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Utopia and trade

Donald Trump’s decision to impose import tariffs—on solar panels and washing machines now, and perhaps on steel and aluminum down the line—has once again opened up the war concerning international trade.

It’s not a trade war per se (although Trump’s free-trade opponents have invoked that specter, that the governments of other countries may retaliate with their import duties against U.S.-made products), but a battle over theories of international trade. And those different theories are related to—as they inform and are informed by—different utopian visions.

In one sense, Trump and his supporters are right. Capitalist free trade has destroyed cities, regions, livelihoods, and industries. The international trade deals the United States has signed in recent decades have been rigged for the wealthy and have cheated workers. They are replete with marketing scams, hustles, and shady deals, to the advantage of large corporations and a small group of individuals at the top.

But Trump, like all right-wing populists, as I explained recently, offers a utopian vision that looks backward, conjuring up and then offering a return to a time that is conceived to be better. For Trump, that time is the 1950s, when a much larger share of U.S. workers was employed in manufacturing and American industry successfully competed against businesses in other countries. The turn to import tariffs is a way of invoking that nostalgia, the selective vision of a utopia that was exceptional, in terms of both U.S. and world history, and that conveniently conceals or overlooks many other aspects of that lost time, such as worker exploitation, Jim Crow racism, and widespread patriarchy inside and outside households.

It should come as no surprise that mainstream economists, today and in a tradition that goes back to Adam Smith and David Ricardo, oppose Trump’s tariffs and hold firmly to the gospel of free international trade. Once again, Gregory Mankiw has stepped forward to articulate the neoclassical view (buttressed by classical antecedents) that everyone benefits from free international trade:

Ricardo used England and Portugal as an example. Even if Portugal was better than England at producing both wine and cloth, if Portugal had a larger advantage in wine production, Portugal should export wine and import cloth. Both nations would end up better off.

The same principle applies to people. Given his athletic prowess, Roger Federer may be able to mow his lawn faster than anyone else. But that does not mean he should mow his own lawn. The advantage he has playing tennis is far greater than he has mowing lawns. So, according to Ricardo (and common sense), Mr. Federer should hire a lawn service and spend more time on the court.

That’s the basis of neoclassical utopianism—the gains from trade: when international trade is unregulated, and every country specializes according to its comparative advantage, more commodities can be produced at a lower cost and as a result average living standards around the world are improved.

Like Mankiw, most mainstream economists, who are the only ones represented in the IGM Economic Experts panel, oppose import tariffs (as seen in the chart above) and celebrate the utopianism of free international trade.

That’s true even among mainstream economists who have argued that, in reality, the causes and consequences of international trade may not coincide with the rosy picture produced within the usual textbook versions of neoclassical economic theory.

For example, Paul Krugman was awarded the Nobel Prize in economics for his work demonstrating that the relative advantages most neoclassical economists take as given are in fact products of history. Thus, it is possible for countries to enhance their trade advantages (through creating internal economies of scale) by regulating international trade. But Krugman was also quick to belittle “a steady drumbeat of warnings about the threat that low-wage imports pose to U.S. living standards” and, then, in his first New York Times column, to denounce the critics of the World Trade Organization.

A few years later Paul Samuelson, widely recognized as the dean of modern mainstream economics, published an article in the Journal of Economic Perspectives in which he challenged the presumed universal benefits of free trade. It is quite possible, Samuelson argued, that if enough higher-paying jobs were lost by American workers to outsourcing, then the gains from the cheaper prices may not compensate for the losses in U.S. purchasing power. In other words, the low wages at the big-box stores do not necessarily make up for their bargain prices. And then Samuelson was immediately taken to task by other mainstream economists, most notably Jagdish Bhagwati (along with his coauthors, Arvind Panagariya and T.N. Srinivasan [pdf]), who argued that “that outsourcing is fundamentally just a trade phenomenon [and] leads to gains from trade.”

Finally, Dani Rodrick, the mainstream economist who has been most critical of the role his colleagues have played as “cheerleaders” for capitalist globalization, still defends the standard models of international trade:

It has long been an unspoken rule of public engagement for economists that they should champion trade and not dwell too much on the fine print. This has produced a curious situation. The standard models of trade with which economists work typically yield sharp distributional effects: income losses by certain groups of producers or worker categories are the flip side of the “gains from trade.” And economists have long known that market failures – including poorly functioning labor markets, credit market imperfections, knowledge or environmental externalities, and monopolies – can interfere with reaping those gains.

