One of the many tough issues facing policymakers these days is trade. Using the North American Free Trade Agreement (NAFTA) as a model, the White House has been pursuing free trade agreements with additional countries and regions. But opposition to such agreements, both inside Congress and outside the Beltway, is strong enough that they may not be ratified. With the monthly trade deficit still posting near-record levels, net U.S. indebtedness at an all-time high, and concern rising over the outsourcing of both low-skill and high-skill jobs, the free trade consensus that has dominated policy in the last two decades has begun to erode.
Is it time for a new vision? Here's a discussion of the arguments for and against free trade with Mark Obrinsky, chief economist for the National Multi Housing Council.
Q: What's the underlying rationale for free trade?
A: There are some non-economic reasons for supporting free trade—namely, the view that trade means reduced tensions and, therefore, reduced likelihood of warfare. However, the primary argument for free trade is an economic one.
That argument rests firmly on the theory of comparative advantage. Briefly, the theory argues that two nations (or, for that matter, two regions, two cities, or two people) will be better off if they each concentrate on those activities in which they are comparatively more efficient and then trade for the other's products. This is true even if one nation has an absolute advantage in all endeavors. In those cases, by focusing on the areas in which its advantage is greatest, a country will exchange its excess for other goods produced elsewhere, and the sum total of products it will have available will be greater.
Q: Is that the same argument behind existing free trade agreements?
A: Not quite. The economic case for free trade is actually quite a bit stronger than generally recognized—it is, in fact, a unilateral one. Any nation is better off economically if it allows goods and services to be freely imported from other countries, regardless of the policy its trading partners pursue. (Yes, you read that right.) In other words, other countries might slap tariffs or quotas on U.S. imports—or ban them altogether—yet we will still have more goods to consume, as a nation, if we allow goods to be imported from these countries freely.
To be sure, the same conclusion applies to other countries—they'd be better off if they eliminated all barriers to trade. Even if they don't, however, it's still in our best interest to pursue free trade.
Q: Then why not adopt free trade unilaterally rather than bother with complicated trade agreements?
A: Good question. Perhaps it seems too radical. More likely, it may be politically risky. For better or worse, many voters are willing to reduce barriers to foreign goods only if our goods get equivalent treatment. Hence, it's much safer politically to negotiate multilateral steps toward free trade. In fact, trade agreements are more often about politics than economics; that they are advertised as “free trade” agreements is more of a marketing tactic. (It's similar to calling any piece of tax legislation “tax reform.”)
Q: But don't the countries we trade with have unfair advantages? Do any of them have to comply with occupational health and safety laws, environmental regulations, or unions that work for higher pay and benefits?
A: Let's remember that our main trading partners are other developed countries. For example, Canada, Japan, Germany, and the United Kingdom are among the top six exporters to, and importers from, the United States. Not only do they have their own substantial regulations, but these countries have a higher share of unionized workers than the United States.
Nonetheless, it is true that our less developed trade partners, such as China and Mexico, pay lower wages (regardless of whether their workers are free to organize) and impose fewer regulatory restrictions. This gives firms in those countries a cost advantage in the global marketplace. But it also means that we pay lower prices for these goods, which is to our advantage.
Q: It may be an advantage to buyers, but won't it make U.S. workers and companies in that industry lose their competitive edge? Isn't free trade supposed to make everyone better off?
A: Not exactly. Economists recognize that not all individuals benefit directly—that free trade creates both winners and losers. In particular, those employed in import-competing industries will find that trade reduces their wages or costs them their jobs.
The critical point, from the standpoint of economic theorists, is that the winners gain more from trade than the losers lose. In other words, the winners could more than compensate the losers for all their trade-related losses and still have gains left over.
Q: Will this lead to a “race to the bottom,” as more advanced countries reduce wages and eliminate social regulations to keep up with world markets?
A: The problem isn't trade, but rather what we do (or don't do) with the gains from that trade. We have already put in place a number of programs, such as Trade Adjustment Assistance and job retraining . Unfortunately, these only target those who have lost their jobs, not those still working for a lower wage. The latter are much harder to identify.
To some extent, the winners are also hard to identify. We don't exactly know who buys the cheaper foreign imports (and in what quantities), nor what portion of the higher wages of some is the result of trade-induced demand for their products.
This puts economists and well-intentioned policymakers in the uncomfortable position of being confident that the net gains from free trade outweigh the costs, yet lacking any clear means of transferring a portion of those gains to those who have borne the costs.
Ultimately, this sort of trade accounting may be unnecessary. We can instead choose to make the social safety net better or worse, regardless of our trade policy.
With the 2008 presidential election moving into high gear, it is quite likely we'll see attention focused on at least one aspect of that safety net: our health care system.
Beyond that, appropriate macroeconomic policies can keep us near full employment—perhaps the most important thing for the apartment industry. Stay tuned.
Mark Obrinsky is NMHC's vice president of research and chief economist.