The story of surplus: the forces behind trade.

Krugman, Paul

While trade shouldn't be viewed as competitive because an increase in productivity means increased product for an entire market, will differences in growth rates lead to political competition that threatens free trade?

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I do not think that the difference in growth rates is the issue. I do not think anyone is looking at Chinese growth and saying it is the problem. The specific jobs that are being shifted overseas spurs political debate; it is just not basically a growth rate issue.

Much media coverage has focused on exporting jobs and the transition to a service-based economy. Is this an accurate depiction of the future of the US economy and the balance of future economies of developed and developing nations?

No. Everything we know from theory and from history says that international trade is not going to lead to a net loss in jobs. It will lead to all other kinds of consequences, but overall employment will be just the same as it would have been without the trade. Overall, this is not going to be a net negative for employment; the problem is that we can not neglect the very real concerns of workers who lose their jobs.

Is international investment a stable method for growth and development, or is capital flight still a legitimate concern?

Capital flight is still a legitimate concern. Hot money that flows in and out of countries has been a big source of instability for the past decade. That has been a major negative and we can not dismiss it. For what it is worth, international investment has not been flowing where it should. We have not seen a situation where savings from advanced countries are being used to finance development in poorer countries. If anything, the flows have gone in reverse. A lot of people are rethinking international investment. There are still arguments for relatively unrestricted investment, but the big upsides have not materialized.

What would be the big upsides of international investment without the risk of capital flight?

The theory was that international investment was going to deliver capital to countries where capital was scarce. It was going to increase investment in productive capacity in places that were short of productive capacity. This just has not happened, anywhere. In both Latin America and Southeast Asia there were brief periods of capital flow, but it all dissipated. In fact, there was subsequent capital outflow as countries moved into current account surpluses. The whole idea that international investment was going to be a way to transfer savings from already developed countries to countries on the way up, for whatever reason, just has not happened.

Will regional trade agreements lead to economic growth or are they means to political ends?

Regional trade agreements have turned out to be not that important. If you were looking at the big story of US trade since 1990, NAFTA would not be a big part of the story. If you looked at the likely impact of the Free Trade Agreement of the Americas (FTAA), assuming one is possible, it would not be that big. Regional trade agreements turned out to just be a hypothetical story. These agreements are largely political gestures. They do offer some increase in trade between the parties that sign the agreement; they do cause some problems for multilateral trade because they distort the global system of trade. Ten years ago, regional trade agreements looked like they were going to be the big thing of the global economy, but this just has not panned out. It is not the big story.

What are the implications of the increasing internationalization of financial markets, including international investment, for third world countries? What do you see as some of the obstacles to achieving truly international finance markets?

Do that in reverse. The big obstacle is that international finance has, for the last 15 years, been a source of problems rather than solutions. Whatever we may say about the principle of free markets, the fact is that we have had these disruptive large capital flows. I think that a poor track record is the main obstacle for a country like China, which will not be in any rush to liberalize or open up its financial markets because similar countries that have liberalized have seen very unpleasant crises as a result.

Given the increasing influence and hegemonic prowess of North Atlantic countries, do you see the rest of the world's trade politics conforming to western trade standards?

Actually, I would not have used any of those words. We have a system of relatively open market standards that is embodied in the rules of the World Trade Organization. By and large, countries are moving in line with these rules. I am not sure it is a particularly North Atlantic standard. I think that if you started form scratch with no particular national background, you would have ended up with a similar set of rules. The questions are always about the limits of globalization, which is difficult to deal with, but I do not think there is a lot of hegemonic coercion going on right now.

Do policy issues such as national security concerns, human rights concerns, or environmental concerns pose a danger to free trade when protectionism is justified in their names?

National security, definitely. The environmental and human rights issues can be handled quite reasonably in terms of the free trade issue. There will be occasional cases where a real conflict between free trade and environmental standards exists, but not often. By and large these things can work together. The same is true of human rights. I do not think the threat is in any of those [concerns]; the real threat is in domestic politics.

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So is the threat from domestic politics due to the increasing demands on governments to provide a social safety net or welfare state?

No, not at all. The countries that have strong social safety nets and welfare states are relatively able to deal with trade issues calmly. It is the micro-politics. It is the US Gulf Region catfish industry that resents competition and is hurt by competition from Vietnam, and has the political influence to shut out such competition. It is the steel industry that gets protection because West Virginia just might win the election. And, of course, it is the European farmers. The problem is that European agricultural policy is a disaster for the world. It is not driven by the fact that France has or wants a strong welfare state; it is driven by the fact that French farmers have too much power.

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How significant are the conflicts between international trade regimes and domestic social norms? Will these conflicts materialize into anything serious?

There is a little bit of conflict; there is some real instability. The issue that trade poses is that it can lead to rather sudden loss of job security for groups of people who thought they were secure. That is what is happening with technology outsourcing. This is difficult for society to swallow under any circumstances; this is the make or break issue. I have not seen any way in which international trade undermines things like national health care or strong unemployment insurance. Among advanced countries, the United States has a very weak welfare state. Western European countries have very strong welfare states. I do not think that the United States is handling the pressure from international trade any more easily than the European countries. This is just a fake conflict; there is a welfare state issue and a trade issue, but the two do not interact all that much.

Multinational corporations (MNCs) generally enter new markets through foreign direct investment in the factors of production or through trade. What role do you see MNCs playing in the proliferation of tree trade policies and the opening of markets?

Not much. This seems to be my answer to a lot of things. MNCs tend to be free traders only because they do not have a national center of gravity and so they tend to be global in outlook. If you look at the long record they have been on all sides of that issue. In some Latin American countries, MNCs invested in import substituted industries and they became advocates of continued protectionism. I do not think that MNCs make that much of a difference.

So do you see MNCs as influencing the foreign policies of developed and developing nations?

Corporations, not necessarily MNCs, do. Big political donors do. It is not something new, but sure, there was a time when US trade policy was significantly influenced by the Chiquita banana company. So, yes, but not more so than domestic oil companies or other interest groups. But multinational corporations are part of the story. I think that MNCs have a lot less leverage in terms of actual direction than people imagine. It is not that they are trivial. But if you look at globalization success stories, you find that they run a gamut; some places are like Singapore, which is basically an enclave for multinational corporations to operate and other places are like South Korea, where to the extent that there are multinational corporations, it is because South Korean companies have gone multinational. I think that you are overrating the role of multinational corporations. They are just one of the actors in a process that has a lot going on.

an interview with PAUL KRUGMAN

PAUL KRUGMAN is an op-ed columnist with the New York Times. He is also Professor of Economics at Princeton University. He has written and edited over 18 books on international trade.