Doha Round and Around: Understanding
International Trade
Social Gains from Trade
August 25, 2006
copies of this presentation can be found at
www.business.duq.edu/faculty/davies
1
Trade: The Underlying Assumptions
Part of what makes debate on trade heated is that both protectionist and globalist
positions are logically consistent. However, each proceeds from a different
underlying assumption.
Protectionist Assumption:
Trade leads to a centralization of political power, decreased competition, and the
concentration of wealth.
Globalist Assumption:
Trade leads to a decentralization of political power, increased competition, and the
dissemination of wealth.
The purpose of this analysis is to ask whether empirical data support one
assumption over the other.
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Income
Protectionist position:
Trade leads to a shift in wealth from workers, consumers, and developing countries
to multinationals.
Rationale:
In developed countries, workers become unemployed as their jobs move abroad
where labor is cheaper. In lesser developed countries, workers earn lower wages as
the number of employers declines via consolidation and buy-outs driven by
multinationals.
Examples:
McDonald’s is accused of preventing union formation and paying substandard wages
in its restaurants abroad. Nike uses child labor to make soccer balls.
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$40,000
Higher levels of trade are associated with higher levels of
per-capita income.
$35,000
Luxembourg
Belgium
Per-capita Trade (US$)
$30,000
Ireland
$25,000
$20,000
$15,000
$10,000
U.S.
$5,000
Japan
$0
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
Per-capita Income (US$)
Source: International Financial Statistics, International Monetary Fund
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$3,500
Suriname
$3,000
For lesser-developed countries, higher
levels of trade are associated with
higher levels of per-capita income.
Lithuania
Per-capita Trade (US$)
$2,500
$2,000
Samoa
Guyana
$1,500
Russia
$1,000
Peru
Colombia
$500
$0
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
$4,500
Per-capita Income
(US$)
Per-capita Income (US$), Low-Middle
and Low
Income Countries Only
Source: International Financial Statistics, International Monetary Fund
5
Income
Data suggest:
For both developed and lesser-developed countries, increased trade
accompanies increased per-capita income.
Supporting theory:
Trade promotes competition which (1) results in more jobs as workers are hired
to produce export goods, and (2) more available goods as currency earned via
exports enables consumers to import more goods.
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Examples:
Affiliates of US multinational firms pay a wage premium that ranges from 40% in
high-income countries to 100% in low-income countries.
Workers in foreign-owned apparel and footwear factories in Vietnam rank in the top
20% of wage earners.
In 2000 at Nike factories abroad, annual wages were $670 compared with an
average minimum wage of $134. In Indonesia, Nike paid $720 compared with an
average annual minimum wage of $241.
In Mexico, firms that exported half of their product paid wages that were, at the
low end, 11% higher than wages of non-export oriented firms. Firms that exported
most or all of their product paid wages from 58% to 67% higher than wages of
non-export oriented firms.
Source: Brown, Drusilla K., Alan V. Deardorff, and Robert M. Stern, “The Effects of Multinational Production on Wages and Working Conditions in
Developing Countries,” discussion paper no. 483, School of Public Policy, The University of Michigan, August 2002.
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Income Distribution
Protectionist position:
Trade results in a concentration of income so that the few benefit
disproportionately to the many.
Rationale:
Trade does result in an increase in income for some (e.g. multinational
corporations and their affiliates), but the consolidation of economic power by the
multinationals results in a concentration of more and more income in the hands of
fewer and fewer individuals.
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$40,000
Higher levels of trade are associated with
more equitable income distributions.
Singapore
$35,000
Hong Kong
Per-capita Trade (US$)
$30,000
$25,000
$20,000
$15,000
$10,000
US
$5,000
$0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
55.0
60.0
65.0
Gini Coefficient (0 = equitable, 100 = inequitable)
Source: International Financial Statistics, International Monetary Fund, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World
Bank, 2002
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Income Distribution
Data suggest:
Increased trade accompanies more equitable income distributions within countries.
Supporting theory:
More trade implies greater opportunities: (1) producers see more opportunity to sell
on new export markets, and (2) buyers are able to purchase at lower prices on new
import markets.
Greater opportunities implies better environment for entrepreneurship. More
entrepreneurship flattens the income distribution by (1) providing a return to the
entrepreneur, and (2) creating new jobs.
