Globalization, Productivity, and "Protectionism": CEPR Responds To Foreign Affairs

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Mark Weisbrot and Dean Baker
International Business Times, July 6, 2007

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In "A New Deal for Globalization," (Foreign Affairs July/August 2007), Kenneth Scheve and Matthew Slaughter have made a contribution by recognizing that what they call "a protectionist drift in public policy" in the U.S. is a result of the fact that the majority of the US labor force has seen little (in recent decades) or no (in the last five years) income gains. They even acknowledge that "it is plausible that there is a connection" between the "skewed pattern of income growth" in the United States and globalization, something that most of the economics profession is still in denial about.1

But the public's - and their elected representatives' - increasing rejection of "free trade" agreements has even more solid ground than the terrain that they depict. First, there is no need to exaggerate the potential gains from further reduction of the United States' relatively small remaining barriers to trade. For example, the authors state that an agreement in the Doha Round of the WTO negotiations would generate $500 billion per year in additional income in the United States. According to the World Bank's most recent estimates of various Doha Round scenarios, the United States would add between 0.02 and 0.05 percent to our annual GDP, or between $2.7 and $6.8 billion a year, from a Doha agreement.2

The authors also use productivity data for the U.S. to argue that "International trade and investment have spurred productivity growth" in the United States, noting that "the rate of increase in output per worker hour in the U.S. nonfarm business sector has doubled in the past decade, from an annual average of 1.35 percent between 1973 and 1995 to an annual average of 2.7 percent since 1995." If international trade and investment had really caused this magnitude of a productivity increase, this would be a powerful argument for such liberalization. However this does not appear to be the case. First, if we take a more comprehensive, economy-wide, and appropriate measure of usable productivity3 - taking into account such things as increased depreciation that counts as part of output but does not contribute to living standards - the picture is much different. By this measure, the annual rate of productivity growth increased by 0.9 percentage points in the years from 1995 to 2006 compared with the long 1973-1995 slowdown. Furthermore, productivity growth has slowed sharply over the last three years, raising the possibility that this decade-long up tick was just a one-time burst with no obvious connection to a quarter century of globalization.

Much more importantly, if we take a longer time period of accelerated international trade and investment liberalization, the picture is completely reversed. For example, we can ask the question, how much usable productivity growth would we have had since 19734 , if we had experienced the same rate of usable productivity growth as occurred from 1946-1973? The answer is, productivity would have grown by 169.5 percent since 1973, as compared to its actual growth of 47.8 percent.5

In other words, even ignoring the re-distribution of income in the last few decades, the U.S. economy during a period in which it was mostly a closed economy (1946-1973) vastly outperformed the increasingly open economy that we have had over the last 33 years, in terms of raising living standards.

Thus the authors' statement that "the integration of the world economy has boosted productivity and wealth creation in the United States and much of the rest of the world" is an assertion that remains to be demonstrated, and which does not find much support in the data. In fact, the vast majority of low-and-middle-income countries have suffered a sharp slowdown in economic growth and reduced progress on social indicators such as infant and child mortality, and life expectancy, over the last quarter century.6 This long-term economic slowdown is one of the main reasons that the Doha Round of the WTO is collapsing, and hemispheric agreements such as the proposed Free Trade Area of the Americas have been buried, after more than a decade of negotiations. There are important exceptions such as China that have indeed benefited from increased economic integration, but they did not follow the rules embodied in the WTO or other proposed commercial agreements.

In the United States, it is quite likely that the vast majority of the labor force has actually lost more from the redistribution of income and lowering of their real wages due to trade and investment liberalization, than they have gained from access to cheaper consumer goods.7 Ironically, now that outsourcing threatens to lower the incomes of professionals earning six-figure salaries, some economists8 have become concerned about globalization. But the gains from introduction of international competition to the protected professions such as law and medicine are many times greater than what the WTO could deliver in other goods and services.9

This drives home the nature of what we are dealing with: it is not a question of "saving globalization" from "special-interest protectionists" as the authors argue. The "special interest protectionists" - highly paid professions, CEO's, pharmaceutical companies and other monopolists - have been reaping the gains from misnamed "free-trade" agreements for many years, while subjecting the majority of Americans to international competition that has lowered their living standards. The "dangerous path" ahead is not so much the "creeping protectionism" feared by the authors as it is the continued use of global commercial agreements to increase income disparities in the United States.

Mark Weisbrot and Dean Baker are Co-Directors of the Center for Economic and Policy Research, in Washington, D.C. (www.cepr.net).


[1]
See Jagdish Bhagwati, "Technology, not globalisation, is driving wages down," Financial Times (London, England), January 4, 2007 Thursday, London Edition 1, COMMENT; Pg. 15

[2] Agricultural Trade Reform and the Doha Development Agenda , edited by Will Martin and Kym Anderson, Table 12.4

[3] See Dean Baker, "The Productivity to Paycheck Gap: What the Data Show"

[4] The picture does not change if we take a different business cycle peak as dividing line, e.g. 1980. It is important to take a longer period because we do not know if the late 1990's upturn in productivity growth was a one-time increase, as it increasingly appears, rather than a permanent increase in the rate of productivity growth.

[5] Dean Baker, "The Productivity to Paycheck Gap: What the Data Show" , figure 3.

[6] See Mark Weisbrot, Dean Baker and David Rosnick, "The Scorecard on Development: 25 Years of Diminished Progress".

[7] See Mark Weisbrot, Dean Baker, "Will New Trade Gains Make us Rich? "

[8] See Alan S. Blinder, "Free Trade's Great, But Offshoring Rattles Me," Washington Post, Sunday, May 6, 2007; Page B04.

[9] See Dean Baker, "Professional Protectionists: The Gains from Free Trade in Highly Paid Professional Services" .


Mark Weisbrot is co-director of the Center for Economic and Policy Research in Washington, D.C.

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.