But Rodrick, like Krugman, Samuelson, and other mainstream economists who have identified problems with the story told by Mankiw, Bhagwati, and other free-traders—who have “consistently minimized distributional concerns” and “overstated the magnitude of aggregate gains from trade deals”—still holds to the neoclassical utopianism that, with “all of the necessary distinctions and caveats,” more international trade can and should be promoted. Thus, as Rodrick argued just last week,

If our economic rules empower corporations and financial interests excessively, then the correct response is to rewrite those rules — at home as well as abroad. If trade agreements serve mainly to reshuffle income to capital and corporations, the answer is to rebalance them to make them friendlier to labor and society at large.

The goal is to make sure everyone, not just “corporations and financial interests,” benefits from international trade.

But recent criticisms of trade deals from within mainstream economics still don’t include the possibility that capitalism itself, with or without free international trade and multinational trade agreements, however the rules are written, privileges one class over another. Capital gains at the expense of workers because it is able to extract a surplus for literally doing nothing. That kind of social theft occurs—both when international trade is regulated and controlled and when it is allowed to operate free of any such interventions.

That’s why Karl Marx ironically came out in support of free trade in his famous speech to the Democratic Association of Brussels at its public meeting of 9 January 1848:

If the free-traders cannot understand how one nation can grow rich at the expense of another, we need not wonder, since these same gentlemen also refuse to understand how within one country one class can enrich itself at the expense of another.

Do not imagine, gentlemen, that in criticizing freedom of trade we have the least intention of defending the system of protection.

One may declare oneself an enemy of the constitutional regime without declaring oneself a friend of the ancient regime.

Moreover, the protectionist system is nothing but a means of establishing large-scale industry in any given country, that is to say, of making it dependent upon the world market, and from the moment that dependence upon the world market is established, there is already more or less dependence upon free trade. Besides this, the protective system helps to develop free trade competition within a country. Hence we see that in countries where the bourgeoisie is beginning to make itself felt as a class, in Germany for example, it makes great efforts to obtain protective duties. They serve the bourgeoisie as weapons against feudalism and absolute government, as a means for the concentration of its own powers and for the realization of free trade within the same country.

But, in general, the protective system of our day is conservative, while the free trade system is destructive. It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. It is in this revolutionary sense alone, gentlemen, that I vote in favor of free trade.

That’s because Marx’s critique of political economy embodied a utopian horizon radically different from the utopianism of classical and neoclassical economics. He sought to transform economic and social institutions in order to eliminate capitalist exploitation. And if free trade was the quickest way of getting to the point when workers revolted and changed the system, then he would vote against protectionism and in favor of free trade.

As it turns out, as Friedrich Engels explained forty years later, both protectionism and free trade serve, in different ways, to produce more capitalist producers and thus to produce more wage-laborers. In our own time, Trump’s protective tariffs may do that in the United States, just as free trade has accomplished that in other countries that have increased their exports to the United States.

But neither protectionism nor free trade can succeed in undoing the “elephant curve” of global inequality, which in recent decades has shifted the fortunes of workers in the United States and Western Europe and those in “emerging” countries and still left all of them falling further and further behind the top 1 percent in their own countries and globally.

Reversing that trend is a goal, a utopian horizon, worth fighting for.

Balance this!

Both Donald Trump and Eduardo Porter would have us believe the U.S. trade deficit is a serious problem—and that, if it can brought back into balance, jobs for American workers will be restored.

Nonsense!

Yes, I know, Trump’s attacks on free trade did in fact resonate among working-class voters. And, as I have argued, there is clear evidence that that a tiny group at the top has captured most of the benefits of trade agreements and other measures that have allowed U.S. corporations to engage in increased international trade, both importing and exporting commodities that have boosted their bottom-line.

It’s possible then to make the case (as I did here) that mainstream economists, in their zeal to push globalization forward, ignored those problems and concerns, thus paving the way for Trump’s victory—and, at the same time, that the solutions for those real issues will not come from reducing the trade deficit and supporting a renewal of the manufacturing sector.

First, we have to understand, the U.S. trade deficit has risen and U.S. manufacturing output has fallen not because of the “blind forces” of international trade. For decades now, U.S. corporations have decided to increase their profits by a combination of shifting production to other countries and automating many of the production processes that remain in the United States. And they’ve left the American working-class behind.

Second, there’s no guarantee that increasing manufacturing output within the United States will be accompanied by an equivalent number of new jobs. Just look at the chart at the top of the post. Since 2009, U.S. manufacturing output has increased by more than 38 percent but jobs in the manufacturing sector have only risen by 8.2 percent.

