Walling Off GrowthChris Farrell
Remember President Ronald Reagan's famous line delivered at the Brandenburg Gate in West Berlin in 1987: "Mr. Gorbachev, tear down this wall!"? Two years later, the Berlin Wall came tumbling down, signaling Communism's collapse. From that moment on, much of the former Soviet Union and most developing nations embraced freer markets. The fall of the wall marked the transition to a truly global economy. Globalization, driven by the rapid democratization of information, technology, and finance, is turning out to be a force hostile to privileged elites and closed-minded bureaucracies.
Walls are powerful symbols. That's why it's worrisome to see that the Senate wants to build a 370-mile wall along the U.S.-Mexican border. The House would like to construct an even longer one (see BW Online, 05/16/2006, "Huddled Masses, Tricky Politics"). The problem is, such a wall would represent a backlash against the trend toward more open borders and freer trade. The economic gains of the past two decades -- and the policies that were the foundations of those improvements -- would be at risk.
A wall physically repudiates the 1994 North American Free Trade Agreement. That deal reduced barriers to trade between the U.S., Canada, and Mexico. Despite a number of flaws and some bad economic luck -- such as the 1995 Mexican peso crisis -- Mexico largely benefited from NAFTA's tighter economic linkages (see BW Online, 05/30/2006, "Bordering on Absurdity"). So did Mexican political reformers who wanted to reduce the dead weight of the authoritarian Institutional Revolutionary Party (PRI) on the economy.
The impact on the U.S. was far more muted, largely because the huge size of the U.S. economy mitigated any effect. Instead of spending time debating a wall, why not build on the spirit of NAFTA and seriously negotiate to tear down any remaining barriers to trade on the North American continent?
The symbolism of a wall comes at a tough time for supporters of freer trade -- like me. It's no secret that the Doha round of global trade talks is in serious trouble. And here in the U.S., many people are riled up -- against illegal immigrants from Mexico, outsourcing IT jobs to India, and intensifying competition for jobs and markets from China, Taiwan, South Korea, Brazil, and Chile, just to name a few things.
With industry after industry facing pressure to cut costs and lower prices, workers are understandably fearful of losing their jobs and incomes. And when workers are handed pink slips, they also lose their company-sponsored health-care benefits. "I see the wall as part of the broader backlash against globalization, but [targeted at] its highly specific U.S.-Mexican dimension," says Gary Hufbauer, an economist at the Institute for International Economics.
American workers are right to be frustrated. Sure, the gross domestic product numbers look good. But wages have stagnated for several years. Many defined-benefit pension plans are imploding. The health-care system is a mess, even as premium payments spiral higher and higher.
Problem is, stepping away from open borders won't help solve any of the pressing issues weighing workers down -- it will only make them worse. The reason is that strong growth in the modern global economy depends on the creative energies unleashed by the freer flow of ideas, goods, services, and (with some restrictions) people. A vigorous economy provides the economic wealth and the social optimism to deal with the underlying problems. Walls, trade barriers, and the like are inimical to a robust future.
The case for free trade is always difficult. One reason is that decades of economic research document that the benefits are widespread, while the losses are concentrated. What's more, the dirty little secret of most trade calculations is that the gains from more open borders are relatively small. The reason is that in traditional economic theory, the benefits mainly come from greater efficiency and lower prices. You can go to Wal-Mart (WMT) and buy a cheaper phone than last year, or buy a fuel-efficient car at a reasonable price. That's great, but it doesn't do much to boost growth in the long run.
So how can I say that our economy's health depends on freer trade? When it comes to the economy, what matters is innovation and creativity. Those are the true seeds of higher living standards. Trade invigorates growth by providing access to bigger markets, new ways of doing business, and new path-breaking innovations -- whether created in a Silicon Valley garage or an office park in Shanghai. The hundreds of millions of investors that make up the global capital markets seek out those good ideas and business models to fund -- and flee -- moribund ways of doing business.
Put somewhat differently, Stanford University economist Paul Romer once calculated that if a developing nation imposes a 10% across-the-board tariff, the cost in investment and profits from the new economic activity being blocked by tariffs could run as high as 20% of GDP. Considering how much a developed economy like the U.S. depends on innovation, the impact could be even greater.
To be sure, although many economists I've talked to in recent weeks find the idea of a wall repugnant, they're more sanguine about the potential economic impact. For instance, Douglas Irwin, an economist at Dartmouth College and a leading expert of the economics of free trade, isn't particularly concerned, "as long as all the trucks hauling Mexican goods north -- and U.S. goods south -- continue unimpeded," he wrote in an e-mail.
Similarly, Tyler Cowen, an economist at George Mason University, is undaunted. "Think of trade and immigration as substitutes. If you can't bring them here to trade with them, trade with them at a distance," he remarked in an e-mail correspondence.
Perhaps they're right. After all, they're the experts. Yet I'm still not reassured. It's a step back from the global economy. Before building a wall, political leaders should reread the memorable lines of Robert Frost's poem, Mending Wall.
Before I built a wall I'd ask to know What I was walling in or walling out, And to whom I was like to give offence. Something there is that doesn't love a wall, That wants it down.
Before I built a wall I'd ask to know
What I was walling in or walling out,
And to whom I was like to give offence.
Something there is that doesn't love a wall,
That wants it down.