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Paul Krugman Gets It Wrong On Trade--Sadly

Krugman perpetuates some false myths and, disappointingly, regurgitates the notion that people who are opposing so-called "free trade" are "protectionists."
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I am glad Paul Krugman is a columnist for The New York Times. He is one of the great voices exposing the incompetence and dishonesty of the Bush Administration on all matters economic and chimes in usually quite well on foreign policy. But, he has one blind spot---trade. His column today does a great disservice to the debate about trade. My goal here is not to tear down Krugman--for whom I have enormous respect--but, hopefully, to get us to change our language about the trade debate.

Krugman's taking off point for the column is the debate over the recent deal struck between the Administration and some Congressional Democrats, principally House Ways and Means chair Charlie Rangel and Nancy Pelosi. First, to correct a factual point about the apparent deal, Krugman says:

The furor subsided a bit as details about the deal emerged: the Democrats got significant concessions from the Bushies, while effectively giving a go-ahead to only two minor free trade agreements (Peru and Panama).

As I noted when the deal first came to light, yes, it's not a bad thing for these so-called "free trade" agreements to have international labor standards incorporated into the body of these deals--if the standards are, in fact, part of the deal. We have no idea whether these are "significant concessions" because the exact language is still unclear, AFL-CIO President John Sweeney pointed out, along with other unions, when they reserved judgment until they could actually study the text of the deal. It's still a mystery. Call me paranoid but I don't trust this Administration--even more so when claims are made without evidence (sound familiar?).

But, the real issue I have with Krugman is much bigger than the controversy over the recent political trade deal. Krugman perpetuates some false myths and, disappointingly, regurgitates the notion that people who are opposing so-called "free trade" are "protectionists." First, some of the key passages of Krugman's column:

When we import labor-intensive manufactured goods from the third world instead of making them here, the result is reduced demand for less-educated American workers, which leads in turn to lower wages for these workers.


Should we go back to old-fashioned protectionism? That would have ugly consequences: if America started restricting imports from the third world, other wealthy countries would follow suit, closing off poor nations' access to world markets.

Where would that leave Bangladesh, which is able to survive despite its desperate lack of resources only because it can export clothing and other labor-intensive products? Where would it leave India, where there is, at last, hope of an economic takeoff thanks to surging exports -- exports that would be crippled if barriers to trade that have been dismantled over the past half century went back up?

And where would it leave Mexico? Whatever you think of NAFTA, undoing the agreement could all too easily have disastrous economic and political consequences south of the border.

The first point is that global trade is being depressed not just for "less-educated" American workers. As the Economic Policy Institute recently pointed out, the wages for collage graduates are also declining:

These well-schooled individuals--possessing at least a bachelor's degree, and in some cases, an advanced degree--would be expected to fare better than those without college degrees because demand for their skills should insulate them from labor market fluctuations. However, while their employment levels are higher than those without college degrees, employment trends still indicate that young college graduates have not returned to the wage levels or employment rates just prior to the start of the 2001 recession.

So-called "free trade" is about one thing: wages. That is, lowering wages. While the most obvious past impact was on lower-skilled jobs, that is not true anymore--over time, so-called "free trade" pushes down wages at a wide range of education and skills levels. There are highly-educated Chinese and Indian workers who are capturing a broad range of work at all skills levels--and at a fraction of the wages. Mix in the relentless anti-union campaign in the U.S. and, presto, you have a guaranteed recipe for a broad decline in real wages over time--and that is happening already.

As for other countries, the issue is much more complex than Krugman says. Krugman leaves out a critical point about Bangladesh. Indeed, that dirt poor country was, in fact, dependant on export clothing for its survival. But, as I pointed out in 2004, the very trading system that we have in place threatened the country's economic survival. At that time, the World Trade Organization was about to eliminate quotas on clothing that had been in place for 40 years--quotas that maintain some equilibrium and fairness in the world trading system. I wrote then:

Take Bangladesh. Apparel accounts for 78 percent of total exports and 1.6 million jobs. It has an unemployment rate of 40 percent and a per capita income of $1,900 a year. When the quotas expire, this poor, struggling country will lose 1 million apparel jobs, 62 percent of its industry.

It was pretty simple. When the competition in the world is based solely on wages, once the quotas disappeared, millions of apparel jobs shifted dramatically to an even lower wage haven: China.

Quotas are not a bad thing. They make sure that poorer countries can have a foothold and develop some manufacturing capacity.

Krugman is also not fairly representing the broad view of developing countries, many of whom are rejecting the basic pillars of the trading regimes. I don't know which countries Krugman includes in the "third world" but, in Latin America, the people elected governments in Venezuela, Ecudaor, Bolivia, and Chile, to mention a few, primarily because they do not want to live with NAFTA-style trade and the neo-liberal model that NAFTA represents.

And, as for NAFTA, well, yes, I would say that we should go back and renegotiate NAFTA. It's hard to argue that things are better for Mexicans under NAFTA--the hoped-for burgeoning middle-class is about as robust as Dick Cheney's honest, with millions of working Mexican plunged into deep poverty post-NAFTA. The very flaws of NAFTA are present in every subsequent and pending so-called "free trade" agreement.

• The so-called "free trade" agreements still include NAFTA Chapter 11-style foreign investor rights. These rights encourage U.S. companies to move offshore, as well as open up basic U.S. environmental, health, zoning and other laws to attack (they allow a company to argue that a pro-labor or pro-consumer law constitute an unfair trade barrier and, therefore, needs to be eliminated).

• NAFTA-style, so-called "free trade" agreements are a threat to prevailing wage laws, recycled content and renewable energy policies.

• NAFTA-style, so-called "free trade" agreements result in the displacement of millions of peasant farmers, increasing hunger, social unrest, desperate migration and, as Peruvian and Colombian government reports indicate, likely increase drug cultivation, trade and violence.

• NAFTA-style, so-called "free trade" agreements allow food safety laws that require us to import meat not meeting our safety standards.

The biggest disservice Krugman does, though, is by raising a complete straw man by raising the specter that we might go back to "old-fashioned protectionism." The problem is not protectionism versus so-called "free trade" (though to his credit, Krugman never uses the phrase "free trade"), which is simply a marketing phrase. The problem is: what are the rules? Right now, trade deals are structured primarily around the interests of capital and investment.

The real challenge is to scrap the NAFTA-style trade deals. The only way to do that is to start with a blank page and start with the following premise: trade is about trying to improve the standard of living of communities. When you answer that premise, then, labor rights and the environment are addressed as fundamental pillars of any agreement--not grafted on as an afterthought. And, then, and only then, would we ask the question--how to corporations help society reach that goal?

Krugman does conclude with a reasonable point, calling for measure beyond trade, like universal health care, to aid workers. But, I hope Krugman gets away from a narrow viewpoint about the choices over trade.

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