April 10, 2007
Are Democrats Truly More Protectionist? (Part II)
There was some disagreement with my assertion that Democrats were -- effectively -- not as protectionist as many have argued. Here are some more thoughts on the matter, as the Administration prepares the case for countervailing duties on Chinese imports .
In their April 11th edition, the London-based consultancy IDEAglobal observed that of the 38 House and Senate bills targetting China proposed since 2005, 21 enjoyed bipartisan co-sponsorship. Of the single-party sponsored bills, 9 were Democratic, and 8 Republican. The common denominator in the bills' sponsors was geographical in nature -- that is a relationship to industrial states such Pennsylvania, Michigan, Ohio, NY, North Carolina, Virginia, Illinois and Indiana.
Additional support for the conjecture that a specific-factors -- rather than factor-proportions -- interpretation of protectionist impulses comes from this paper by Michael E. S. Hoffman presented at the 2006 SGE conference, in which he examines some polling data on views regarding international trade policy:
An interesting picture emerges from the regression results when they are considered together. Educational attainment is most clearly associated with proglobalization attitudes. Income is not. The latter result is at odds with Scheve and Slaughter (2001), and Mayda and Rodrik (2002). If education affects trade policy attitudes irrelevant of income, then the effect of education may be based more on information (see Coughlin  for a discussion) and less on factor endowments. Blinder and Krueger (2004) conclude that greater education leads people to be better informed about economic policy issues, which could certainly explain the effect of college education in this case.
The partisan effect is perhaps the most interesting. Party affiliation is not significantly related to opinions on globalization or free trade in general. However, Republicans are much more likely to support the steel tariffs that President George W. Bush approved in 2002. This became a signature issue for Bush (The Economist, February 14, 2002). Democrats are significantly more likely to be pro-NAFTA, which was a signature issue for Bush's predecessor, President Bill Clinton. Rather than being a pro-capital party, as predicted, rank-and-file Republicans instead take positions espoused by party leaders. On the other side, Democratic voters are not synonymous with labor in the Heckscher-Ohlin sense, and instead support NAFTA despite its vilification by organized labor. Blinder and Krueger (2004) also find that partisan ideology is a major determinant of opinions on policy issues. This suggests that opinions are highly malleable when it comes to trade policy. Attempts at trade liberalization (or trade intervention!) may be made feasible through vocal party advocacy.
There are some industry effects as well. People working in manufacturing are anti-NAFTA and anti-trade in general, and individuals living in rural areas are less likely to support the CAFTA, perhaps due to a presumed agricultural comparative advantage of Central American nations. These sector effects, coupled with the fact that income is not a significant determinant of trade policy attitudes, seem to support a specific-factors view of the economy. This is consistent with Magee (1980), but inconsistent with Scheve and Slaughter (2001), and O'Rourke and Sinnott (2002), among others.
You might not have thought it possible, but I'm going to squeeze in housing into this discussion:
Scheve and Slaughter (2001) put particular emphasis on the role of assets in their analysis of trade policy preferences. They do not test the role of home ownership in isolation (and interestingly, in the results reported earlier here, the coefficient on home ownership is marginally significant in only one of the regressions), but by interacting it with the degree of import competition. If some of consumers' wealth is stored in their homes, they should be concerned about how trade policy affects the value of real estate in their area. Trade liberalization (barriers) should increase (decrease) the value of housing in export-oriented communities and vice versa for import-competing communities.
To test this econometrically, I follow Scheve and Slaughter and interact the home ownership dummy variable with the measure of export exposure. It is a significant determinant of trade policy attitudes for only one of the dependent variables: free trade in general. ...
This leads me to my next thought: That it's not really enough to "just say no" to protectionism. In order to foster a free trade environment, consumers, workers and firms have to believe that they will gain from freer trade -- and that if they lose, then the government will insure that they will have some of the net benefits acruing to society at large transferred to them as partial compensation. Until there are programs that do this (such as wage insurance -- see here), we will see continued erosion of free trade (discussion of current programs is in this CRS report on TAA and workers as well as on firms).
Posted by Menzie Chinn at April 10, 2007 10:56 PMdigg this | reddit
Wouldn't the enactment of a wage insurance policy be a de facto admission of defeat?
Surely the point of free trade is to enhance living standards without the necessity of state intervention; so wouldn't a scheme like this acknowledge that what is happening now is not classical free trade, but something else?
Posted by: Martin at April 10, 2007 11:02 PM
Martin: No, I think it's always been the case that trade liberalization potentially created winners and losers. It's just that now, those groups that would lose from liberalization do not see sufficient compensation from current government programs, or are more politically salient. New alignments of interest groups require modifications of the tactics necessary to build up constituencies.
Posted by: Menzie Chinn at April 11, 2007 07:16 AM
Thanks for the plug!
