Thursday, July 15, 2010

Recent US Moves toward Trade Liberalization : Economics vs. Politics

The Obama administration has recently announced several initiatives to promote US international trade. One is a National Export Initiative aimed at doubling US exports over 10 years. Another is a renewed effort to revive stalled bilateral trade agreements with Korea, Columbia, and Panama.

Economists, with relatively few exceptions, tend to favor free trade. They are at home in a world of economic models where the interests of consumers, firms, and workers are balanced against one another in a neutral, unbiased manner. Using familiar conceptual tools like producer and consumer surplus, economists tally up the net gains and losses to trade liberalization and almost always find that lifting trade restrictions benefits both importing and exporting countries.

The political game unfolds on a different playing field, for two reasons. First, although economists tend to focus on the net gains from trade, politics is very sensitive to the fact that any change in trade policy produces some losers along with the winners. Second, the political influence of winners and losers is not necessarily proportional to the magnitude of their economic gains or losses. Instead, well-organized groups, like corporations, farm groups, and unionized workers, have disproportionate political power compared to poorly organized groups like consumers and non-unionized workers.

As a case in point, consider the Korea-US Free Trade Agreement (KORUS FTA). It was originally negotiated in 2006 and signed by both governments in 2007, but it is not yet ratified. In the United States, the main opposition has come from the Big Three automakers and their unions. These control enough Democratic votes in Congress to have blocked ratification up to this point.

Ratification opponents claim that US-Korean automobile trade is inherently unfair because Korea exports 700,000 cars a year to the US, but imports more than 100 times fewer US cars. They less often emphasize the fact that KORUS FTA would lower Korean auto tariffs by more than US tariffs would be lowered, or that Korean and US automakers each produce many cars in the others' country, which do not show up in import figures, or that trade in auto parts is less unbalanced than trade in finished cars.

Will KORUS FTA be ratified? At the recent G20 summit in Canada, the presidents of the US and South Korea pledged a renewed push for ratification. A group of Republic senators has offered to help the ratification push. Still, as of mid-2010, the outcome is far from certain.

The bottom line: There is a big gap between the politics and the economics of trade liberalization. In Washington,  lobbyists for corporations and unions battle one another in a zero-sum game. Consumer interests and non-unionized workers are rarely heard from. In contrast, economic analysis tells us that when the interests of all groups are taken into account, trade liberalization leads to net gains for both importing and exporting countries.

Follow this link to download a set of free, classroom-ready slides with a more detailed analysis of trade liberalization and KORUS. The slides make use of the concepts of consumer and producer surplus. Click here if you think your students would benefit from a quick tutorial on producer and consumer surplus.

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