America needs a new case for trade - FT.com

Summary:
Larry Summers on rise of anti-free trade sentiment in US. Despite economic benefits, free trade does appear to be hurting American workers. Vigorous effort needed to help those left behind. Global prosperity at expense of workers and middle classes in rich countries. This may lead to loss of support for internationalist economic policy. In order to prevent this, better alignment is needed between the interests of this group and the success of the global economy, to be discussed in part 2. (Published 28/04/2008)

Notes:

• America's commitment to internationalist economic policy in doubt
• significant rise in unemployment likely in months ahead due to financial crisis
• presidential candidates attacking NAFTA
• increasing attacks on foreign investment in US
• growing support for restrictive immigration policies
• typical 4-part response by conventional wisdom:
1. trade benefits not just producers but also consumers, and economy in general
2. free trade also represents good mercantilism: US already has low trade barriers, don't need to be reduced as much as those of trading partner; note: US in competition with other major economic powers, and will therefor be at a disadvantage if developing country has free trade agreement with them and not with us
3. most of the increase in observed income inequality due to new technology rather than increase trade; moreover most of the increase in trade not attributable to trade agreements
4. acknowledged that although trade is good for the economy overall, not everybody wins
• needs complementing with ambitious effort to reduce insecurity and income inequality; eg universal healthcare?
• All correct economic arguments
• compelling case that US is better of than without free trade agreements, that world will be a richer and safer place with more economic integration
• if combined with vigorous efforts to help those left behind, support for economic internationalism may be maintained
• But policy debate will need to confront suspicion held by many that growing prosperity of global economy may not be in their interest
• Paul Samuelson, years ago: the valid proposition that trade barriers hurt an economy does not imply the corollary that it necessarily benefits from the economic success of its trading partners
• When other countries develop American producers benefit from larger export market but are faced with more competition; which effect dominates?
• reasonable to think that economic success abroad hurts American workers; 3 reasons:
1. increased export by developing countries of goods that the US slso produces such as computers and software puts pressure on wages; at the same time, global prosperity increases rewards for the already highly paid producers of intellectual property goods such as films and music
2. increased global competition for energy and natural resources raising prices for Americans
3. most fundamental: growth of global economy encourages development of 'stateless elites'; allegiance to global economic success and own interest rather than nation where headquartered
• even as globalization increases inequality and insecurity, it is usually invoked as argument against progressive taxation, support for labour unions, strong regulation, and substantial production of public goods that mitigate its adverse impact
• Focus must shift from supporting internationalism as traditionally defined, to designing an internationalism that more succesfully aligns the interests working people and the middle class in rich countries with the success of the global economy