I think this is an important issue for understanding and improving trade policy. You are quite right that the differences between the parties on trade policy aree much slimmer than they used to be, and maybe even more slim in the rank-and-file. This may be part of the broader trend that Michael Tanner of the Cato Institute documents exhaustively in "Leviathan on the Right: How Big-Government Conservatism Brought Down the Republican Revolution."
An alternative explanation that I find compelling is that (not unrelated to Martin's point above), due to structural changes related to the most recent wave of globalization, growing trade continues to benefit the U.S. economy but fewer individual workers than previous waves of enhanced trade. This is borne out by looking at median income dynamics over the last half-decade: we've had a huge increase in imports, a nice boost in GDP per household, and actually falling median household income over most of that time period. For those of you familiar w/ elementary trade theory, this sounds like Stolper-Samuelson is finally kicking in on an aggregate basis. So the changing party attitudes may be a reflection that the median voter is no longer capturing the laissez-faire gains from trade.
I'm working on a paper right now that documents some of the trends in median income v. mean income, and the extent to which education and trade, among other factors, explain some of the deviations between mean and median income growth. I'll keep you apprised.
Posted by: Michael Hoffman at April 11, 2007 08:29 AM
As I stated earlier I totally agree with you that both major parties are equally protectionist, but I am concerned with any reactions to the calls for protectionism that include redistribution of wealth. Those who engage in the import/export business do this to make a profit. There is no reason for the government to in any way guarantee that profit. If a company needs to hedge through insurance they can go for it, but keep the government out. They will only waste resources and the taxpayer will end up with the bill.
Posted by: DickF at April 11, 2007 02:30 PM
As someone from Michigan I have to say that the policies from both Democrats and Republicans are killing us. Most cetainly on the state level. That is why we are finding it necessary to take to the streets. We aree asking Michigan taxpayers to save the state because politicians will not.
Tea Party www.wctaxpayers.org
[edited for length -- mdc]
We need you to come and join the voices of the hard-working men and women of our state in saying 'enough is enough! Tell Lansing politicians to balance their budget by cutting spending and enacting reforms; NOT BY RAISING TAXES ON CITIZENS! Get to the Capitol around 10:00am. Rally starts at 11:00am, but you will need time to park.
Bring a tea bag to give to Governor Granholm. Bring your children to watch democracy in action. Bring as many friends as you can to ensure taxpayers' voices will be heard in Lansing on April 18!
If you have any questions about the rally, please contact Rose Bogaert with the Wayne County Taxpayers Association at email@example.com.
Rose Bogaert, Chair
Wayne County Taxpayers Association, Inc.
Posted by: Rose Bogaert at April 11, 2007 04:54 PM
I agree with you that the Democrats are not the protectionists that they are sometimes made out to be. However, that does not mean that they are not more protectionist than their Republican counterparts. If you look at the turnover in the Senate due to the midterm elections, it is certainly less pro free trade than it was when the Republicans were in charge (Sherrod Brown, Jim Webb, Bob Casey, Bernie Sanders).
I was also wondering if you could elaborate on your idea of greater wage insurance. I agree that there something should be done for the losers of free trade, but I am not sure that wage insurance is the right approach. Hasn't the US benefited from lower unemployment in comparison to the EU at least partially because of their overly generous wage insurance policies? Finally, what's your opinion on the Robert Rubin backed wage insurance bills that are making their way through the Senate?
Posted by: Robert H. at April 11, 2007 07:54 PM
Thanks for your reply. May I ask a follow-on question?
I agree with you that trade liberalisation does create winners and losers; however, my belief is that the effects of this were less drastic before than they are now and in the past could have been mitigated in ways which would be far less likely to happen today - for example, the 'buggy whip makers' put out of business by cars would have got jobs in the car plant, their sons would have become foremen, their grandsons would have gone into the call centres when the car plant closed, etc.
This is a big problem in my part of Scotland. The local economy has gone from being based on heavy manufacturing to light manufacturing to services in the space of no more than half a century; but nobody seems to have thought of or planned for, the inevitable -
What do people do when the services move away?
The bulk of Glasgow's output is now based on services which can be performed at lower cost somewhere else in the world, and which can be quite easily transferred to low cost locations through ICT. If the call centres go, what do we do then?
I'd be very interested in your thoughts, because this, to my mind, goes to the heart of all discussions concerning 'trade' as it's practiced now. I might be wrong but my belief from what I see around me is that the inexorable flow of work to where labour will perform it most cheaply cannot really be classed as 'trade', as the 'real wealth' gains made from access to cheaper goods by those in areas which have lost employment to this kind of export substitution do not, or more properly cannot, compensate for the loss of higher earning capacity.
And nobody ever seems to factor in the social cost.
It might even be the case that the belief that 'Economics is not a zero sum game' should instead be rewritten as 'Economics should not be a zero sum game'; for as far as I can see, for a lot of people that's precisely what it seems to be becoming.
