Exporting to a Better Economy

President Obama, despite opposition from many Democrats, is sensibly pushing to go forward with free trade agreements with Panama, Columbia, and South Korea. 

“For a long time, we were trapped in a false political debate in this country, where business was on one side and labor was on the other,” Mr. Obama said in the East Room of the White House, at an event intended to highlight his administration’s efforts to promote exports. “What we now have an opportunity to do is to refocus our attention where we’re all in it together.”

Freeing trade is always a hard sell, never mind during a weak economy. Understandably, many people fear greater integration in world markets given our recent history (thanks a lot Greece). So let me preempt some potential hesitancy. Liberalizing trade in goods and services isn’t the same as lifting capital controls or liberalizing finance, which can have greater disruptive potential in world markets. The main difference between stabilizing free trade and the more volatile global financial integration is the herd mentality and confidence issues inherent in finance that can produce bubbles and other herd action. Here’s Jagdish Bhagwati, in the excellent In Defense of Globalizationafter explaining why herd panic initiated the Asian financial crisis of the late 90s: 

A lack of banking and financial regulation compounded the problem. Many commercial banks borrowed short-term from abroad, given the new ability to do so as capital flows were freed from control, and lent the borrowed funds long-term to domestic private investors, often in real estate, without adequate safeguards. “In the five…economies, short-term borrowing amounted to almost a quarter of bank loans to the private sector in 1996.” So when the panic set in and capital began to flow out rather than in, the banks were forced to recall their loans. The central banks also cut the money supply as their foreign exchange reserves shrank due to the capital outflow. Both factors led to closing businesses and, in turn, to collapsing banks.

By contrast, India and China, which had been chalking up high growth rates through the decade prior to the Asian crisis while rejecting the calls for the elimination of capital controls, escaped the crisis altogether.”

This was written before our most recent financial crisis but illustrates why I think the Asian crisis should help inform our current responses and lessons. 

In contrast, Greece today is mired in business regulations and protectionist policies – loosening those could be a key to salvaging their economy. From Reuters:

Economists say developing a wider export base — especially outside the euro zone — will be key to reaching the levels of growth the cash-strapped country needs to cope with a public debt expected to swell to 149 percent of GDP in 2013.

“Supply-side reforms are the make-or-break for the Greek economy over the longer term,” said Ken Watrett, chief euro zone market economist at BNP Paribas.

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