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
The 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:
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
Outline
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:
Survey 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%
I. Views of Economists and the General Public:
Survey Information
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%
I. Views of Economists and the General Public:
Survey Information
General Public
I am in favor of freer trade
64%
I am not in favor of freer trade
31%
Don’t Know / Refused
5%
I. Views of Economists and the General Public:
Survey Information
General Public
Question:
Which statement is closest to your position?
I favor agreements between the U.S. and other
countries to mutually lower trade barriers,
provided the government has programs to
help workers who lose their jobs.
55%
I favor agreements to lower trade barriers, but
I oppose government programs to help workers
who lose their jobs.
11%
I oppose agreements to lower trade barriers.
27%
No answer
7%
II. 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
Gains from Trade: Supply and Demand
The United States as an Importer
Price
of Good
Sdomestic
Price Before Trade
A
B C
World Price
Price After Trade
Ddomestic
Domestic
Quantity
Supplied
Movement to free trade
Consumer Gain
Producer Loss
U.S. Gain
A+B+C
A
B+C
Domestic
Quantity
Domestic
Quantity
Demanded
Quantity of Good
decline in price of import good
(larger quantity purchased at lower price per unit)
(smaller quantity produced at lower price per unit- reduced employment)
Gains from Trade: Supply and Demand
The United States as an Exporter
Price
of Good
Sdomestic
World Price
Price After Trade
E
Price Before Trade
F
G
Ddomestic
Domestic Domestic
Quantity Quantity
Demanded
Movement to free trade
Consumer Loss
Producer Gain
U.S. Gain
E+F
E+F+G
G
Domestic
Quantity
Supplied
Quantity of Good
increase in price of export good
(smaller quantity purchased at higher price per unit)
(larger quantity produced at higher price per unit- increased employment)
General Public Understands Many of the
Consequences 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.
Agree (either strongly or somewhat)
78%
Disagree (either strongly or somewhat)
18%
Neither / Don’t Know / Refused
4%
General Public Understands Many of the
Consequences of Freer Trade
Statement:
Freer trade helps to increase prosperity, both in the U.S. and other parts of the world.
Agree (either strongly or somewhat)
68%
Disagree (either strongly or somewhat)
28%
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 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%
III. Why the General Public Is Skeptical of Freer Trade
• 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%
Don’t know / Refused
4%
III. Why the General Public Is Skeptical of Freer Trade
Statement:
Freer trade leads to lower quality jobs in the U.S.
Strongly agree
24%
Somewhat agree
24%
Somewhat disagree
31%
Strongly disagree
16%
Neither
1%
Don’t know / Refused
3%
III. Why the General Public Is Skeptical of Freer Trade
• 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.
III. Why the General Public Is Skeptical of Freer Trade
• 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.
III. Why the General Public Is Skeptical of Freer Trade
Statement:
Freer trade leads to more economic and social inequality in the United States.
Strongly agree
18%
Somewhat agree
30%
Somewhat disagree
29%
Strongly disagree
18%
Neither
2%
Don’t know / Refused
4%
• Clear that individuals have concerns about freer trade beyond their
individual consequences.
Additional Concerns About Labor and
Environmental 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%
Somewhat disagree
22%
Strongly disagree
9%
Neither
1%
Don’t know / Refused
5%
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.
Additional Concerns About Labor and
Environmental Standards
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%
Additional Concerns About Labor and
Environmental Standards
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%
Additional Concerns About Labor and
Environmental Standards
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%
Additional Concerns About Labor and
Environmental Standards
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%
Additional Concerns About Labor and
Environmental Standards
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 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
IV. Bridging the Gap
• 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)
IV. Bridging the Gap
• 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)
IV. Bridging the Gap
• 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)
IV. Bridging the Gap
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
IV. Bridging the Gap
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%
Don’t know / Refused
11%
IV. Bridging the Gap
• 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 reemployed (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??
IV. Bridging the Gap
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. 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