Why Is Free Trade Controversial? A Professor’s Guide: Hot Topics and Cool Data March 1, 2007 Cletus C. Coughlin Vice President and Deputy Director of Research

Why Is Free Trade Controversial?Why Is Free Trade Controversial?

A Professor’s Guide: Hot Topics and Cool DataA Professor’s Guide: Hot Topics and Cool Data

March 1, 2007March 1, 2007

Cletus C. CoughlinCletus C. CoughlinVice President and Deputy Director of ResearchVice President and Deputy Director of Research

The Federal Reserve Bank of St. LouisThe Federal Reserve Bank of St. Louis

Note: The views expressed are mine and do not necessarily reflect official positions of the Federal Reserve System.

Opinion Surveys Reveal:Opinion Surveys Reveal:

1) Consensus among economists – free trade is the preferred international trade policy and policy changes leading to freer trade are highly desirable

2) General public – serious reservations about policy changes that reduce barriers to international trade

OutlineOutline

I. Document the differing views of economists and the public

II. Why the consensus among economists

III. Why the general public is skeptical of freer trade

IV. Potential suggestions for dealing with gap between the views of economists and the general public

I. Views of Economists and the General Public:I. Views of Economists and the General Public:Survey InformationSurvey Information

Economists

Statement:

The U.S. should eliminate remaining tariffs and other barriers to trade.

Strongly Agree 40.0%

Agree 47.5%

Neutral 5.0%

Disagree 5.0%

Strongly Disagree 2.5%


Economists

Statement:

Tariffs and import quotas usually reduce the general welfare of society.

2000 1990 1976 (adjusted)

Agree 61.4% 60.7% 81.0%

Agree, with provisos 31.5% 32.8% 16.0%

Disagree 5.0% 5.0% 3.0%

No Response 2.0% 1.5%


General Public

I am in favor of freer trade 64%

I am not in favor of freer trade 31%

Don’t Know / Refused 5%


General Public

Question:

Which statement is closest to your position?

I favor agreements between the U.S. and other 55%countries to mutually lower trade barriers, provided the government has programs tohelp workers who lose their jobs.

I favor agreements to lower trade barriers, but 11%I oppose government programs to help workerswho lose their jobs.

I oppose agreements to lower trade barriers. 27%

No answer 7%

II. Why Economists Support Freer TradeII. Why Economists Support Freer Trade

• Theory as well as empirical studies show that nations are better off with free trade than with policies restricting trade

• Freer trade can increase a nation’s income and its economic well-being through numerous channels.

• Sources of gains

– Specialization and exchange according to comparative advantage

– Increasing returns to scale stemming from larger markets

– Exchange of ideas through increased communication and travel

– Spread of technology via investment and exposure to new goods

Ddomestic

Quantity of Good

Sdomestic

The United States as an Importer

Price After Trade

Price of Good

World Price

Price Before Trade

Domestic Quantity Supplied

Domestic Quantity

Demanded

Gains from Trade: Supply and Demand

Domestic Quantity

Consumer Gain A + B + C (larger quantity purchased at lower price per unit)

Producer Loss A (smaller quantity produced at lower price per unit- reduced employment) U.S. Gain B + C

A B C

Movement to free trade decline in price of import good

Ddomestic

Quantity of Good

Sdomestic

Gains from Trade: Supply and Demand

Price After Trade

Price of Good

World Price

Price Before TradeE G

The United States as an Exporter

F

Movement to free trade increase in price of export good

Domestic Quantity

Demanded

Domestic Quantity

Domestic Quantity Supplied

Consumer Loss E + F (smaller quantity purchased at higher price per unit)

Producer Gain E + F + G (larger quantity produced at higher price per unit- increased employment) U.S. Gain G

General Public Understands Many of the General Public Understands Many of the Consequences of Freer TradeConsequences of Freer Trade

Statement:

Freer trade enables U.S. businesses to open new markets for U.S. products.

Agree (either strongly or somewhat) 78%

Disagree (either strongly or somewhat) 18%

Neither / Don’t Know / Refused 4%

Statement:

Freer trade leads to lower prices and more product choices for consumers.



