Mad About Trade: Why Main Street America Should Embrace Globalization (review)

The onset of the current recession has seen a renewed wave of popular pressure for the implementation of protectionist measures amidst public declarations of commitment to free trade by political leaders around the world. The case for free trade is an interesting one due to the large disconnect between popular opinion and economic theory. Economists may disagree on many things, but free trade is one issue that generally receives universal support within the economics community. Yet in mainstream society, there remains a general skepticism among large swaths of the population regarding the benefits of open borders and increasing globalization. In his new book, Mad About Trade, Daniel Griswold of the Cato Institute attempts to bridge the gulf between economic theory and popular opinion by offering concrete, relatable examples in support of free trade, presenting the case for a continual embrace of free trade and globalization. With talks of a possible ASEAN-US Free Trade Agreement on the horizon, trade negotiators in the ASEAN region would do well to bear these lessons in mind and remind their American counterparts of the rationale behind the need to maintain open markets.

Griswold spends a large portion of the book responding to public concerns regarding trade. For example, he exposes the flaws in the argument that free trade hurts the economy, by pointing out that although lower prices caused by greater import competition may indeed harm import-competing producers, consumers benefit more than producers suffer, since an imported product is consumed in a greater quantity that it is produced domestically. Society as a whole is therefore better off as a result of freer trade.

Another issue that Griswold addresses is the trade deficit, which has acquired a rather negative reputation in popular opinion. Griswold notes that in addition to the current account market for goods and services, it is also important not to overlook the capital account, which tracks the trade of assets. By definition, the net outflow of goods and services associated with a trade deficit must be balanced by a net inflow of foreign investment into the U.S. There is therefore nothing inherently wrong with the U.S. running a trade deficit, and there is no need for correcting policies. The greatest danger of the trade deficit lies in the pressure it places on politicians to try to "correct" it by implementing protectionist policies.

In addition to introducing an economic framework to the discussion of free trade, Griswold also dispels some of the myths about free trade. One popular belief is the "race to the bottom" myth, which states that multinational companies will congregate in countries with the lowest wage costs and the most lenient environmental and labour standards, sparking off a downward spiral as countries compete to push wages and labour standards down in order to remain competitive and attractive to investors. Griswold, however, points out that low wages are also indicative of low productivity, which means that companies seeking to employ productive, skilled labour will remain in rich countries with high wage costs.

Another interesting point in the book is Griswold's refutation of the idea that the income of American workers has shrunk over the years. In making this point, critics often point to a lower average real hourly wage today relative to the 1970s, and blame free trade on this phenomenon. Yet Griswold points out that the average real wage is a misleading measure of the American workers' welfare. This figure depends on consumer price index (CPI) estimates, which tend to overstate the cost of living due to their inability to capture the effect of improving technology and product quality on rising costs. Furthermore, worker compensation packages have also grown to include non-monetary perks, such as healthcare benefits and 401(k) contributions, which do not factor into real wage figures. Hence, despite what might appear to be a lower average real hourly wage today, the American worker has enjoyed real gains in utility.

In addition, Griswold addresses...