The U.S. trade balance is thus not the problem. The forces of U.S. capitalism have sacrificed the American working-class on the altar of higher profits. They did so before Trump was elected—and they’ve continued to do so since.

Let’s see Trump and Porter balance that.

Beyond Trump and free trade

Now that President Trump has begun carrying out his campaign pledges to undo America’s trade ties, formally withdrawing the United States from the Trans-Pacific Partnership and announcing he will start to renegotiate the North American Free Trade Agreement, it’s time to analyze what this means.

As it turns out, I’d already started to do this before the election, with a series of posts (e.g., here, here, here, and here) on Trump and the mounting criticism of the trade agreements the United States had signed (such as NAFTA) or was in the process of negotiating (the TPP).

It’s clear Trump’s decisions—which he claims are a “Great thing for the American worker”—challenge the view of economic and political elites, as well as those of mainstream economists (such as Brad DeLong), in the United States and around the world that everyone benefits from free trade.*

But, we now know, there has also been a growing counter-narrative, that not everyone has gained from growing international trade and trade agreements, which have generated  unequal benefits and costs. What’s interesting about this alternative story, at least when it comes to NAFTA, is that critics on each side argue the other side is the one that has benefited: U.S. critics that Mexico has gained, and just the opposite in Mexico, that the United States has captured the lion’s share of the benefits from NAFTA.

Here’s the problem: workers on both sides of the border have lost out, and their losses are mostly not due to NAFTA.

We know, for example, that the wage share of national income in the United States has in fact declined after NAFTA was implemented (in January 1994)—from 45.1 percent of gross domestic income to 42.9 percent. But we also have to recognize workers have been losing out since at least 1970, when the wage share stood at 51.5 percent.

Much the same has been happening in Mexico, where (according to the research of Norma Samaniego Breach [pdf]), the wage share (the dark green line in the chart above) has been falling since 1978—and continued to fall after NAFTA was put into place. And, as Alice Krozera, Juan Carlos Moreno Brid, and Juan Cristóbal Rubio Badan have shown, economic and political elites in Mexico, much like their U.S. counterparts, have mostly ignored the problem of inequality and resisted efforts to raise the minimum wage and workers’ share of national income.

The fact is, while NAFTA did propel a large increase in trade between Mexico and the United States, it “did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters” (according to a 2015 study commissioned by the Congressional Research Service [pdf]).

The bottom line is, eliminating or renegotiating NAFTA—including in the manner Trump is proposing—is not going to help the working-classes in either Mexico or the United States. It is merely a diversion from the real changes that need to be made, to which the political and economic elites as well as mainstream economists in both countries stand opposed.

 

*The only real debate within mainstream economics is between neoclassical economists who argue free trade generates the most efficient outcomes, within and between countries (regardless of whether countries run trade surpluses or deficits), and their critics (such as Jared Bernstein) who argue that trade deficits lead to a loss of jobs (e.g., in U.S. manufacturing), and thus require interventions of the sort Trump is proposing to change the pattern of international trade.

China syndrome

There are two sides to the recent China Shock literature created by David Autor and David Dorn and surveyed by Noah Smith.

On one hand, Autor and Dorn (with a variety of coauthors) have challenged the free-trade nostrums of mainstream economists and economic elites—that everyone benefits from free international trade. Using China as an example, they show that increased trade hurt American workers, increased political polarization, and decreased U.S. corporate innovation.

The case for free international trade now lies in tatters, which of course played an important role in the Brexit vote as well as in the U.S. presidential campaign.

On the other hand, invoking the China Shock has tended to reinforce economic nationalism—treating China as an unitary entity, a country has shaken up world trade patterns, and disregarding the conditions and consequences of increased trade with other countries, including the United States.

source

Why has there been an increasing U.S. trade deficit with China in recent decades? As James Chan explained, in response to an August 2016 article in the Wall Street Journal,

Our so-called China problem isn’t really with the Chinese but rather our own multinational companies.

As I see it, U.S. corporations have made a variety of decisions—to subcontract the production of parts and components with enterprises in China (which are then used in products that are later imported into the United States), to purchase goods produced in China to sell in the United States (which then show up in U.S. stores), to outsource their own production of goods (to sell in China and to export to the United States), and so on. The consequences of those corporate decisions (and not just with respect to China) include disrupting jobs and communities in the United States (through outsourcing and import competition) and decreasing innovation (since existing technologies can be used both to produce goods in China and sell in the expanding Chinese consumer market), thereby increasing political polarization in the United States.

