Part 9 (1/2)

In a more complex world the dollars and rened for each other We sell drills to the Saudis, the Saudis sell oil to the japanese, the japa-nese sell robots to the Chinese, and the Chinese sell televisions to us We can borrowthis-or we can produce assets like machine drill factories and sell the factories rather than the machine drills But the circular flow of currencies will balance out completely in the end The United States can afford imports only if we eventually produce exports to pay for them, and the same is true for every country

A s further Think of a country whose governe our local econoovernling One effect will be that a lot of effort will be devoted to producing locally as once iement to the local economy But another effect is that all of the export industries will quickly shrivel and die Why? Because ould want to spend tin currency, if nobody is allowed to spend the foreign currency on ied, another is crippled The ”no imports” policy is also a ”no exports” policy And indeed, one of the most important theorems of trade theory, the Lerner theorem, named after the economist Abba Lerner, proved in 1936 that a tax on imports is exactly equivalent to a tax on exports

Lerner's theore imports of Chinese televisions to protect Aexports of American machine drills to protect A In fact, the A industry is not re-ally co in-dustry at all; it is coainst the American machine drill industry If the machine drill industry isindustry will not survive, just as surely as E O Wilson's proround in the face of his superior skills as scientist

This certainly ht But it doesn't prove that trade barriers cause any harhtn't the benefit of trade barriers to the Ah the harm to the American machine drill industry? David Ricardo's theory of coe tells us that the answer is no As we know, under free trade, both Chinese and American workers can quit work earlier than they could under restricted trade, having produced the same amount as before

The commonsense answer based on practical experience is also no: coary To take a very rough guide to how much better it is to have an open, liberal economy than a closed one, simply note that in 1990, just after the fall of the Berlin wall, the average Aus-trian was between two and six ti on how you e South Korean is wealthy while the average North Korean is starving North Korea is so isolated that it's hard to get any measurement of quite how poor the country is

Trade barriers will always cause ainst which the barrier is erected but also the country that erects the barriers No matter if other countries choose to inflict trade restrictions on thereat economist Joan Robinson once quipped that just because others throw rocks into their harbor, that is no reason to throw rocks into our own As the Zwin silted up, the citizens of Bruges were no doubt realizing the same truth centuries before

None of this is to say that free trade is good for everybody Con products cannot put all of our domestic industries out of business, because othere couldn't afford to buy the foreign products But it can alter the balance of our econoo back to the exah in our exa both machine drills and televisions, we still producewith the Chinese In fact, we produce twice as many machine drills as we did before, but our televisionindustry has been wiped out Good for theindustry People will lose their jobs They will have to try to learn new skills and get reemployed in the machine drill sector, which may be easier said than done Overall, the United States is better off, but some people will lose out, and the losers will curse free trade and deh we kno that they could equally demand restric-tions on exported machine drills

Even the most casual historian will be rean in 1811 in the English mid-lands, a desperate response by skilled textile workers to co fra ainst the new econoinative thug, the Luddites were responding to a real threat to their livelihoods

So did technological change hurt some people? Without a doubt Did it impoverish Britain as a whole? A ridiculous notion Withoutto those who lost their livelihoods along the way, it's obvious that technological progress ht of as another fory Economist David Friedman observes, for instance, that there are tays for the United States to produce autorow the they that turns wheat into Toyotas: simply put the wheat onto shi+ps and send them out into the Pacific ocean The shi+ps come back a short while later with Toyotas on they used to turn wheat into Toyotas out in the Pacific is called ”japan,” but it could just as easily be a futuristic biofactory floating off the coast of Hawaii Either way, auto workers in Detroit are in direct competition with farmers in Iowa Import restrictions on japanese cars will help the auto workers and hurt the far”

The solution, in a civilized but progressive society, is not to ban new technology or to restrict trade Neither is it to ignore the plight of those people put out of work by technology, trade, or indeed anything else It is to allow progress to continue while helping support and retrain those who have been hurt as a result

Perhaps that sounds callous After all, even one person ants a job and cannot find one is suffering a personal tragedy Yet the interest groups who oppose free trade for their own profit have vastly overblown the effects of trade Between 1993 and 2002, almost 310 million jobs were lost in the United States Over the same period, more than 327 million jobs were created Nearly 18 million more people had jobs in 2002 than in 1993 Each of the 310 million times somebody lost a job, that person was en-titled to syn co to do with it Trade or no trade, a healthy economy loses jobs all the tiood thing?