Neither / Don’t Know / Refused 4%

General Public Understands Many of the General Public Understands Many of the Consequences of Freer TradeConsequences of Freer Trade

Statement:

Freer trade helps to increase prosperity, both in the U.S. and other parts of the world.



Neither 2%

Don’t Know / Refused 3%

Question:

How much would lowering trade barriers help growth?

Very helpful 17%

Somewhat helpful 47%

Not very helpful 17%

No impact 10%

Don’t know / Refused 8%

III. Why the General Public Is Skeptical of Freer TradeIII. Why the General Public Is Skeptical of Freer Trade

Findings based on trade policy studies and opinion surveys

• The lower the skill level of a worker, the stronger the opposition to freer trade (or the weaker the support for freer trade) – consistent with economic self-interest (Stolper-Samuelson)

• Public tends to see the gains from freer trade flowing primarily to MNCs rather than to themselves

Question:

How much would MNCs (you) benefit from freer trade?

MNCs You

Benefit a great deal 50% 8%

Benefit somewhat 31% 47%

Suffer somewhat 10% 19%

Suffer a great deal 2% 6%

Stay the same 1% 14%

Don’t know / Refused 5% 5%


• Public has major concerns about the employment effects of freer trade (social concern as well as self-interested behavior)

Statement:

Freer trade costs more U.S. jobs than it creates.

Strongly agree 30%

Somewhat agree 29%

Somewhat disagree 26%

Strongly disagree 8%

Neither 2%



Statement:

Freer trade leads to lower quality jobs in the U.S.

Strongly agree 24%

Somewhat agree 24%



Neither 1%



• In a list of 14 U.S. foreign policy goals, “protecting the jobs of American

workers” was identified as a very important foreign policy goal of the

United States by 76% of respondents.

• Jobs goal cited more often than either preventing the spread of nuclear

weapons or combating international terrorism.


• Assume job gains in export industry match job losses in import-competitive

industry AND new jobs pay more than lost jobs.

Not worth the disruption of losing jobs 52%

Better to have higher paying jobs 41%

No answer 7%

• Despite long-run gains of freer trade, major concerns about short-run

adjustment costs that those who might lose their jobs would face.


Statement:

Freer trade leads to more economic and social inequality in the United States.

Strongly agree 18%

Somewhat agree 30%



Neither 2%


• Clear that individuals have concerns about freer trade beyond their

individual consequences.

Additional Concerns About Labor and Additional Concerns About Labor and Environmental StandardsEnvironmental Standards

Statement:

Freer trade puts the U.S. at a disadvantage because of our high labor and environmental standards.

Strongly agree 27%

Somewhat agree 36%



Neither 1%


Perception of uneven playing field

– demands for limiting imports into U.S.

– demands that other countries increase their labor and environmental standards as part of trade agreement

Above is focused on U.S. self-interest – Yet some interest in global

community also driving these concerns.


Labor Standards

• norms and rules governing working conditions and industrial relations

• standards: freedom of association, right to organize and bargain collectively, and abolition of forced labor

• child labor: intense controversy (1995 – 120m. aged 5 -14 worked full-time, 250m. if include part-time) – crucial for economic survival vs. denial of educational opportunities

Do you think that countries that are part of international trade agreements should or should not be required to maintain minimum standards for working conditions?

Should be required 90%

Should not be required 7%

No answer 3%


Moral obligation to assist workers in harsh conditions

Some people say that if people in other countries are making products that we use, this creates a moral obligation for us to make efforts to ensure that they do not have to work in harsh or unsafe conditions. Others say that it is not for us to judge what the working conditions should be in another country. Do you feel that we do or do not have a moral obligation to make efforts to ensure that workers in other countries who make products we use are not required to work in harsh or unsafe conditions?

Yes, have moral obligation 74%

No, don’t have moral obligation 24%

No answer 2%


Survey suggests people willing to pay higher prices for a guarantee that clothing is not

made in sweatshops – But behavior does not always match words.

Some factories in countries that produce clothing for the American market place their workers in harsh and unsafe conditions, sometimes called sweatshops, to keep their costs low. Presently there is a proposal to have an international organization that would check the conditions in a factory and, if acceptable, give them the right to label their products as not made in a sweatshop. However, this may mean that the price of those products will be higher than those made in a sweatshop. If you had to choose between buying a piece of clothing that costs $20 and you were not sure how it was made, and one that is certified as not made in a sweatshop, but costs $25, which one would you buy?