The flip side of the story is the accumulation of capital in China. Until the development of the conditions for the development of capitalism existed in China, none of those corporate decisions were possible—not by U.S. corporations nor by multinational enterprises from other countries, all of whom were eager to take advantage of the growth of capitalism in China. Which of course they then contributed to, thus spurring the widening and deepening of capital accumulation within China.

source

It should come as no surprise, then, that there’s been an upsurge of strike activity by workers in the fast-growing centers of manufacturing and construction within China—especially in the provinces of Guandong, Shandong, Henan, Sichuan, and Hebei.

According to Hudson Lockett, China this year

saw a total of 1,456 strikes and protests as of end-June, up 19 per cent from the first half of 2015

The problem with the China Shock literature, which has served to challenge the celebration of free-trade by mainstream economists and economic elites in the West, is that it hides from view both the decisions by U.S. corporations that have increased the U.S. trade deficit with China (with the attendant negative consequences “at home”) and the activity by Chinese workers to contest the conditions under which they have been forced to have the freedom to labor (which we can expect to continue for years to come).

It’s our responsibility to keep those decisions and events in view. Otherwise, we risk the economic and political equivalent of the China Syndrome.

The politics of Trumping free trade

Late last month, I argued Donald Trump doesn’t know what he’s talking about when it comes to international trade. But his attacks on free trade are in fact resonating among working-class voters. That, and the fact that the polls show the presidential election much closer in recent weeks than anyone expected, has finally made others sit up and take notice.

And now we’re witnessing the free-trade, anti-Trump backlash.

Thomas B. Edsall cites the same Peter Goodman article I did last week, which included this astute observation:

Across much of the industrialized world, an outsize share of the winnings has been harvested by people with advanced degrees, stock options and the need for accountants. Ordinary laborers have borne the costs and suffered from joblessness and deepening economic anxiety.

But then Edsall goes all in with the mainstream economists who, as part of their unchanging mantra, celebrate free international trade.* He cites, as one example, Erik Brynjolfsson, an economist at M.I.T.’s Sloan School of Management:

No nation can succeed by trying to protect the past from the future. We will succeed by having the confidence to embrace competition, and leveraging our comparative strengths, which are numerous. We have the largest, most productive and most technologically advanced economy that’s ever existed on this planet. The more open the world economy is, the more we have an opportunity to leverage our many strengths.

My sense is that mainstream economists are doubling down on their free-trade argument, forgetting about the “ordinary laborers [who] have borne the costs and suffered from joblessness and deepening economic anxiety,” for two major reasons.

First, they fervently believe in free trade, because their models are designed to ignore the unequal costs and benefits of international trade. That is, the “gains from trade” that supposedly accrue to everyone are literally baked into their models. And they’re afraid to admit that some gain, and many others lose, under existing international trade regimes and agreements. They’re afraid because admitting the unequal outcomes opens the door to intervening and creating patterns of trade that might actually help workers and other losers within the current arrangements. They’re also fearful of incurring the wrath of other mainstream economists, who attack any exceptions to the free-trade mantra with a vengeance (as even Paul Samuelson discovered).

Second, mainstream economists are doubling down on their defense of free trade because they’re willing to say anything and everything to attack Trump. Just the fact that Trump has had the temerity of criticizing free-trade agreements, such as the North American Free Trade Agreement and the Trans-Pacific Partnership, thereby creating (in the eyes of mainstream economists) the specter of protectionism, has led them to cast aside all caution and reinforce their uncritical support for free trade. (Edsall even invokes the long-discredited idea that the Smoot-Hawley Tariff Act was “one of the principle causes” of the first Great Depression to make the case.) But, of course, in their determination to oppose the Republican candidate, mainstream economists also dismiss the indignities and injuries many of Trump’s supporters have suffered in recent decades.**

International trade is not the only thing hurting American workers. It’s probably not even the major factor. Decades of stagnant wages, rising inequality, outsourcing, and job-displacing technological change created by their employers are, in my view, even more important. But mainstream economists’ and pundits’ all-out defense of free trade, their refusal to recognize the unequal benefits and costs of globalization, and their determined efforts to let employers completely off the hook are among the important reasons that, against all odds, Trump is only 5-6 points behind in the national polls.***

 

*It should come as no surprise that, according to the International Monetary Fund, the World Bank, and the World Trade Organization, the solution to the problems of international trade is. . .more trade.

**Many of Clinton’s supporters have also been harmed by U.S. economic policies, including international trade agreements.

