Beware of the Trader

Before we can compare McCain and Obama’s positions on trade, we have to give some background on the trade debate.  There are a whole slew of positions that people take on trade issues.  These stances arise from differing viewpoints on the effect that trade has on everything from growth, wages, the environment, labor standards and unemployment rates.  Let’s lay it all out there.

There are several kinds of “free-traders” in the political world. There is the ardent, messianic free-trader who believes in the power of free trade to transform the world and causes no one any harm.  There is the “made in the USA,” proponent who wants to impose large tariffs on foreign goods to protect the American worker at all costs.  There is also a middle position, the “cave mercatem,” beware of the trader, position.

What are we to be wary of with respect to trade?  There is a spectrum of positions here as well.  There is the environmentalist, who proposes that environmental prerequisites be attached to trade deals.  There is the labor unionist, who proposes that “fair treatment” of workers be a necessary condition of trading with the US.  There is also the “assisted free-trader,” who is in general favor with free trade but wants to help those who lose their job due to competition with foreign workers.

Let us start with the Messianic Free Trader (MFT).  The MFT takes a strict reading of trade theory.  In classic trade theory, when two countries engage in trade, they expand the opportunities available to both countries because each country, to some degree, specializes in making what they’re good at.  This specialization allows the total production of goods in the world to increase, thus making everyone better off.  The MFT buys into this story completely, no if’s and’s or but’s.  Therefore, in the eyes of an MFT, anything that impedes trade is damaging to the welfare of the world.  This includes tariffs, which are taxes on foreign goods, quotas, which are restrictions on the quantity of goods that can be imported, and any environmental or labor standards which must be met in order to trade.

The Made in USA (MIA) proponent takes a different tact.  An MIA believes that the jobs in the home country, in this case the USA, are worth a great deal.  If we open up to trade as the story goes, countries will, to some degree, specialize in the production of goods in which they are good at.  If you are in an industry that is specialized away from, you lose your job because domestic production in that industry decreases.  An MIA attaches huge losses to the destruction of domestic jobs.  So large, in fact, that the gains from trade pale in comparison.  Thus, everything should be “Made in the USA.”

The middle ground is much more interesting.  The Cave Mercatem proponent is somewhat of a hybrid of the MFT and MIA.  The CM buys the benefits of trade espoused by the MFT, but it also believes that there are some ill effects of trade that must be ameliorated.

The first of these types is the assisted trader (CMAT).  The CMAT is generally in favor of free trade but wishes to transfer some of the benefits of trade, which are enjoyed by all, to the few workers which are hurt by trade.  An admirable goal, no doubt, but it is hard to implement.  Thus far, the CMAT’s reservations have been assuaged with trade adjustment assistance.  Trade adjustment assistance is a federal program that assists workers whose jobs are “lost to trade.”  If your job is deemed by the department of labor to have been lost due to trade with a foreign country, you are eligible for wage assistance and job retraining.  This program was established by The Trade Act of 1974.  In the federal government’s fiscal year 2006, this program was appropriated $1 billion, a small sum in government budget terms.  Here are three views on trade assistance: Beyond Trade Adjustment from the Atlantic.com, Mankiw’s Two Questions About TAA, and Baker’s Helping Losers from Trade on the Cheap.

I will lump the remaining two CM’s together into a “meeting our standards” wing, the CMOS proponents, because their line of reasoning is very similar.  The two groups within this wing are labor unions and environmentalists.  Both sides argue that if two countries are to compete by trading goods, then the playing field must be level, i.e. no side must have an advantage that the other cannot match due to ingrained institutions in one country.  The difference is in what the ingrained institutions are.  For labor unions, it is the minimum wage, health insurance, social security, medicare, medicaid, and working condition laws enforced by OHSA.  All of these things must be paid for or provided by employers in the US.  These cost money to provide and are built into the cost of doing business.  Their provision puts a cost floor on American firms.  If such features, which impose a similar cost on doing business, are absent from trading partners, then they have an unfair advantage.  Therefore, to level the playing field, we must include “labor standard provisions” in our trade deals.  Environmentalists argue that since firms in the US must comply with certain environmental standards, which impose a cost floor on American firms, we must impose similar restrictions on our trading partners.

Now that we’ve cataloged the positions in the free trade debate, we can move on to further outlining McCain’s trade position.  After this, we will move to Obama.