Examples:
Microsoft, Cisco Systems, eBay, Intel, Advanced Micro Devices, Oracle, Celera
Genomics
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Health and Life Expectancy
Protectionist position:
Increases in life expectancy, decreases in infant mortality, better nutrition accrue
mostly to developed countries. Trade causes a reduction in health measures for
lesser developed countries.
Rationale:
Trade causes agricultural resources to be diverted to meet the needs of
exporters rather than local needs. People driven off rural land are forced to work
in overcrowded cities without proper water and sanitation. Foreign-owned firms,
unfettered by environmental and health regulations, pollute the environment of
lesser developed countries and maintain inadequate working conditions.
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$100,000
Higher levels of trade are associated with greater life
expectancies.
Per-capita Trade (US$, logarithmic scale)
$10,000
Botswana
US
$1,000
$100
India
$10
$1
30.0
40.0
50.0
60.0
70.0
80.0
90.0
Life Expectancy (years)
Source: International Financial Statistics, International Monetary Fund, and World Development Indicators, World Bank
12
$3,000
For lesser-developed countries, higher levels of trade are associated with
greater life expectancies.
Per-capita Trade (US$)
$2,500
$2,000
$1,500
$1,000
$500
$0
30
35
40
45
50
55
60
65
70
75
80
Expectancy
Life Expectancy (years),Life
Low-Middle
and (years)
Low Income Countries Only
Source: International Financial Statistics, International Monetary Fund, and World Development Indicators, World Bank
13
$100,000
Higher levels of trade are associated with reduced infant mortality.
Per-capita Trade (US$, logarithmic scale)
$10,000
US
Gabon
Botswana
South Africa
$1,000
Lesotho
Ivory Coast
Azerbaijan
$100
$10
$1
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
160.0
Infant Mortality (per 1,000 live births)
Source: International Financial Statistics, International Monetary Fund, and World Development Indicators, World Bank
14
$100,000
Hong Kong
Per-capita Trade (US$, logarithmic scale)
recommended
$10,000
US
$1,000
$100
Myanmar
$10
$1
1,500
Higher levels of trade are associated
with increased caloric intake.
2,000
2,500
3,000
3,500
4,000
Daily per capita Supply of Calories
Source: International Financial Statistics, International Monetary Fund, and World Development Indicators, World Bank
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$100,000
Per-capita Trade (US$, logarithmic scale)
recommended
$10,000
US
$1,000
$100
$10
Higher levels of trade are associated
with increased protein intake.
$1
30
40
50
60
70
80
90
100
110
120
Daily per capita Supply of Protein (grams)
Source: International Financial Statistics, International Monetary Fund, and World Development Indicators, World Bank
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Health and Life Expectancy
Data suggest:
Increased trade accompanies improved health and longevity.
Supporting theory:
Trade makes goods and services available that would not otherwise be available.
Goods which can be competitively produced domestically are traded for food and
medicines that might not be competitively produced domestically. Capital flows
make foreign investment in hospitals and health care infrastructure possible.
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Gender Equality
Protectionist position:
Because trade is founded on the premise of exploitation, gender inequality (like
child labor rates) will worsen in the presence of trade.
Rationale:
Politically and economically weak demographic groups are least able to resist the
consolidation of power that accompanies increased trade.
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Per-capita Trade (US$, logarithmic scale)
$100,000
Higher levels of trade are associated with increased
female literacy.
$10,000
Oman
Libya
$1,000
Morocco
Yemen
Haiti
$100
Myanmar
Burundi
$10
$1
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Female Adult Literacy Rate (relative to male)
Source: International Financial Statistics, International Monetary Fund, and Human Development Report, United Nations Development Programme
19
Per-capita Trade (US$, logarithmic scale)
$100,000
Higher levels of trade are associated with increased GDI.
$10,000
Oman
US
Botswana
$1,000
Ivory Coast
$100
Myanmar
$10
GDI measures equality of quality of life (longevity,
education, literacy, income) across genders.
$1
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Gender Related Development Index (0 = low gender adjusted HDI, 1 = high gender
adjusted HDI)
Source: International Financial Statistics, International Monetary Fund, and Human Development Report, United Nations Development Programme
20
$100,000
Singapore
Per-capita Trade (US$, logarithmic scale)
Norway
Kuwait
$10,000
US
$1,000
China
$100
Niger
Mozambique
Higher levels of trade are
associated with increased GEM.
