Trade Policy in an Age of Protectionism -- How Governments Can Promote Free Trade through a Domestic Agenda

I had the opportunity to attend a meeting this morning with Dr. Laura Tyson, professor at UC Berkeley's Haas School of Business, a former chair of the Council of Economic Advisers under Clinton and one of Obama's chief economic advisers.  She addressed the current economic and financial morass in a way that was clear, succinct and persuasive unlike anyone else I've heard speak on the subject to date.  Indeed she assuaged many of my doubts about Obama's candidacy all of which centered around his policies on trade, taxation and government investment.  Actually, I wish that she were running for president instead of either of the two guys who are.

 

Among the many topics she addressed was how any given country's government (she was speaking of course specifically about the U.S.) can solve a globally integrated economic crisis when our political institutions are strictly nationalistic.  This blog had a post a year ago on the challenges faced by central banks dealing with the then developing sub-prime mortgage implosion as a result of the contravening impact of LIBOR versus the federal funds rate that raised this issue.  Her first point in addressing this conundrum revolved around her historical and continuing support of a strong role for international structures such as the WTO and the IMF.  It's heartening to hear a key adviser to a liberal politician speak favorably about an institution such as the WTO.

 

She then, however, made an interesting connection between international trade and domestic policy.  She argued (I think correctly) that there are 3 simultaneous realities about international trade -- (1) free trade has greatly benefited the US in the aggregate, (2) decisions about the future of trade are being driven increasingly by powers outside the US and beyond our control, and (3) the benefits of trade have not been shared uniformly by all people creating an insecurity on the part of many people that they blame on international trade, whether or not that blame is founded in fact. She made the point that all 3 of these realities exist and that it's not helpful to choose one or two as a matter of ideological perspective while disregarding the others in forming policy. 

 

Her greater point then was that in order to effectively expand free trade -- which she strongly believes is beneficial and indeed essential for the economic well being of both developed and developing countries alike -- it is critical to address and ameliorate the insecurities that cause nationalistic populations to resist free trade.  Certainly one would have to agree that these days opposition to free trade is rampant on both the Democratic and Republican sides of the aisle fueled by angry constituent mail from people who perceive (whether accurately or not) that the U.S. is being disadvantaged by international trade.  If one does not act to remove these barriers to sound trade policy, it is difficult for any administration to move ahead with a free trade agenda. 

 

The beauty of her argument is that the policies necessary to ameliorate this insecurity and reduce protectionist reaction are largely "domestic" and thus ones over which national governments still have significant control.  Among the specific domestic agenda priorities that Dr. Tyson listed as providing a foundation for a successful trade policy in her mind are (1) portability of health insurance, (2) expanded job displacement support and retraining, and (3) investments in infrastructure and R&D that promote global competitiveness on the part of domestic companies.   It's hard even for a rampant free trader to argue against the reasonableness of that list of priorities.