***I wrote this post before the revelation of the 2005 Trump tape and the Wikileaks publication of the emails concerning Hillary Clinton’s speeches. Given the media coverage of the two events (plus whatever happens in the Sunday debate), my guess is the new polls will register a much larger lead for Clinton—and there will be much less discussion of international trade (or economics of any sort) in the weeks ahead.

What about the white working-class?

We can thank Donald Trump for one thing: he’s put the white working-class on the political map.*

In recent months, we’ve seen a veritable flood of articles, polls, and surveys about the characteristics, conditions, and concerns of white working-class voters—all with the premise that the white working-class is fundamentally different from the rest of non-working-class, non-white Americans.

But why are the members of the white working-class attracting so much attention? My sense is, they both represent a threat—because many plan to vote for Trump and, more generally, reject much elite opinion (including, but not limited, to Trump)—and, at the same time, are assumed to be a dying breed—as the U.S. working-class becomes more female, more racially and ethnically diverse, and increasingly employed in non-manufacturing jobs. So, the argument goes, the white working-class, supposedly radically different from the rest of Americans, is motivated by fear and resentment occasioned by a loss of identity and standing.**

Hence the curiosity—best exemplified by a new CNN/Kaiser Family Foundation [ht: ja] poll, about what white working-class Americans think. The results of the poll are interesting, if only because on many issues (aside from support for or opposition to Trump and immigration) the white working-class holds views that are not all that different from other whites, blacks, and Hispanics.

The fundamental problem with CNN/Kaiser poll (as with so many others) is its basic definition of the working-class: “those who have attained less than a four-year college degree, excluding those between the ages of 18-24 who are currently enrolled in school.” As I have argued before (e.g., here and here), that’s not the working-class. It’s just people who never went to or didn’t finish college. What they’re using is a definition of the working-class that doesn’t include all those other people, many of whom have college degrees, who are forced to have the freedom to work for someone else in order to make enough money to support themselves and their families. Together, most Americans with and without college degrees work for the boards of directors of large corporations—and they don’t manage the production process or supervise other employees.

As Vivek Chibber explains,

Workers show up for work every day knowing that they have little job security; they are paid what employers feel is consistent with their main priority, which is making profits, not the well-being of employees; they work at a pace and duration that is set by their bosses; and they submit to these conditions, not because they want to, but because for most of them, the alternative to accepting these conditions is not having a job at all.

The working-class, as I am defining it then, turns out to comprise the vast majority (70-80 percent) of the U.S. population. And most of them, of course, are white.

So, what does the CNN/Kaiser pool reveal about the views of, to be clear, one portion of the white working-class? As I wrote above, on many issues, they’re not all that different from other whites or blacks and Hispanics without college degrees. In terms of their own lives, most of the so-called white working-class, as the other poll respondents, are not angry, worried, pessimistic, or unhappy. But they are dissatisfied with the country’s economic situation and with the influence on the political process of people like them. In recent years, they report it’s become harder for them to get ahead financially and to find good jobs. Finally, they blame the federal government much more than their employers or Wall Street for the economic problems facing the working-class and they believe the federal government helps wealthy people too much and members of the working-class too little.

That’s exactly the set of answers one would expect from the American working-class—white, black, and Hispanic, with and without college degrees—right now. They’re getting screwed and, while they may not be dissatisfied in their own lives, they certainly think both the economic and political systems are stacked against them. Perhaps the only surprising item in the survey is the extent to which they blame the government, and not their employers or Wall Street, for the economic problems facing the working-class.

The only major differences within the working-class have to do with Trump and the role of immigrants. While 56 percent of whites without a college degree would consider voting for Trump, most other respondents would definitely not vote for him. A similar difference emerges with respect to immigrants: a much smaller percentage of the so-called white working-class believe immigrants “strengthen our country” and a much higher percentage thinks “immigrants today are a burden on our country” than the other groups.***

In the end, those two differences—on Trump and immigration—are what make the so-called white working-class interesting to the media. It’s not their conditions or their grievances, much of which they share with other members of the working-class. It’s only the fact that they threaten to vote for the renegade presidential candidate and they’re wary about the role played by other, immigrant members of the working-class. And, of course, many of them are thrown into the “basket of deplorables” by the opposing campaign.

Both presidential candidates, then, are sowing and exploiting those differences to their own advantage, which is what U.S. politicians have always attempted to do when it comes to real or imagined divisions within the working-class. That’s how they campaign and that’s how they hope to get elected.