Unsure how it is made for $20 20.3%

Not made in sweatshop for $25 75.7%

Don’t know 3.5%

Refused 0.6%


Environmental Standards – similar to labor standards, link environmental

issues to trade.

Do you think that countries that are part of international trade agreements should or should not be required to maintain

minimum standards for the protection of the environment?

Should be required 93%

Should not be required 4%

No answer 3%


Concern: free trade economic growth, but the growth harms the environment. Economists point out that economic growth generates the resources to deal with environmental problems.

Economists – remove governmentally imposed trade barriers to generate efficient results

vs.

Environmentalist – freer trade generates adverse environmental consequences that require additional governmental regulations

Global vs. national environmental problems:

greenhouse gases (international problem international solution)

vs.

pollution of a stream (national problem national solution)

IV. Bridging the GapIV. Bridging the Gap

Education

• Recall that general public, for the most part, has accurate perception of the consequences of freer trade – yet still work to be done

• Issue is how to educate the general public – students in undergraduate trade classes are likely to be convinced by the same arguments that convince economists


• Challenges of convincing general public

– easier to see job losses from imports (pictures of closed plants, interviews with laid off workers) than job gains from exports

– opponents likely to be far more passionate than proponents (opponents likely easy to organize because they have much to lose, while beneficiaries are much more diffuse)

– arguments against freer trade more readily appreciated than arguments in favor (increased competition due to imports profits, wages, employment)


• Need to use concrete examples rather than attempt to use theory – comparative advantage and gains from specialization and exchange need to be transformed into specific examples (examples – stress numerical examples of protectionism in terms of costs per jobs saved, provide numerical estimates of the consequences of faster growth for a period of time on average per capita income)


• Confront the issues raised by environmentalists and others (these issues cannot be ignored)

– child labor might be deplorable, but the earnings may be needed to keep the children alive

– cleaner environment in a poor country may be desirable, but the cleaner environment may push the country further into poverty

– might be that a country is willing to endure short-run tradeoffs to achieve long-run social objectives – economic development ultimately allows a country to set higher labor and environmental standards (standards of high-income countries may be too costly for low-income countries to abide by)


Reduce the cost for those harmed reduced opposition

• Trade adjustment assistance – U.S. Department of Labor program for those losing their jobs because of increased imports

– lengthens period of unemployment compensation

– assistance for retaining programs

– out-of-area job search allowances and moving expenses

• Effectiveness of this program has been questioned by many academic studies plus general public


Do you think the U.S. government does a good job or a bad job in helping

workers adjust to new competition due to freer trade through education and

retraining?

Good job 27%

Bad job 62%



• Wage insurance – upon reemployment workers are guaranteed some percentage of the previous earnings for a period of time

– Many displaced workers, especially those with much tenure, suffer lower wages after they become re-employed (as well as during their period of unemployment)

– Incentive to find a new job more quickly than under unemployment compensation acquiring on-the-job training and skills to allow for future increases in earnings

– Might allow older workers to reach retirement without a significant reduction in their standard of living

– Major concern about cost – how much cost to generate political support??


Expanding the trade agenda

• Would this approach work? More opportunities for compromise, but also increases the issues upon which compromises would be difficult.

• Developed countries vs. developing countries: high labor standards and enforcement vs. low standards and minimal enforcement.

• Restrict additional issues to a small set of issues that would garner widespread support – difficult to accomplish

• Possible that expanding the agenda would simply give additional power to protectionists – strong pressures to expand the trade agenda to include additional issues

V. ConclusionV. Conclusion

• Economic case for free trade is strong

• Lack of domestic political support provides a major hurdle

• Political opposition arises from economic, social, and environmental concerns

– Jobs: insecurity, adjustment costs, wages, and inequality;

– Social: child labor and sweatshops;

– Environmental: is growth good or bad for the environment?

• No quick fixes for eliminating political opposition – various options but most promising revolve around proposals to reduce the costs borne by those adversely affected by freer trade

Documents

Why Is Free Trade Controversial? A Professor’s Guide: Hot Topics and Cool Data March 1, 2007 Cletus C. Coughlin Vice President and Deputy Director of Research