Follow-Up Thoughts on KORUS and Free Trade

After writing my previous post on the United States-South Korea Free Trade Agreement (KORUS), I realized that a bit more needs to be said about KORUS, free trade agreements, and Roger Bybee's "Funnel for Exploitation" article in order to do justice to the complexity of these issues.

According to the U.S. Trade Representative's Office, the provisions of the KORUS FTA stipulate:

• 95% of bilateral trade in consumer and industrial products would be duty-free within a 5 year time frame
• South Korea lowers tariffs and non-tariff barriers on U.S. automobiles, manufactures, and agriculture.
• Increased export opportunities for U.S. service-based firms in sectors such as finance, health care, telecommunications, and education.

The cumulative result can lead to gains that (at the very least) increase U.S. export volume from $10 billion to $11 billion. The South Koreans, in turn, could gain from a more efficient allocation of resources to its most productive sectors.

But Mr. Bybee doesn't really care about the specifics of the KORUS FTA, does he? If you read the article closely enough, you realize that the particular group of activists that the article speaks for isn't concerned about the nitty-gritty details -- these activists operate on a fundamental rejection of free trade and globalization. The reasons are varied, but they all stem from a latent fear: the fear of needing to adapt and compete in a global economy.

It may be a bit trite to say that there's nothing to fear but fear itself, because the pain felt by workers in traditional blue-collar industries is very real. But on a broader level, it's important to understand that jobs in these industries are not coming back -- that other countries now have a comparative advantage in those industries. Rather than to try to preserve the low-skilled manufacturing jobs that are getting outsourced to developing countries, it makes a lot more sense to focus on export industries where we have a comparative advantage: high-tech machinery, financial services, education etc.

Think of it this way: Don't fight Schumpeter's gales of creative destruction (a catch-all term for job creation and destruction via the forces behind globalization). Compete in the global economy by utilizing it to your advantage. Redirect the blows of creative destruction with economic aikido. That's the type of mindset that workers and policymakers facing a free trade regime should adopt.

One final point: activists like Mr. Bybee who (explicitly or implicitly) claim that we need protectionist policies to weather a recession should go back to their history textbooks and read up on the 1930 Smoot-Hawley Tariff, which was passed during the Great Depression. No self-respecting economist -- or educated person, for that matter -- would argue that workers were helped by the era's protectionist policies. In fact all studies indicate that it exacerbated the Great Depression.

South Korea FTA: Reports of Exploitation are Greatly Exaggerated

Recently there's been more talk in Congress about the United States-Korea Free Trade Agreement (KORUS). As one would probably come to expect by now, the anti-globalizers are angrily shaking their fists and crying foul. Yet they do so for all the wrong reasons.

Check out the In These Times article "South Korea 'Free Trade' Deal: Another Funnel for Exploitation", which was re-posted today on Global Trade Watch's official blog. According to the article, KORUS opens the U.S. market to goods that are 35% "Made in Korea" (meaning that 65% can by low-wage labor in developing countries like China -- which the article equates to as "21st century slavery"). It basically argues that outsourcing to East Asia means exploiting labor abroad while impoverishing labor at home.

Scary stuff, right? What's actually scary here isn't the reality of the free trade deal, but the mish-mash of textbook fallacies and unwarranted anxieties that the article presents as its key arguments. Here's my take on these arguments:

(1) "Job Loss"
Trade doesn't unilaterally destroy jobs. Trade, by definition, involves quid pro quo -- you import something while exporting something else. It's funny how the article never mentions jobs that would be created in industries that would be supplying our exports to South Korea. These industries, according to the Brookings Institution, include finance, telecommunications, law, accounting, health care, and education. So while the ALF-CIO could potentially lose out as a result of KORUS, people in these industries stand to gain. This is on top of the fact that both American and Korean consumers would have access to better quality goods and services at cheaper prices.

(2) Social Safety Net -- "Shove 'em Off the Cliff"??
What the article lambasts as "ensure them a safety net, then shove 'em off the cliff" is actually a very responsible economic policy. The Heckscher-Ohlin Model of international trade shows that since the economy as a whole benefits from trade, the best way to help displaced workers is to promote freer trade and then compensate the workers through unemployment benefits or job retraining.

(3) "Exploitation"
The indictment that traded products will be produced in conditions equivalent to 21st century slavery is moralistic nonsense. As Nobel-winning economist Paul Krugman explained in his 1997 Slate article "In Praise of Cheap Labor", jobs in China or Myanmar at low wages and spotty working conditions (by U.S.-standards) is better than no jobs at all. By arguing for what is essentially "good jobs in principle, no jobs in practice" for workers in these countries, the "Funnel for Exploitation" article is effectively saying that the workers deserve to stay in abject poverty.

The fact of the matter is that KORUS is rather economically benign for both South Korea and the United States. Or to borrow from Mark Twain's immortal quip: the reports of exploitation are greatly exaggerated.