1 Doha Round and Around: Understanding International Trade Social Gains from Trade August 25, 2006 copies of this presentation can be found at

2 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. Trade: The Underlying Assumptions

3 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. Income

4 Source:International Financial Statistics, International Monetary Fund Higher levels of trade are associated with higher levels of per-capita income.

5 Source:International Financial Statistics, International Monetary Fund For lesser-developed countries, higher levels of trade are associated with higher levels of per-capita income. Per-capita Income (US$), Low-Middle and Low Income Countries Only

6 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. Income

7 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.

8 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. Income Distribution

9 Source:International Financial Statistics, International Monetary Fund, and Measuring Income Inequality: A New Database, Deininger, Klaus, and Lyn Squire, World Bank, 2002 Higher levels of trade are associated with more equitable income distributions.

10 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 Income Distribution

11 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. Health and Life Expectancy

12 Source:International Financial Statistics, International Monetary Fund, and World Development Indicators, World Bank Higher levels of trade are associated with greater life expectancies.

13 Source:International Financial Statistics, International Monetary Fund, and World Development Indicators, World Bank For lesser-developed countries, higher levels of trade are associated with greater life expectancies. Life Expectancy (years), Low-Middle and Low Income Countries Only

14 Source:International Financial Statistics, International Monetary Fund, and World Development Indicators, World Bank Higher levels of trade are associated with reduced infant mortality.

15 Source:International Financial Statistics, International Monetary Fund, and World Development Indicators, World Bank Higher levels of trade are associated with increased caloric intake.

16 Source:International Financial Statistics, International Monetary Fund, and World Development Indicators, World Bank Higher levels of trade are associated with increased protein intake.

17 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. Health and Life Expectancy

18 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. Gender Equality

19 Source:International Financial Statistics, International Monetary Fund, and Human Development Report, United Nations Development Programme Higher levels of trade are associated with increased female literacy.

20 Source:International Financial Statistics, International Monetary Fund, and Human Development Report, United Nations Development Programme Higher levels of trade are associated with increased GDI. GDI measures equality of quality of life (longevity, education, literacy, income) across genders.

21 Source:International Financial Statistics, International Monetary Fund, and Human Development Report, United Nations Development Programme GEM measures the proportion of women in legislatures, among senior officials, holding technical and management positions. Higher levels of trade are associated with increased GEM.

22 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. Gender Equality

23 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. Child Labor

24 Source: International Financial Statistics, International Monetary Fund, and World Development Indicators, World Bank Higher levels of trade are associated with reduced child labor rates.

25 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 Child Labor

26 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. Human Development

27 Source:International Financial Statistics, International Monetary Fund, and Human Development Report, United Nations Development Programme HDI is a composite measure of life expectancy, educational enrollment, adult literacy, and per-capita income. Higher levels of trade are associated with an increased HDI.

28 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. Human Development

29 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 U.S. Wages and Employment

30 Source: Bureau of Labor Statistics, and Bureau of Economic Analysis Higher levels of trade are associated with an decreased unemployment.

31 Source: Bureau of Labor Statistics, and Bureau of Economic Analysis Higher levels of trade are associated with increased real wages.

32 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. U.S. Wages and Employment

33 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 The Trade Deficit

34 Source: Federal Reserve Bank Flow of Funds Tables Higher trade deficits are associated with increased foreign direct investment.

35 Source: Federal Reserve Bank Flow of Funds Tables Higher trade deficits are associated with increased foreign purchases of US stocks and bonds.

36 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: FirmFoundedCurrent Value Cisco Systems1984 $110 billion Dell1984$49 billion eBay1995$38 billion Yahoo1995$40 billion Google1998$115 billion Facebook2004$1.4 billion offer from Yahoo The Trade Deficit

37 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. Summary

38 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. Summary

39 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. Summary

40 Hypothesis: Political freedom makes economic freedom possible. Economic freedom makes political freedom meaningful.

41 Doha Round and Around: Understanding International Trade Social Gains from Trade August 25, 2006 copies of this presentation can be found at