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Economic Reporting Review

December 6, 1999:

WTO meeting; effects of a crash; slide of the euro

By Dean Baker

WTO | Stock Market | Europe | Outstanding Stories


"President Chides World Trade Body in Stormy Seattle"
David E. Sanger
New York Times, December 2, 1999, page A1

"U.S. Effort to Add Labor Standards to Agenda Fails"
Steven Greenhouse and Joseph Kahn
New York Times, December 3, 1999, page A1

These articles discuss the Clinton administration's agenda at the WTO meetings. Both articles contain the assertion that labor standards were at the top of this agenda. While the administration had political reasons for making this claim, that does not necessarily mean it is true. The negotiations are held in secret, and neither article suggests that it was written with knowledge of the actual content of the negotiations. If labor standards actually are the top item on its agenda, then presumably the administration would be making threats to walk out of the session if it doesn't get movement on this issue. There is no evidence in these articles that it has applied this sort of pressure.

It is worth noting the timeline that would likely be associated with the administration's proposal to establish a working group on labor standards, which is not mentioned in these articles. This working group could conclude that labor standards are an appropriate item for negotiation. If this happened, then they could be discussed at the next round of the WTO, which would typically begin in six to eight years. If this round led to agreement on labor standards, they could begin to be implemented at its conclusion, which would be approximately 2014. In other words, even if the issue progressed along the path the administration is suggesting, any imposition of labor standards is probably at least 15 years in the future.

According to the first article, an "American official" in Seattle suggested that the working group on labor standards did not have to be associated with the WTO, but could instead be attached to another international body, such as the International Labor Organization or the World Bank. If labor standards were ultimately established through one of these other organizations, they could not be enforced with trade sanctions. As a result, such standards would likely have little effect.

"Seeing the Fear of Free Trade Made Concrete"
Joseph Kahn
New York Times, December 2, 1999, page A15

This article reports on the complaints of delegates to the WTO that people don't understand how they have benefited from expanded trade. At one point the article notes comments from Long Yongtu, China's chief delegate to the WTO. Mr. Long said that the U.S. may have something to learn from China, since China's state-run media had been promoting the WTO as a path to prosperity for the 13 years that the country was trying to gain entry.

The U.S. government and media have also consistently promoted the nation's trade policies as a path to promote growth. The main difference between the two nations, in this respect, is that the opponents of trade policies in the United States are free to promote their views as well.

"Carrying the Flag for Free Trade: Brazil Still Embraces Globalization"
Simon Romero
New York Times, December 2, 1999, page C1

This article discusses the impact of increased international trade on Brazil's economy. The article asserts that "Brazil ... points to itself as an example of the positive economic change that can come from policies advocated by the 135-nation group [the WTO]." Actually, the evidence does not suggest that the impact of these policies has been especially positive. According to the data presented in a chart accompanying the article, Brazil's per capita GDP growth has averaged approximately 2.5 percent annually over the last decade. By comparison, according to data from the United Nations, Brazil's per capita GDP growth averaged 4.7 percent annually in the period from 1960 to 1980, when it was following a more inward-looking path to development.

At one point the article notes that Brazil is still a relatively closed economy, and points out that other nations, such as Mexico, are much more integrated into the world economy. It comments on this point: "Brazil has a long way to go before thoroughly reaping the rewards of free trade." According to data from the IMF, over the last 15 years Mexico's per capita GDP growth has averaged approximately 1.0 percent annually.

"Trade Theory Collides With Angry Reality"
Steven Pearlstein
Washington Post, December 3, 1999, page A1

This article discusses the protests in Seattle and the objections to WTO's agenda more generally. At one point it comments that proponents of this agenda "have figured they could win the debate simply by pressing over and over again the economist's mantra that increased trade results in better jobs for workers...." This is a serious misrepresentation of standard economic theory on trade. Standard economic theory implies that increased trade can on average raise living standards, but there will also be winners and losers from increased trade. It is entirely possible that much of the workforce, possibly even a majority, could see their wages depressed as a result of international competition. It is also worth noting that according to economic theory, extending barriers like patents and copyright protection, which has also been part of the WTO agenda, could lower living standards worldwide.

"Across the Atlantic, Free Trade's Victors"
Anne Swardson
Washington Post, December 2, 1999, page A34

This article discusses a chemical firm in England that has vastly expanded its business based on the growth in its export products. The article presents the firm and its workers as an example of the winners from trade, but notes that no one from the firm went to protest in favor of the WTO in Seattle because "the better-off are quieter than those complaining of harm."

The discussion in the article is misleading because it implies that the workers at this firm would have been worse off had it not been for the reduction in tariff barriers from the most recent round of trade negotiations. Implicitly, the article assumes that these workers would either not be employed, or had worse paying jobs, if these tariff reductions had not taken place. Actually, the vast majority of workers who hold jobs in an export industry would have also held jobs had those exports not existed, just as the vast majority of workers who lose jobs due to imports will find alternative employment. Whether trade has on net benefited a particular group of workers will depend on whether it has on net lead to an increase in demand for their specific skills.

For example, if this WTO round standardized education and licensing requirements, so that hundreds of thousands of people from developing nations could work as doctors in the United States, it could lead to a significant displacement of doctors already working in the United States. Some of the displaced doctors may subsequently find employment in export-related jobs. However, these jobs may pay a far lower wage than doctors received before the removal of barriers to competition. In this case, it would be wrong to assert that the displaced doctors had benefited from trade based on the fact that they hold jobs producing goods for export.

