Monday, April 7, 2008

Half Right on Trade

The New York Times editorial staff, in a rare display of good sense, urges Clinton and Obama to stop talking nonsense and support free-trade deals.
Democrats need to tell voters the truth: First, trade is good for the economy, providing cheap imports and markets for exports, spurring productivity and raising living standards. And second, while trade can drive down some wages and displace some jobs, Democrats have real ideas to help workers cope. Mrs. Clinton and Mr. Obama should base their approach on these ideas. They would not only make sound policy, they would also provide a competitive advantage over John McCain.
If there's anything that came out of the 80's and 90's as a near-universal truth, it ought to be that free trade simply works. It's a win-win. It produces wealth for both parties. That even the NYT recognizes this fact ought to say something.

The NYT goes even further and argues that attempting to renegotiate NAFTA and CAFTA with better labor standards is a fool's errand:
Strengthening rules on workers’ rights in Nafta would be a good thing to do, on the merits. But it would do little to help American workers compete with cheaper Mexican labor. If a President Obama or a President Clinton were to fulfill their pledge to renegotiate the deal, he or she would quickly find that Canada and Mexico would want changes, too. Immigration reform would most likely top Mexico’s list. And if push came to shove, would either candidate take the country out of Nafta when about a third of its exports go to Mexico and Canada?
But there's a better reason to avoid the labor practices swamp: It is merely protectionism in sheep's clothing. Adding in labor standards regulations is expensive. When you add expense to products coming from less-developed markets, you're hurting their competitiveness. This dries up the free trade you'd like to promote and everybody loses.

If, instead, you allow your trading partners' labor markets to develop naturally, eventually the workers in those countries will agitate for their own labor standards. Mexico has been unusually slow to do this (largely because competition from China has hurt them enormously) but it'll happen eventually.

Meanwhile, pressure is already coming to bear on China, both externally from trading partners who want higher quality products and internally as more and more of the Chinese economy industrializes. China has been able to take enormous advantage of the US with cheap labor, predatory monetary policy, and lax intellectual property laws. But that's coming to an end. International outcry is on the rise. China's population is vastly more sophisticated than it used to be. In order for China to continue to develop, it needs to get along with the rest of the world.

I'm pretty confident that China can soft-land itself to be a warmer and fuzzier international trading partner. If not, well, that's self-corrective, but nobody will like the result. All the more reason to pay down the US debt now, while we still can. It gives us leverage over Chinese policymakers if they can't threaten to dump our debt. Of course, that would be tantamount declaring war on the US, but it might come to that. Better to take the weapon out of their hands.

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