Trump and Hillary Clinton (and their echoes in the mainstream media) have created the “white working-class” and they hope to ride it—as a source of support or a specter—to victory in November. And then, whoever wins, they’ll abandon it—along with the rest of the working-class.

 

 

*Actually, Bernie Sanders also played an important role in focusing attention on the white working-class, especially with his stunning primary victories in Michigan and West Virginia. Since his loss to Hillary Clinton, however, the white working-class (along with the rest of the American working-class) has virtually disappeared from Democratic discourse.

**As Connor Kilpatrick has explained, the Democratic Party “has established a clear line on the white wage-earning class: they’re all either dying (demographically or literally), irrelevant in an increasingly nonwhite country, or so hopelessly racist they can go off themselves with a Miller High Life-prescription-painkiller cocktail for all they care.”

***There is one additional difference that requires mention: while a majority of whites—with (62 percent) and without (69 percent) college degrees—believe trade agreements cost the United States jobs, a much smaller percentage of blacks and Hispanics without college degrees (both 37 percent) think that’s the case.

Once more on free trade

Every once in a while, a reader sends me the link to an article and asks me what I think of it.

The most recent one is Geoff Gilbert’s [ht: db] piece, “Who Plans the Economy? Imagining Fair and Free Trade.”

Clearly, at least in terms of U.S. presidential politics (but also, I think, in the United Kingdom and across Europe), the issue of international trade is “hot.” Donald Trump has certainly focused on the downside of U.S. trade details (such as NAFTA, which he has promised to “immediately renegotiate. . .to get a better deal for our workers”), as has Bernie Sanders (who eventually succeeded in pulling Hillary Clinton in that direction).

Gilbert, for his part, argues that

The way we talk about trade is all wrong. We’re told we have two options: the “free” trade status quo or protectionism. But many other possibilities exist, if we are willing to entertain different rules for owning and controlling capital both within and between countries.

I think he’s right. The free trade versus protectionism argument is exactly the way the debate has been framed across the history of capitalism and within mainstream economics. Capitalists and mainstream economists have been mostly in favor of free trade, which they then counterpose to protectionism, that is, one or another regulation of or barrier to free trade (such as national content legislation, tariffs, and so forth).

That’s it? Those are the limits within which we can discuss international economics? It’s just like the debate between markets and planning or export-led and import-substitution development—a false, narrowly circumscribed debate, and often a pitfall, especially for critics of free trade. Many times (as with Trump, Sanders, and now Clinton), they end up criticizing free-trade agreements because of their negative impact on workers but then moving in the direction of one or another kind of protectionism, as if that’s the only alternative.

And while Gilbert is correct in arguing that free trade is “corporate-managed trade for corporate interests,” he fails to recognize that protectionism is, too. Both Alexander Hamilton and Friedrich List sought to protect “infant industries” from foreign competition just as the U.S. steel and sugar industries did a couple of centuries later—and there many examples in between. They were all defending”corporate-managed trade for corporate interests,” but in the form of protectionism.

In fact, as I argued back in 2011 (in criticizing Harvard economist Greg Mankiw), the whole idea of international trade as trade between individuals (from which we all benefit, at least on aggregate) is profoundly misleading.

What Mankiw and other neoclassical economists refuse to understand is that, when international trade takes place, it has nothing to do with an individual in one country (say, the United States) buying a scarf from an individual in another country (say, China) as if they were just equal neighbors engaging in a mutually beneficial transaction. There are other economic processes involved. The consumers in the United States sell their ability to work to a corporation, and then use their wage or salary to purchase goods, some of which are produced in other countries. Some of those corporations have decided to produce goods in other countries, and thus to export jobs, while other corporations have decided to purchase the goods they sell either from their own subsidiaries in other countries or from corporations located in other countries. And in those other countries, the workers are not deciding to sell their goods to consumers in the United States; the corporations they work for are making those decisions.

Simply put, international trade doesn’t take place either between individual consumers and producers or between countries. International trade takes place between and, increasingly, within corporations located within different nations. They make the decisions about where and how goods will be produced, and where and how people will be employed.

What people who actually work for a living understand all too well is that both the much-vaunted freedom in free trade and the supposed unfreedom of protectionism are merely different ways corporations and their representatives have, at different times and places, chosen to structure international trade to advance their own interests.*

That’s certainly what Karl Marx and Friedrich Engels understood in the mid-nineteenth century, when free trade was also being hotly contested.

The question of Free Trade or Protection moves entirely within the bounds of the present system of capitalist production, and has, therefore, no direct interest for us socialists who want to do away with that system.

