Monday, June 20, 2011

Trade, Exchange Rates, and Public Opinion

. Monday, June 20, 2011

Drezner wants to know what's up with Republicans not supporting free trade these days:

What's more disturbing, however, and uncommented until now, was the total lack of support for freer trade among the GOP field.

This came through loud and clear through what was said and what was not said in New Hampshire. Trade didn't come up all that much during the debate. Tim Pawlenty provided the only comment of substance, and it wasn't a productive one...

The other thing that was striking was what wasn't said during the debate. All of the candidates focused like sharks with frikkin' laser beams attached to them on the economy. The standard GOP litany of solutions for jump-starting the economy were offered: tax cuts, cutting regulation, tax cuts, cutting government spending, tax cuts, reigning in the Fed, tax cuts, ending Obamacare, tax cuts. Not one of the candidates, however, mentioned trade liberalization as part of their fornmula for getting America moving again.

This is more off-the-cuff observation than analysis, and I'm not sure how far it reaches (as Scott Lincicome points out in Drezner's comments), but let's take it as given and think about why might this be the case. Another of his commenters presents a typical explanation:

The obvious thing is that when most of the American people have been economically hammered for decades, they're not in an economically liberal mood. They've seen repeated free trade agreements lead directly to lower wages and layoffs, despite what the various propagandists have said.

Call this the "business cycle theory of trade attitudes": When economic times are good, public support for further liberalization is high. But during downturns, everyone wants protection. It's a fairly standard argument, and Drezner's co-blogger at FP makes it every day.

Thing is, there are good reasons to doubt it. Dr. Oatley recently published an article arguing that real exchange rate movements better predict calls for trade protectionism than the business cycle. His central finding?

The empirical analysis therefore provides robust support for the real exchange rate hypothesis. The number of antidumping petitions rises as currencies strengthen and falls as currencies weaken. This relationship holds even once we control for other likely causes of industry demand for protection such as import growth and changes in macroeconomic conditions. ...

Thus, real exchange rate movements provide at least as strong an explanation for temporal variation in protectionism than the most popular alternative business cycle hypothesis.

Douglas Irwin has a recent article on the link between exchange rates and trade policy in historical perspective. So what's happened to real exchange rates in the US?

Looking at this in light of Oatley's paper, it's not all that surprising that Bush wasn't able to do much on trade during the 2000s. He entered office during a period immediately following a huge exchange rate appreciation that peaked with the early-naughties recession. Second, though the exchange rate depreciated during the decade, that process slowed and mildly reversed in 2008-2009. Recall, as Drezner does, the anti-trade competition that Hillary Clinton and Obama engaged in during the 2008 primary. We're still living through that, so it shouldn't be too surprising that momentum for new trade agreements has stalled in both parties.

In other words, Drezner, Lincicome, and Oatley could all be right: elite Republican opinion on trade might not have changed all that much (Lincicome), but they are choosing to remain eerily quiet on the issue (Drezner) as real exchange rates have yet to depreciate enough to restore American competitiveness (Oatley). The optimistic take for the globalist is that real exchange rate movements are occurring, and if recent trends continue we should expect greater enthusiasm for more liberalized trade in the coming years.


Trade, Exchange Rates, and Public Opinion
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