$10
GEM measures the proportion of women in legislatures, among
senior officials, holding technical and management positions.
$1
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
Gender Empowerment Measure (0 = low empowerment, 1 = high empowerment)
Source: International Financial Statistics, International Monetary Fund, and Human Development Report, United Nations Development Programme
21
Gender Equality
Data suggest:
Increased trade accompanies greater gender equality.
Supporting theory:
Because trade decentralizes power and augments competition, demographic groups
that would seek to dominate others are disempowered. Economic and political
power accrues to those who provide the innovation, goods, and services that others
desire.
Examples:
Historically, oppressed demographic groups have gained greater freedoms
coincident with general economic gains: slavery in the US ends as industrial
revolution waxes; women in the US attain suffrage as technological advances from
industrial revolution reach into the home; the most repressive Islamic countries
today are also among the poorest.
22
Child Labor
Protectionist position:
Increased trade leads to the exploitation of children.
Rationale:
Developed countries import manufactured goods from underdeveloped countries
that can supply the goods at lower cost by employing child labor. The increased
trade encourages underdeveloped countries to increase child labor.
Example:
Nike employs child labor in Pakistan.
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$100,000
Higher levels of trade are associated with
reduced child labor rates.
Per-capita Trade (US$, logarithmic scale)
Hong Kong
$10,000
US
Botswana
Gabon
$1,000
$100
Burundi
Sierra Leone
$10
$1
0
10
20
30
40
50
Children 10 to 14 in the Labor Force (as % of age group)
Source: International Financial Statistics, International Monetary Fund, and World Development Indicators, World Bank
24
Child Labor
Data suggest:
Increased trade is associated with decreased child labor rates.
Supporting theory:
Increased trade results in increased income – increased foreign demand for the
output of an underdeveloped country means (1) more people are hired to supply the
foreign demand, and (2) those people earn better wages due to increased foreign
demand.
As income increases, basic needs (food, clothing, shelter) are met and surplus income
becomes available for education. Increased education rates reduce child labor in the
current and subsequent generations because (1) children are in school instead of in
factories, and (2) the children grow into educated adults who, with greater earning
power, can afford to educate their children.
Example:
Padaugh women of Burma
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Human Development
Protectionist position:
What is important is not simply the “economic” ramifications of trade, but also
the social consequences.
Rationale:
If trade produces more wealth in the aggregate, it does so at the expense of
non-economic “goods” such as health, education, and well-being.
Example:
Robber barons of the industrial revolution.
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$100,000
Higher levels of trade are associated with an increased HDI.
Per-capita Trade (US$, logarithmic scale)
$10,000
US
$1,000
$100
Myanmar
Sierra Leone
$10
HDI is a composite measure of life expectancy, educational
enrollment, adult literacy, and per-capita income.
$1
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1.0
Human Development Index (0 = low human development, 1 = high human development)
Source: International Financial Statistics, International Monetary Fund, and Human Development Report, United Nations Development Programme
27
Human Development
Data suggest:
Increased trade is associated with increased human development.
Supporting theory:
Because trade contributes to both an increase in wealth and an decentralization of
economic and political power, trade provides peoples with the tools and opportunities
to better their lives.
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U.S. Wages and Employment
Protectionist position:
Increased trade leads to unemployment of U.S. workers and reduced wages as
foreign competition destroys American jobs.
Rationale:
Lesser developed countries can supply labor at a lower wage and without the
added costs associated with labor protection laws that apply to U.S. workers.
Firms in these countries export product to the U.S. at prices with which American
firms cannot compete. American firms then layoff U.S. workers.
Examples:
Steel, textiles
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January 1975 to June 2006
12%
Higher levels of trade are associated with an decreased unemployment.
Unemployment Rate
10%
8%
6%
4%
2%
0%
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
Trade (imports plus exports) as % of GDP
Source: Bureau of Labor Statistics, and Bureau of Economic Analysis
30
January 1975 to June 2006
Average Real Hourly Earnings (2000$)
$15.00
Higher levels of trade are associated with increased real wages.
