds is fundamentally profitable). But they are losses all the same.
I understand Mancur Olsen’s argument. But to me, it seems a bit dated. Trade now generates concentrated as well as diffuse winners and concentrated as well as diffuse losers.
Back to tracking global reserves …