But if we refuse the narrow and misleading terms of free-trade-versus-protectionism debate (as both Gilbert and I believe we need to), does that mean we have nothing else to say or propose?**

Fair trade is one such alternative. Starting in the mid-1990s, George DeMartino has suggested one possibility: a fair-trade policy based on a Social Index Tariff Structure.*** The basic idea is as follows:

SITS is a multilateral trade regime that would promote benevolent means by which countries seek to improve their trade performance and growth while at the same time punishing countries that pursue export-promoting strategies that undermine human development, equality or sustainability. It does this through a multilateral system of social tariffs.

It can be thought of as a leveling-up, rather than a race-to-the-bottom, approach to international trade—a way of taking areas of economic and social life out of competition, rather than subjecting them to the competitive pressures entailed in both free-trade and the usual protectionist approaches.

Gilbert, in invoking the Mondragón Cooperative and targeted tariffs, makes a similar argument (although, to correct one point, that’s not what Raúl Prebisch and UNCTAD were attempting to do in the 1940s and 1950s) :

The idea is to use tariffs to favor goods produced by democratically owned and controlled capital at home and throughout the world.

Any systemic solution to inequality and mass economic deprivation will need to expand the amount and types of people who get to make the investment decisions that determine where industry and jobs will exist and at what pay.

One can make exactly the same argument about free trade—to expand trade (either within or across national boundaries) by democratically owned and controlled enterprises.

What are we left with then? To my mind, we can refuse the terms of the existing debate between free trade and protectionism and, at the same time, speak out in favor of either free-trade or protectionist policies as long as the goal is to build and expand institutions and spaces “capable of actually placing investment decision-making in the hands of the people.”

 

*Perhaps less understood is the fact that, as I argued three years ago, “much of the international trade that takes place these days does not occur through market transactions.” Instead, a great deal of trade occurs within corporations; it is intra-firm trade, transactions among and between different parts of giant multinational corporations, that is planned by the corporate directors.

**Marx’s own famous option was to speak in favor of free trade because, as Engels explains,

To him, Free Trade is the normal condition of modern capitalist production. Only under Free Trade can the immense productive powers of steam, of electricity, of machinery, be full developed; and the quicker the pace of this development, the sooner and the more fully will be realized its inevitable results; society splits up into two classes, capitalists here, wage-laborers there; hereditary wealth on one side, hereditary poverty on the other; supply outstripping demand, the markets being unable to absorb the ever growing mass of the production of industry; an ever recurring cycle of prosperity, glut, crisis, panic, chronic depression, and gradual revival of trade, the harbinger not of permanent improvement but of renewed overproduction and crisis; in short, productive forces expanding to such a degree that they rebel, as against unbearable fetters, against the social institutions under which they are put in motion; the only possible solution: a social revolution, freeing the social productive forces from the fetters of an antiquated social order, and the actual producers, the great mass of the people, from wage slavery. And because Free Trade is the natural, the normal atmosphere for this historical evolution, the economic medium in which the conditions for the inevitable social revolution will be the soonest created — for this reason, and for this alone, did Marx declare in favor of Free Trade.

***DeMartino has outlined that policy in a series of articles, including “The Social Index Tariff Structure: An Internationalist Response to Economic Integration (with Stephen Cullenberg), in the Review of Radical Political Economics (1994, vol. 26, no. 3, pp. 76-85) and “Achieving Fair Trade Through a Social Tariff Regime: A Policy Thought Experiment” (with Jonathan D. Moyer and Kate M. Watkins), in the Cambridge Journal of Economics (2016, vol. 40, pp. 69-92) (unfortunately, behind paywalls).

Cartoon of the day

Special mention

 

“Capitalism is the legitimate racket of the ruling class”

No, that’s not the democratic socialist candidate for the Democratic nomination. It was actually Al Capone who once said that “Capitalism is the legitimate racket of the ruling class.”*

That racket—and, with it, challenges to the legitimacy of capitalism—was evident in a wide variety of news stories yesterday.

First, there was the issue of health. Once again, we’re learning that the capitalist racket is affecting health. In particular, the gap in life span between rich and poor is widening. The top 1 percent among American men live 15 years longer than the poorest 1 percent; for women, the gap is 10 years. These rich men and women have gained three years of longevity just in this century.

And for some groups—especially white working-class men and women—death rates are actually rising.**

Public health experts say the rising white death rate reflects a broader health crisis, one that has made the United States the least healthy affluent nation in the world over the past 20 years. The reason these early deaths are so conspicuous among white women, these experts say, is because in the past the members of this comparatively privileged group have been unlikely to die prematurely. . .

