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

1

Doha Round and Around: Understanding International Trade

Social Gains from Trade

August 25, 2006

copies of this presentation can be found atwww.business.duq.edu/faculty/davies

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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

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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

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$0 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000

Per-capita Income (US$)

Per

-cap

ita

Trad

e (U

S$)

Luxembourg

Belgium

Ireland

U.S. Japan

Higher levels of trade are associated with higher levels of per-capita income.

5

Source: International Financial Statistics, International Monetary Fund

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500

Per-capita Income (US$)

Per

-cap

ita

Trad

e (U

S$)

Suriname

Lithuania

Samoa

Russia

ColombiaPeru

Guyana

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

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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

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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.

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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

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$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

15.0 20.0 25.0 30.0 35.0 40.0 45.0 50.0 55.0 60.0 65.0

Gini Coefficient (0 = equitable, 100 = inequitable)

Per

-cap

ita

Tra

de (

US

$)

US

Singapore

Hong Kong

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.

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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

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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

$1

$10

$100

$1,000

$10,000

$100,000

30.0 40.0 50.0 60.0 70.0 80.0 90.0

Life Expectancy (years)

Per

-cap

ita

Trad

e (U

S$,

lo

gar

ith

mic

sca

le)

US

Botswana

India

Higher levels of trade are associated with greater life expectancies.

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$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

30 35 40 45 50 55 60 65 70 75 80

Life Expectancy (years)

Pe

r-c

ap

ita

Tra

de

(U

S$

)


For lesser-developed countries, higher levels of trade are associated with greater life expectancies.

Life Expectancy (years), Low-Middle and Low Income Countries Only

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$1

$10

$100

$1,000

$10,000

$100,000

0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0

Infant Mortality (per 1,000 live births)

Per

-cap

ita

Trad

e (U

S$,

lo

gar

ith

mic

sca

le)

US Gabon

BotswanaSouth Africa

Ivory CoastLesotho

Azerbaijan

Higher levels of trade are associated with reduced infant mortality.

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$1

$10

$100

$1,000

$10,000

$100,000

1,500 2,000 2,500 3,000 3,500 4,000

Daily per capita Supply of Calories

Pe

r-c

ap

ita

Tra

de

(U

S$

, lo

ga

rith

mic

sc

ale

)

Myanmar

US

Hong Kongrecommended

Higher levels of trade are associated with increased caloric intake.

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$1

$10

$100

$1,000

$10,000

$100,000

30 40 50 60 70 80 90 100 110 120

Daily per capita Supply of Protein (grams)

Pe

r-c

ap

ita

Tra

de

(U

S$

, lo

ga

rith

mic

sc

ale

)

US

recommended

Higher levels of trade are associated with increased protein intake.

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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

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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

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Source: International Financial Statistics, International Monetary Fund, and Human Development Report, United Nations Development Programme

$1

$10

$100

$1,000

$10,000

$100,000

30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0%

Female Adult Literacy Rate (relative to male)

Pe

r-c

ap

ita

Tra

de

(U

S$

, lo

ga

rith

mic

sc

ale

)

Yemen

Oman

Burundi

Morocco

Libya

Myanmar

Haiti

Higher levels of trade are associated with increased female literacy.

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$1

$10

$100

$1,000

$10,000

$100,000

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00

Gender Related Development Index (0 = low gender adjusted HDI, 1 = high gender adjusted HDI)

Pe

r-c

ap

ita

Tra

de

(U

S$

, lo

ga

rith

mic

sc

ale

)

US

Myanmar

OmanBotswana

Ivory Coast

Higher levels of trade are associated with increased GDI.

GDI measures equality of quality of life (longevity, education, literacy, income) across genders.

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$1

$10

$100

$1,000

$10,000

$100,000

0.00 0.10 0.20 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00

Gender Empowerment Measure (0 = low empowerment, 1 = high empowerment)

Pe

r-c

ap

ita

Tra

de

(U

S$

, lo

ga

rith

mic

sc

ale

)

US

Mozambique

Norway

Niger

Singapore

Kuwait

China

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.

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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

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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

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$1

$10

$100

$1,000

$10,000

$100,000

0 10 20 30 40 50

Children 10 to 14 in the Labor Force (as % of age group)

Per

-cap

ita

Trad

e (U

S$,

lo

gar

ith

mic

sca

le) US

Hong Kong

Sierra LeoneBurundi

GabonBotswana

Higher levels of trade are associated with reduced child labor rates.

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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

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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

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$1

$10

$100

$1,000

$10,000

$100,000

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Human Development Index (0 = low human development, 1 = high human development)

Per

-cap

ita

Trad

e (U

S$,

lo

gar

ith

mic

sca

le)

US

Sierra Leone

Myanmar

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.

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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

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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

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Source: Bureau of Labor Statistics, and Bureau of Economic Analysis

January 1975 to June 2006

0%

2%

4%

6%

8%

10%

12%

12% 14% 16% 18% 20% 22% 24% 26% 28% 30%

Trade (imports plus exports) as % of GDP

Un

emp

loym

ent

Rat

e

Higher levels of trade are associated with an decreased unemployment.

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January 1975 to June 2006

$12.00

$12.50

$13.00

$13.50

$14.00

$14.50

$15.00

12% 14% 16% 18% 20% 22% 24% 26% 28% 30%

Trade (imports plus exports) as % of GDP

Av

era

ge

Re

al H

ou

rly

Ea

rnin

gs

(2

00

0$

)

Source: Bureau of Labor Statistics, and Bureau of Economic Analysis

Higher levels of trade are associated with increased real wages.

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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

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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

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January 1975 to March 2006

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

-1% 0% 1% 2% 3% 4% 5% 6% 7% 8%

Foreign Direct Investment as % of GDP

Trad

e D

efic

it a

s %

of

GD

P

Source: Federal Reserve Bank Flow of Funds Tables

Higher trade deficits are associated with increased foreign direct investment.

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January 1975 to March 2006

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

-2% -1% 0% 1% 2% 3% 4% 5% 6%

Foreign Purchases of US Stock and Corporate Bonds as % of GDP

Tra

de

Def

icit

as

% o

f G

DP

Source: Federal Reserve Bank Flow of Funds Tables

Higher trade deficits are associated with increased foreign purchases of US stocks and bonds.

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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:

Firm Founded Current ValueCisco Systems 1984 $110 billionDell 1984 $49 billioneBay 1995 $38 billionYahoo 1995 $40 billionGoogle 1998 $115 billionFacebook 2004 $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

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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

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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

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Hypothesis:

Political freedom makes economic freedom possible. Economic freedom makes political freedom meaningful.

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Doha Round and Around: Understanding International Trade

Social Gains from Trade

August 25, 2006

copies of this presentation can be found atwww.business.duq.edu/faculty/davies

Documents

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