$14.50
$14.00
$13.50
$13.00
$12.50
$12.00
12%
14%
16%
18%
20%
22%
24%
26%
28%
30%
Trade (imports plus exports) as % of GDP
Source: Bureau of Labor Statistics, and Bureau of Economic Analysis
31
U.S. Wages and Employment
Data suggest:
Increased trade is associated with decreased levels of unemployment and increased
real wages.
Supporting theory:
Increased trade destroys some domestic jobs and creates other domestic jobs.
Jobs destroyed are in industries in which we do not have a competitive advantage.
Jobs created are in industries in which we do have a competitive advantage.
Productivity gains result in increased real wages.
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The Trade Deficit
Protectionist position:
The trade deficit is bad because it indicates a net outflow of wealth from the
U.S. to the rest of the world.
Rationale:
As the U.S. imports more than it exports, there is a net outflow of dollars to the
rest of the world. The rest of the world uses these dollars to buy up American
companies.
Examples:
Daimler/Chrysler, UBS/PaineWebber, BP/Amoco, Vodafone/AirTouch,
DeutscheTelekom/VoiceStream, Unilever/Bestfoods
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January 1975 to March 2006
7%
Higher trade deficits are associated with
increased foreign direct investment.
6%
Trade Deficit as % of GDP
5%
4%
3%
2%
1%
0%
-1%
0%
1%
2%
3%
4%
5%
6%
7%
8%
-1%
-2%
Foreign Direct Investment as % of GDP
Source: Federal Reserve Bank Flow of Funds Tables
34
January 1975 to March 2006
7%
6%
Trade Deficit as % of GDP
5%
4%
3%
2%
1%
0%
-2%
-1%
0%
-1%
-2%
1%
2%
3%
4%
5%
6%
Higher trade deficits are associated with increased
foreign purchases of US stocks and bonds.
Foreign Purchases of US Stock and Corporate Bonds as % of GDP
Source: Federal Reserve Bank Flow of Funds Tables
35
The Trade Deficit
Data suggest:
Increased trade is associated with increased acquisition of U.S. firms by foreigners.
However:
This is only a bad thing if the supply of American firms is constant. In fact, Americans
create new firms continuously. The U.S. exports entrepreneurship by selling U.S. firms.
Examples:
Firm
Cisco Systems
Dell
eBay
Yahoo
Google
Facebook
Founded
1984
1984
1995
1995
1998
2004
Current Value
$110 billion
$49 billion
$38 billion
$40 billion
$115 billion
$1.4 billion offer from Yahoo
36
Summary
This analysis looks at the correlation between trade and socio-economic measures.
While the argument can be made that trade directly impacts income, the argument
that trade directly impacts health, longevity, and the environment is more tenuous.
What is more likely is that trade is not the cause of improved socio-economic
measures, but is one result of underlying conditions responsible for improving a
broad variety of social and economic measures.
The underlying condition, and the common thread throughout this discussion, is
freedom: economic and political.
Political freedom ensures that individuals can think, speak, and act as they please.
Economic freedom ensures that individuals can generate income and comfortably
own property that is dependent on and/or arises from their thoughts, words, and
actions.
37
Summary
This is not, however, the end of the story…
While trade is clearly better for society as a whole, there are losers.




Trade puts some hard-working, American taxpayers out of work.
Many of these people have families to support.
Many of these people are at a stage in life in which they cannot be retrained.
For these people, trade’s harm is morally wrong.
Is compromise possible?
Yes. Use the power of trade to protect those who would be disenfranchised
by trade.
38
Summary
Example:
Remove protective tariffs while simultaneously enacting temporary supports for those directly
disenfranchised by the removal of the protection.
Short-run win:
Workers in the formerly-protected industry will be as well off as they would have been under
the protective tariff during the time it takes them to retrain and find alternate employment.
On the whole, the economy will be better off than it would have been under the protective
tariff.
Long-run win:
In the long-run, lower priced imports will cause a gradual shift in resources toward industries
in which we have competitive advantage.
39
Hypothesis:
Political freedom makes economic freedom possible. Economic freedom makes
political freedom meaningful.
40
Doha Round and Around: Understanding
International Trade
Social Gains from Trade
August 25, 2006
copies of this presentation can be found at
www.business.duq.edu/faculty/davies
41