[Anne] Case said that the whites who are dying are not America’s elites.

“They may be privileged by the color of their skin,” she said, “but that is the only way in their lives they’ve ever been privileged.”

Second, consider the problem of international trade. Michael Riordan challenged Carrier Corporation’s recent decision to transfer its Indianapolis plant’s manufacturing operations and about 1,400 jobs to Monterrey, Mexico.

The transfers of domestic manufacturing jobs to Mexico and Asia have benefited Americans by bringing cheaper consumer goods to our shores and stores. But when the victims of these moves can find only lower-wage jobs at Target or Walmart, and residents of these blighted cities have much less money to spend, is that a fair distribution of the savings and costs?

Recognizing this complex phenomenon, I can begin to understand the great upwelling of working-class support for Bernie Sanders and Donald J. Trump — especially for the latter in regions of postindustrial America left behind by these jarring economic dislocations.

And as a United Technologies shareholder, I have to admit to a gnawing sense of guilt in unwittingly helping to foster this job exodus. In pursuing returns, are shareholders putting pressure on executives to slash costs by exporting good-paying jobs to developing nations?

Even Lawrence Summers, desperate (like most mainstream economists) to maintain free international trade and global integration, had to admit that the globalization agenda has been a racket by and for those at the very top:

The core of the revolt against global integration, though, is not ignorance. It is a sense — unfortunately not wholly unwarranted — that it is a project being carried out by elites for elites, with little consideration for the interests of ordinary people. They see the globalization agenda as being set by large companies that successfully play one country against another. They read the revelations in the Panama Papers and conclude that globalization offers a fortunate few opportunities to avoid taxes and regulations that are not available to everyone else. And they see the kind of disintegration that accompanies global integration as local communities suffer when major employers lose out to foreign competitors.

Finally, when coupled with the revelations in the Panama Papers, there’s the growing suspicion that the 1 percent are both abandoning the rest of society (by hiding their money and avoiding taxes) and remaking the rules of the game (by using their money to influence elections and legislation). As Aditya Chakrabortty explains,

the Panama Papers confirm that the super-rich have effectively exited the economic system the rest of us have to live in. Thirty years of runaway incomes for those at the top, and the full armoury of expensive financial sophistication, mean they no longer play by the same rules the rest of us have to follow. Tax havens are simply one reflection of that reality. Discussion of offshore centres can get bogged down in technicalities, but the best definition I’ve found comes from expert Nicholas Shaxson who sums them up as: “You take your money elsewhere, to another country, in order to escape the rules and laws of the society in which you operate.” In so doing, you rob your own society of cash for hospitals, schools, roads…

But those who exited our societies are now also exercising their voice to set the rules by which the rest of us live. The 1% are buying political influence as never before. Think of the billionaire Koch brothers, whose fortunes will shape this year’s US presidential elections. In Britain, remember the hedge fund and private equity barons, who in 2010 contributed half of all the Conservative party’s election funds – and so effectively bought the Tories their first taste of government in 18 years.

Capitalism, of course, has always been a racket of the ruling class. Now, it seems—with revelations about unequal health and life spans, the costs of globalization, the ability of a tiny group at the top to exercise both exit and voice, and much more—its legitimacy is being called into question.

 

*Chicago’s most famous gangster was no anticapitalist radical. On the contrary:

“Listen,” he said, “don’t get the idea I’m one of those goddam radicals. Don’t get the idea I’m knocking the American system. The American system…” As though an invisible chairman had called upon him for a few words, he broke into an oration upon the theme. He praised freedom, enterprise and the pioneers. He spoke of “our heritage”. He referred with contempuous [sic] disgust to Socialism and Anarchism. “My rackets,” he repeated several times, “are run on strictly American lines and they’re going to stay that way”…his vision of the American system began to excite him profoundly and now he was on his feet again, leaning across the desk like the chairman of a board meeting, his fingers plunged in the rose bowls.

“This American system of ours,” he shouted, “call it Americanism, call it Capitalism, call it what you like, gives to each and every one of us a great opportunity if we only seize it with both hands and make the most of it.” He held out his hand towards me, the fingers dripping a little, and stared at me sternly for a few seconds before reseating himself.

**Consider this extraordinary statistic:

Compared with a scenario in which mortality rates for whites continued to fall steadily after 1998, roughly 650,000 people have died prematurely since 1999 — around 450,000 men and nearly 200,000 women.

That number nearly equals the death toll of the American Civil War.