In a recent speech (well, not that recent at this point -- I got distracted by other things), WTO DG Pascal Lamy addressed six "trade fallacies":
Fallacy #1: Comparative advantage does not work anymore
Fallacy #2: It is unhealthy for trade to grow faster and faster compared to output
Fallacy #3: Current account imbalances are a trade problem and ought to be addressed by trade policies
Fallacy #4: Trade destroys jobs
Fallacy #5: Trade leads to a race to the bottom in social standards
Fallacy #6: Opening up trade equals deregulationAll of his responses are excellent. I'm just going to add a couple comments (with extracts of some of his key points included).
#3 Current account imbalances are a trade problem and ought to be addressed by trade policies
It has always seemed to me that, in the long run, exchange rate adjustments should correct trade imbalances. Yet some imbalances have been around for a long time. Does that mean that exchange rate adjustments do not fully resolve trade imbalances? Or does it mean that exchange rate adjustments are not taking place as they should?
... a current account surplus is created if domestic savings exceeds domestic investment, which means that the country is a creditor to the rest of the world. A current account deficit ensues if domestic savings is less than domestic investment, in which case, the country is drawing on savings provided by foreigners.
The growth of global imbalances in the last decade reflects in part the greater integration of financial and capital markets. This has made it easier to accommodate big differences in savings propensities and investment opportunities across countries. Domestic residents can afford to save less because citizens of other countries are saving more, and with few restrictions on capital flows, those foreign savings can be made available at lower cost to domestic residents.
I know that the lack of exchange rate flexibility in some countries has been raised as a problem in the context of global imbalances. The only thing I can say about this issue is that it is difficult to talk about the optimal exchange rate system for a country — whether completely flexible or fixed — without addressing the much broader question of what the appropriate international monetary system must be.
#4 Trade destroys jobs
The problem with the argument that trade destroys jobs is that it sees only the threat posed by imports to jobs but does not take into consideration how jobs may be created in the export sector as a consequence of trade opening. It also fails to take into account that trade opening can increase the rate of economic growth, and therefore improve the ability of the economy to create new jobs.
He's right about all this, but I wonder if perhaps there is another way of thinking about this issue. It is true that if you are in a situation where substantial trade barriers exist, and you then open the economy to imports by removing those barriers, some jobs will be lost in import-competing sectors. But is the lesson to be drawn from this that trade destroys jobs? Take the reverse situation, where there are no trade barriers, but countries suddenly decide to impose them. This, too, would result in job losses, as existing export markets are closed. A lesson that could be drawn from this latter situation is that the absence of trade destroys jobs. However, if you take both situations together, perhaps the appropriate conclusion is that disruptions to the trade status quo destroy jobs. (More precisely, they destoy some jobs and create others). Thus, it's not really about trade or no trade; it's about changes to trade policy. And if that's the lesson, we can then focus on the overall benefits of trade liberalization as compared to protected domestic markets, and think about good ways to deal with the harm from changes in trade policy (for example, making sure trade liberalization is gradual, and setting up adjustment mechanisms).
Fallacy #5: Trade leads to a race to the bottom in social standards.
Some have argued that more trade will drive governments in rich countries to lower their social or labour standards. More trade would hurt workers in rich countries. The problem with this argument is that there is very little empirical basis for it. It is difficult to find examples where countries have lowered social or labour standards in response to trade competition.
One variant of this argument has been used by Emmanuel Todd who claims that open trade between developing countries such as China and industrial countries is the reason for the economic crisis. In his view, the competition coming from low-wage countries has put pressure on wages in industrial countries and caused a deficiency in aggregate demand.
I would argue that differences in wages largely reflect differences in labour productivity. There is a fairly close correlation between wages and productivity across countries with some estimates going so far as to suggest that 90 percent of wage differences between countries can be explained by productivity differences. While wages in many developing countries may be low, labour productivity in these countries is also a fraction of western levels.
With regard to the wage argument, I can see how wages might fall in some cases, but rise in others, due to trade. Take a product like air conditioners, which are mostly sold in richer countries. If air conditioners are being produced in the U.S. for the U.S. market, but due to the tariff reductions resulting from NAFTA producers have the option of setting up factories in Mexico, companies that make air conditioners will now have additional sources of labor to draw from. That is, the supply of labor goes up. By contrast, the demand for air conditioners won't go up by much, at least not right away (maybe it will later as Mexican incomes go up). So, you have an increase in labor supply, but no increase in demand, which should bring wages down.
On the other hand, if you look at an industry like entertainment, opening up new markets leads to greater demand for certain performers, especially those at the top, with the supply pretty constant.
Of course, this is not a comprehensive look at what will happen to wages, but rather just a couple examples to illustrate that wages could go up or down due to trade, depending on market circumstances.
#6 Opening up trade equals deregulation
There is a tendency to confuse trade opening with deregulation of the economy. One way to distinguish between the two is that trade opening refers to a reduction in trade barriers or a reduction of those measures that discriminate against foreign goods and services. A country that opens up to trade does not compromise its ability to regulate, provided of course those regulations do not discriminate in an unjustifiable manner against foreign goods and services, thus contradicting opening commitments.
I'm not sure that anyone equates trade and deregulation, but there are people who argue that trade agreements contribute to deregulation, by putting constraints on domestic regulation. What's important here, I think, is to separate out the non-discrimination rules that Lamy refers to from the various trade rules that go beyond non-discrimination.