It is one thing to say that trade makes countries like the United States richer It is quite another to say that globalization is a good thing To do justice to all the argulobalization would take an entire book In a short chapter there is tilobalization The first is that globalization is bad for the planet; the second is that globalization is bad for the world's poor

We first need to be solobaliza-tionaside noneconomic phenomena such as the spread of A, and japanese ration besides trade I would list at least five distinct issues: trade of goods and services; e; ”foreign direct invest factories and companies abroad; and cross-border investments in financial assets like shares and bonds

Many discussions of globalization confuse all these At the risk of oversiration, ex-change of technology, and cross-border investments in financial assets This is not because they are unimportant, but because they are not what people tend to think of when they talk about global-ization Migration is controversial for other reasons; generally, xenophobia and selfishness On the other hand, few object to the spread of peaceful scientific and technical kno Cross-border investments in financial assets are the subject of consid-erable technical debate areat opportunity for both rich and poor but an opportunity that brings dangers For the sake of space, we shall say no more about these three trends

For lobalization they are talking about the two trends that remain: more trade, and more direct invest factories in poor countries A substantial proportion of foreign investoods for shi+pment back to rich countries; while this ren investn investrowth in poor countries: it is an excellent way for thee techniques, and do so without having to invest their own scarce money Unlike investn direct investment cannot quickly be reversed in a panic As economics journalist Martin Wolf puts it, ”factories do not walk”

Although trade with and investment in poor countries has risen rapidly in recent years, we should be clear that both trade and foreign investly takes place between the rich-est countries, not between rich and poor People look at their Nike shoes and assu is made in In-donesia and China However, farwine froiuames from Britain, cars from japan, and computers from Taiwan, all carried on shi+ps fro with each other Mighty China, with about a quarter of the world's population, produces less than 4 percent of the world's exports Mexico, a country of over a hundred reeest econo trade as the US econoium Meanwhile India is nowhere at all, with a billion people producing less than 1 percent of world exports And these figures are for physical merchandise: if you look at trade in co, developing coun-tries participate even less

What about the very poor countries? Sadly for them, rich countries trade very little with them-and as trade expands elsewhere in the world, the poorest countries are being left behind North American imports from the least developed countries were only 06 percent of total imports in 2000, down from 08 percent in 1980 But 05 percent of Western Europe's imports in 2000 were from the least developed countries, down froure is 03 percent, down froether, the percentage of their imports from the least developed countries is 06 percent, down from 09 percent twenty years before For the really poor countries, their problem certainly isn't excessive participation in the world trading systen investe, coood for econon direct investrowth The poorest countries miss out on those ben-efits This is a sih, questions ren investn investment in poor countries on those who have to accept so-called sweatshop jobs, poorly paid jobs in awful conditions?

Globalization is green Take the environment first We saw in chapter 4 that the econoives us a powerful tool to appreciate the risks of environive us a solution Many-perhaps e and want action to preserve the environe just doesn't stand up to close scrutiny There are three reasons for concern The first concern is of a ”race to the bottooods under cheaper, overn those lenient laws The second is that physically oods around inevitably consumes resources and causes pollu-tion The third worry is that if trade prorowth, it must also harm the planet While each has some initial plausi-bility, the idea that trade is bad for the environ and little evidence

The first worry, that free trade causes environoods produced overseas are subject to more lenient environmental standards, or no standards at all, should first be qualified by re majority of trade is between rich countries, who have similar environmental standards But what about investment in poor countries? The environmentalist Vandana shi+va speaks for many when she declares that ”pollution lobal environ words-but are they true?

In theory, they oods e They can also move around more easily in a world of free trade So the ”race to the bottoain, there are reasons to suspect that it's a fantasy Environulations are not a major cost; labor is If Ameri-can environmental standards are really so strict, why do the most pollution-intensive American fir with pollution? Most spendcheap labor, not a pol-lution haven And co techniques are often cheaper and less polluting at the say efficiency, for instance, saves ard environ-ood efficientEven if it was possible to save so environmental corners,the say from the developed world, simply because that kind of stan-dardization itself saves costs As an analogy: if ten-year-old computer chips were still produced in bulk, they would be sim-pler and cheaper to make than modern chips, but nobody both-ers any more It's now hard to buy an old couh environmental standards to please their work-ers and their customers

Soa ”race to the bottorounds for doubting its existence So leaving theory to one side, what are the facts? First, that foreign invest industries than foreign investn in-vest into the United States In con-trast, foreign investners are bringing dirty industries to the United States, but A clean industries to the world

You raph To those brought up on a diet of environuilt, those statistics seem insane They are not so insane when you consider that poor countries produce goods like clothes, children's toys, and coffee, while the seriously polluting industries like bulk cheh levels of skill, reliable infra-structure, and-since a lot of capital investment is involved- political stability Why jeopardize that bythe plant to Ethiopia to save a few dollars on environmental costs?

Another indicator of the environn investment in poor countries comes from measures of pol-lution in China, Brazil, and Mexico Sixty percent of foreign investment in poor countries arrives in these countries The first figure on page 217 sho as the Chinese economy has de-veloped, urban air pollution in China has been reduced At the san firms build factories in China, either to cater to the Chinese e of cheaper labor and export to the rest of the world Brazil and Mexico have very sin investovernhter envi-ronn investment has arrived All the same, it is hard to reconcile tales of a ”race to the bottom” with this picture Such tales are convenient scare-stories for protectionists looking for neays to favor privi-leged industries at the expense of custolobalization cause pollution?