Posted by: Martin at April 12, 2007 12:47 AM
DickF: We both agree that trade liberalization is on net good for our economy. You might argue that that's sufficient. I would say just because something is Pareto efficient (a positive statement) doesn't mean we should implement the allocation (a normative issue). We make these distinctions all the time.
In any event, it is not enough to just say we should have free trade. All throughout the post-War liberalization era, politicians have found it necessary to "buy off" certain groups in order to obtain greater liberalization, with the view that the benefits outweighed the costs. I believe that further trade liberalization would provide many benefits, but we need to make the cost-benefit calculus for the various groups at the veto points favorable for them to accede to further liberalization. Your path, in my opinion, leads to further erosion. An alternative path might lead to continued liberalization.
This is where Michael Hoffmann's points come into play. That is, the old ways in which we altered the cost-benefit calculus for individual workers and the associated aggregated groupings no longer works. Greater and deeper internationalization of the production process requires different measures. Understanding the dynamics of how international trade and investment affects factor returns across factor classes and sectors/industries is the first step in that process.
Martin: Obviously, if there was an easy answer to your tough question, the solution would already be in place. However, I'd say that while some services are easily offshored, some are not -- see Catherine Mann's (Peterson Institute, now Brandeis U.) work and Lori Kletzer's (University of California-Santa Cruz) work on the subject. Minimizing the cost of adjustment and maintaining income would entail continous retraining of labor with those sectors in mind. Of course, in the long run with intra-country factor mobility, flexible wages and prices, and flexible exchange rates, full employment will be restored (since I'm a believer in sticky prices and sunk costs, I don't advocate the laissez faire approach).
Robert H.: One certainly doesn't want the replacement income for a displaced worker to be anywhere near as high as they were in Europe in the 1980s. But even as replacement ratios have fallen, it's been determined that other rigidities in labor, financial and product markets have been also as important. Hence, wage insurance of the sort mentioned by Kletzer for instance would not in my mind pose the same threat as the panoply of measures extant in Europe in years past. I'm afraid I haven't followed closely the bills you've mentioned, so I'll have to defer comment on those until I've had a chance to study them.
Posted by: menzie chinn at April 12, 2007 02:46 PM
Posted by: Martin at April 12, 2007 11:25 PM
hmmmmmmmm well, I guess it aint good for Michigan. Hey, that is only one state, right? Sizable, but not critical.
Reading through the TAA stuff, there are a lot of "mays": may be eligible, etc.
Soooo....pass our workers through a questionable bureaucratic filter...
Any on the street reports on how well it works? The kind of training offered? Can workers relocated to another country?
I would suggest to you that China is subsidizing its factory owners by not allowing labor to properly organize as well as through currency manipulation.
And then, of course, outside of foreign firms, many firms are government-owned. And can we buy those firms? Have you looked at the restrictions here? I have.
Whole lot of protectionism going on here...under the covers...that few economists bother to look at.
Instead, they keep chanting the free trade mantra. I think things are a bit more complicated than that. You all worry when the paper industry takes China to court.
Yet, you never worry about what China does. Nor do you ever look at the specifics of each case. Was China providing subsidies to its paper industry?
Trade is complicated. Read a trade agreement sometime. Read the court briefs.
Posted by: Stormy at April 13, 2007 03:11 PM
Not to throw a monkey wrench in the above discussion, but if JDH is right about peak oil (and I am in his camp), suddenly we'll find that import-export will diminish in cost effectiveness compared to domestic production.
I think right now, we are in an era of "overtrading", or "excess globalization", which is driven by (still) anomalously cheap energy, cost basis advantages that are temporary, and various large-scale trade factor manipulations (such as the Yuan-Dollar rate).
I wonder whether we will not end up with less global trade in 5 years time, as these conditions evolve...
Posted by: Aaron Krowne at April 14, 2007 09:47 AM
Thanks for your efforts on fair trade issues lately (or longer, I may not have noticed earlier).
Why doesn't our government do more to enforce fair trade (or even negotiate for it)? Let me count the ways:
1. Pot-meet-kettle: we don't practice fair trade ourselves, starting with agriculture and I'm sure others could build a big list.
2. Our government is run by people who are more concerned with opening the Chinese banking sector to Goldman Sachs than with labor conditions or environmental impact.
3. Both parties are dominated by fundraisers for whom adapting to globalization is a matter of portfolio rotation, not job retraining or physical relocation.
4. Our academic bench is populated by tenured professors for whom globalization is similarly abstract -- a set of intriguing intellectual puzzles with a guaranteed happy ending because "free trade is always and everywhere a net positive".
I was pleased to hear the other day (from Mark Thoma's blog) of The Horizon Project (http://www.horizonproject.us/) but don't yet know if they have gotten us closer to a practical political approach to this problem.
Posted by: STS at April 16, 2007 03:06 PM