Wednesday, January 31, 2007

Brad Setser: Larry Summers on Globalization

I am intrigued by a comment the often provacative Larry Summers made at a Davos seminar:

Lawrence Summers, the former U.S. Treasury Secretary and Harvard University president, delivered some harsh criticism of the way globalization has been pitched to the public. Making the intellectual case for free trade and then simply “paying off” some of the losers in globalization, Mr. Summers said, will not work for world leaders trying to sell the current round of global trade talks to a skeptical polity.

“That’s the Davos lie,” Mr. Summers said during a dinner Friday night.

I wonder what Summers thinks would work?

One of the things that has struck me about the current politics of trade is that the losers aren't really paid off -- either formally or informally. The various government programs that help displaced workers are small. The heads of private equity firms don't, for example, don't tend to raise funds for charities to help workers displaced by booming US imports of auto parts, even though private equity firms clearly have been among those who have benefited heavily from the United States ability to import China's savings surplus.

In some areas, paying people off the losers is rather hard. Compensating US farmers for the loss in market value of their land should the US ever really give up its agricultural subsidies would be quite expensive -- as, for that matter, would compensating US homeowners for their losses should the US every stop subsidizing mortgage interest. Once a subsidy gets capitalized into asset values, watch out ...

I suspect Summers believes that the integration of China and India into the world economy have such profound implications -- including such profound implications for who wins and who loses from trade -- that old policies for managing trade-related dislocation aren't enough. But I don't really know ...

One way of "selling" trade is to emphasize the benefits from imports -- not just the gains from exports. It is pretty hard to argue, for example, that the majority of the gains from US trade with China have come from expanding US goods exports. Sure China buys some Boeings, but China clearly buys far more US debt than US goods. Steve Roach of Morgan Stanley never tires of emphasizing how much the US gains from importing cheap Chinese goods and cheap Chinese financing.

But that doesn't address the concerns of those worried about competition from cheap Chinese labor -- or the concerns of those of us who worry that the US has become a bit too dependent on cheap Chinese financing.

Update: For more, see the Economist's (libertarian-tending) blog, Free exchange, which basically argues that the business men who see the opportunites brought by globalization are right, and the intellectuals worried about its risks are wrong. Business, the argument goes, must do a better job of explaining globalization's broad benefits (i.e. cheap goods -- big profits and big CEO salaries don't count as broad benefits). I suspect that won't work. I would be surprised if the average American hasn't already figured out that Walmart's everyday low prices are largely made in China. The average American also, I suspect, has figured out that the latest round of globalization -- the one that has made the Russian businessmen and their "nieces" the toast of Davos -- hasn't brough with it lower prices for many other things they buy, little things like oil and gas ...

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