06 November 2008

More On Rahm Emmanuel & Free Trade

Longtime friend, Dan K., an econ PhD student at Cambridge, provided a very instructive response to my earlier post about the prospects of free trade under an Obama administration.
Just a few things regarding your concerns about free trade.

1. Clinton promised to renegotiate NAFTA to include strong labor and environmental measures. And he did, which took an extra year to get to congress. In reality, those measures deliberately had zero enforcement power. The Clinton negotiators wanted it that way. And the Mexican and Canadian negotiators laughed at the lack of enforcement power, particularly with labor. The book "How the Deal was Done" by Cameron and Tomlin documents this well. The lesson seems to be that while the democrats signal an awareness of labor and environmental concerns with trade agreements, it's not really a credible threat. It's largely because all of that involves the creation and enforcement of international labor and environmental laws which are close to impossible to create and enforce. They do pander to labor unions. But that's because they can't get elected without them. But the end result is the same. So if empty rhetoric and promises are what it takes to calm down the labor groups, then so be it. We now have one President who is exceptionally good at it. I think Obama knows that playbook.

2. No trade economist (that I know of) think it is possible that Obama would unilaterally renegotiate NAFTA. Why? Because it sets a dangerous precedent of unilateral renegotiation on regional and multilateral FTA's for other countries who feel 'cheated' by such agreements. As you know, while the overall benefits of free trade is positive, there are bound to be losers within a domestic setting. Unskilled labor is the loser of NAFTA (economical jargon: less abundant production factor). Every free trade agreement has losers, thus domestic pressure for reform. The precednet for Unilateral negotiation means that many free trade agreements could unravel, to say nothing of the WTO. So, unilateral renegotiations of NAFTA is not an option for Obama, and he knows that. (Let it go Jake. He did what he had to beat Hilary, which I don't mind at all.) He may not be a complete free trader, but he also does not want the blame of dismantling the world free trade network.

3. Have a look at the current tarriff rates of the United States. Almost every product is close to zero (large exception being agriculture). There are not that much more trade benefits to be had with more FTA's. The South Korean FTA is more of a gesture to strengthen political ties anyway. The only (real) thing left now is to promote global efficiency by concentrating on the WTO. There's significant evidence to suggest that bilateral FTA's hurt that goal. By definition, FTA's create preferential treatment. This diverts trade from efficient to inefficient producers (equals dead weight losses). So, if you really want to be a free trader, argue about granting fast-track authority to the Obama administration and pushing through the Doha round. Because the other FTA's are not going to create much benefit (in fact it may create losses in the long run). I say this because you can be a free trader (like myself) and oppose the Columbia and South Korean FTA's (provided for a strong support for WTO). The WTO is the battle ground where the big boys (Brazil India China Russia and EU) play their economic games. I don't mind the least bit if Obama scores some political capital by opposing regional and bilateral FTA's and gets the job done at the WTO.
Dan blogs at From One Cambridge To Another.
(better start blogging again, Dan)

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