China: Urban air quality and foreign investment

1987 1995 Source: Wheeler 2001

The truth is that protectionism itself can have tremendous environmental costs The ricultural Policy in the European Union, a package of trade barriers and subsidies designed to pro-tect European farmers To its defenders, multifunctionality is supposed to convey self-sufficiency, security, environmental per-formance, and a fair deal for poor farmers But instead, the policy subsidizes farmers in the European Union to the tune of alest quarter of the farricultural protection and use of fertilizers in agriculture Percent of Subsidy 70 Switzerland Korea japan European Union Canada United States 0 0 Australia Fertilizer use Kilograetting over two-thirds of this-the richest land, the Duke of Westminster, received 448,000 (nearly 900,000) in subsidies in 20034 The policy encourages intensive farh use of pesti-cides and fertilizers, and all the while du world and depresses the prices received by far to derail the current round of world trade liberalization As Martin Wolf commented in the Financial Tires-sive, wasteful, da to food quality and the environment and an obstacle to trade liberalization everywhere”

Other rich nations, especially japan and Korea, privilege their farmers the same way as the European Union: a third of the typi-cal OECD faroverne 217 shows, the riculture is subsidized, the ri-cultural Policy and other exaricultural protectionism were abolished, there is little doubt that the world's environment would be substantially i could be reduced At the same tiet a much better deal

The United States provides less subsidy for its farmers, but it can still lay on trade protection and cause environar producers enjoyed a 1bil-lion subsidy, half of which went to just seventeen farms (Because of the distortions caused by protection, this cost consumers nearly 2 billion, half of which was pure waste) The protection has daar producers in Colo cocaine instead Of course, the environht still approve if the environ, but it is not: chemical runoff frolades

Intensive far is an unusually clear-cut case Not all environmental problems will be automatically solved by free trade One exa only rice, only coffee, or only wheat This lack of biodiversity renders crops more vulnerable to pests and to fluctuations in the weather

That ainst free trade, since increased trade encourages countries to specialize in single crops for which they have a coe But trade barriers are a terrible way to deal with the problelobal biodiversity are both impor-tant, but national biodiversity is irrelevant: environmental prob-lems do not notice political boundaries To the extent that lack of biodiversity is a probleulation: the keyhole econo that a trade barrier will fix the problem is ludicrous

This is a special case of another important piece of trade theory There will always (in theory) and usually (in practice) be an alter-native policy, which will fix the environmental probledish Bhagwati, an eminent trade theorist, comments in this context that ”You cannot kill two birds with one stone” Trade barriers are a clu way to pursue hile objectives, like a healthy environwati's principle Again, it seems superficially attractive to restrict international trade to cut down on the pollution caused by container shi+ps and freight airplanes Yet again, direct regulation in the fore is the solution Trade barriers attack the trans-port of goods across borders: but there is nothing especially en-viron a border The transport costs of eles are less than the transport costs of eles across to Arizona, or even into a branch of Best Buy in Los Angeles itself The transport costs of so to Best Buy and back hoher yet, when the true environured in Just because goods are moved within countries, or even quite locally, doesn'ttheain, the Undercover Economist has to recommend policies that attack the problee the use of cleaner methods of transportation, whether within or between countries

The final concern, then, is that trade is not bad in its own right but because it leads to environrowth: that is, trade e the environment This claim is worth some attention

The most deadly and certain environmental problems of today- and possibly the iven the threat of clie-are also those that afflict the very poorest people in the world One exa stoves, which causes blindness and fatal respira-tory conditions Another exa water, which kills millions The cure for these environrowth, and trade can help

Other pollutants, such as airborne particulates eet richer-for a while Typically, this pollution becomes less serious after people earn around 5,000 a head (as in Mexico), because at this point they are rich enough to afford improved environmental standards, and they will de-rowth, and directly, because free trade in poorer countries has been as-sociated with the end of subsidies to heavily polluting prestige industries such as petrochemicals and steel as well as the iies

It is true that energy consumption, and with it carbon dioxide e af-ter people reach 5,000 a head It seeh we do not know for sure, that the richest countries in the world are just reaching the point where even energy consu After all, our cars and doet more efficient every year, and e all have two cars and a large air-conditioned house, it's hard to see where extra energy deurohich leads to clie, leads us then to a stark conclusion: we should cut our trade links to make sure that the Chinese, Indians, and Africans stay poor The question is whether any environe, could possibly inflict the sa three or four billion people in poverty To ask that question is to answer it

Does this mean that we are doomed to choose between eddon? Not at all There is plenty we can do to aid the environ the coun-terproductivetrade Externality taxes have already cut sulfur emissions in the United States (and will do so in China, too) They could also be used to cut carbon dioxide ee; if we demanded the coht not even be that expensive We could ht sub-sidies of fossil fuels; Gerreen cre-dentials and a fire, spends 86,000 per coalits coal indus-try from international competition