Lions and Tigers and Trade, Oh My!

American antipathy toward trade has been growing rapidly as American citizens increasingly fear that globalization (and outsourcing) will undermine their job security. However, world-renowned economist Jagdish Bhagwati argues that the current free-trade phobia is unjustified. “But you know, there is no accounting for fear… I would also add that fear has deaf ears, because once you’re really frightened you don’t listen to [experts],” asserted Bhagwati at a CATO book forum.

Most studies point to the negligible negative effect that trade with underdeveloped countries has had on their more industrialized counterparts, and 90% of economists believe that the effect of international trade is positive, argues Bhagwati. Dartmouth Economics Professor Matthew Slaughter estimates that the U.S. economy has gained $1 trillion annually compared to its potential earnings without trade liberalization. Worldwide free trade, he argued at the forum, could add another $500 billion annually to the American economy.

Yet Slaughter argued at the forum that American fears are not necessarily misplaced, so much as reflecting a lack of real wage gains. He pointed out that “over the last few years, the majority of Americans have not seen sustained real income growth,” and most growth has been concentrated in the wealthier classes. Americans “understand they benefit as consumers from globalization but they think in real income terms,” he said. He noted that “skill-biased technological change” has had the largest impact on employment, with technological changes forcing workers to shift out of obsolete industries.

But fears of globalization continue to persist in the face of extensive research of its positive benefits. A Columbia University Economics Professor, Bhagwati feels that irrational fears of the global market have overcome common sense, and eroded the American public’s acceptance of the economic law of comparative advantage. This principle dictates that a truly free and efficient market will reapportion jobs among those countries or businesses that are best suited to a task. According to Bhagwati, currently only 8% of the Indian population attends college, and even fewer can speak intelligible English. This reduces India’s competitiveness on the world market.

Contributing Fortune magazine editor Sheridan Prasso noted in his October article, “Google Goes to India,” that technology firms in India raise salaries an average 18% annually, ever-increasing the cost of educated Indian labor. In addition, Bhagwati notes, “a lot of outsourcing to India is now being re-outsourced to other countries.”

Slaughter’s alleged decline in American real wages may be attributable to the government’s noncompetitive taxing practices. The U.S. government currently levies a corporate tax of 35%, whereas European countries—typically known for their high tax rates and cumbersome welfare apparatus—have an average corporate tax of 25%. In addition, American Free Trade Agreements (FTA’s) often stipulate a series of environmental, labor, and consumer protection regulations, effectively raising the cost of production for international businesses exporting to the United States.

Justified in the name of human rights, Bhagwati argues that these practices are designed to further the American agenda abroad. “You can look at it as an altruistic demand,” argued Bhagwati. “I don’t think it is so, because I talk with unions all the time, I’ve read all the Congressmen’s speeches…in point of fact, within five minutes they’re saying it’s unfair to have to compete with people with lower standards, and that’s your competition and self-interest and fear part,” he added. This has angered developing countries abroad, he argues, who say “Don’t pretend that you’re doing it for us. You’re not doing it for us, you’re doing it for yourself.”

But other countries have used international finance organizations to benefit their domestic economies as well. The World Bank awards 80% of its funds to middle-income countries such as China, India, and Turkey, providing their governments with interest-free loans for public projects, such as education and AIDS treatment, reducing the host countries’ financial burden. The World Bank procurement contracts for these projects are often awarded to member countries’ domestic industries, in effect fueling their own economy. This led Ms. Diane Wilkens, President and CEO of Development Finance International to recommend to the Senate in August that “The U.S. government should enhance its efforts to ensure that U.S. companies have an equal and a fair opportunity to compete for World Bank-funded contracts.”

Bethany Stotts is a Staff Writer at Accuracy in Academia.