Virtually all labor economists agree that, in the United States, trade has had the effect of reducing the demand for workers without college degrees. This has had a negative impact on their wages, although the size of this impact is subject to considerable debate.

See more about trade.


"Inflation Is Still the Only Real Threat"
Tom Redburn
New York Times, November 28, 1999, Section 3 page 4

This analysis examines the potential risks to the current expansion. At one point the article discusses the possibility of a stock market crash. It notes that this can be a problem, but claims that the Federal Reserve Board learned how to deal with a crash in 1987.

Since 1987 the stock market has risen by more than 300 percent. Over the same period, corporate profits have risen by approximately 140 percent. This means that stocks are far more over-valued now than they were in 1987. In order for the stock market to be no more over-valued today than it was prior to 1987 crash, it would have to lose 40 percent of its value. This would imply a loss of approximately $6 trillion in wealth, or $22,200 for every person in the country. The fact that the Federal Reserve Board was able to prevent the 1987 crash from having a significant impact on the economy does not mean that it would be able to cope with the much larger downturn that would be needed to return the market to historic valuations.

"Waiting for 2000, Wondering if the Economy Will Keep Surging and Watching for Fed Signals"
Jonathan Fuerbringer
New York Times, November 29, 1999, page C8

This article discusses the stock market's growth potential for the year ahead. It argues that the biggest threat to the market's future growth is its extraordinary run-up in price over the last five years. According to the article, the reason this poses a problem is that the consumption resulting from this new wealth may cause the Federal Reserve Board to raise interest rates and slow economic growth.

The more obvious explanation is that as a result of the fact that the rise in the stock market has far exceeded the growth of profits, stocks are now hugely over-valued. It is less likely that an over-valued asset will rise in price than one that is under-valued.



"Euro Hits New Low Against the Dollar"
Anne Swardson
Washington Post, November 27, 1999, page E1

"Euro Declines to Record Lows Against Dollar, Pound and Yen"
Edmund L. Andrews
New York Times, November 27, 1999, page B1

These articles report on the decline in the euro against other major currencies. Both articles assert that Europe's slow growth relative to the United States has been one of the main factors in this decline.

There is no theoretical or empirical basis for suggesting that the rise or fall in the value of a currency would bear a direct relationship to a nation's growth rate. Investors opt to hold currencies based on the returns they expect to receive, not based on how rapid an economy is growing. If a nation raises its interest rates, then it provides investors more reason to hold its currency, even if the higher interest rates dampens economic growth. While returns and economic growth can be related, there is no necessary link.

Recent history provides many examples where countries with relatively rapid growth have seen declines in the value of their currency. For example, from 1990 to 1995 the dollar lost more than 35 percent of its value against the yen, even though U.S. economic growth far outstripped Japanese growth during this period. Just this year, the euro has fallen by more than 20 percent against the yen, even though the euro nations have enjoyed a more rapid rate of growth. There are numerous other examples of divergences in economic growth and the movement in the value of a nation's currency. In short, there is simply no basis for claiming that slow growth in Europe explains the decline in the value of the euro.

Both articles attribute Europe's slow growth to structural problems in the European economies. Neither article discusses the possibility that the tight monetary policy of the European Central Bank has been an important factor, as has been argued by many of the world's most prominent economists. (See "An Economists' Manifesto on Unemployment in the European Union," BNL Quarterly Review, 9/98.)

"German Parliament Backs Schroeder's Austerity Plan"
William Drozdiak
Washington Post, November 27, 1999, page A21

"Germany Resists the New Economy"
William Drozdiak
Washington Post, November 28, 1999, page A14

These articles discuss Germany's current economic situation. The first article reports on the decision of the German parliament to support a set of cuts in social spending proposed by Chancellor Gerhard Schroeder. The article refers to this as "an important victory in his battle to curtail the country's soaring national debt and bloated welfare system."

Actually, Germany's national debt is not soaring. Even before these cuts were passed, it was projected to stay almost constant measured as a share of GDP, the standard metric among economists. The article does not indicate how it determined that Germany's welfare state was "bloated."

At one point this article presents the size of Germany's national debt in billions of dollars and then on a per capita basis. Without additional information, very few readers will have the knowledge to put these figures in a meaningful context. The figure of $10,000 per person may appear frightening to readers, but in fact the U.S. debt is actually somewhat higher at about $13,600 per person (although the debt to GDP ratio is somewhat lower in the United States). In fact, by any standard measure, Germany's debt is well within the ability of the economy to sustain it, and would remain so for the foreseeable future even without the cuts being proposed by the government.

The article also misrepresents the platform of the government in the last election. It notes that Schroeder was elected on a pledge to reduce unemployment, and implies that this pledge meant the sort of cuts in the welfare state that he is now promoting. In fact, Schroeder never suggested that he was going to cut back the welfare state during the election campaign, and actually promised to reverse some cuts implemented by the prior government.

The second article characterizes German labor costs as "exorbitant." It does not indicate how it has made this determination. In spite of its relatively high labor costs, Germany manages to run a small trade surplus, unlike the United States, which currently has a very large trade deficit. It is also worth noting, that according to OECD data, there has been very large shift from wages to corporate profits in Germany over the last two decades.

See more about Europe.


"On Chicken's Front Line"
Lena H. Sun and Gabriel Escobar
Washington Post, November 28, 1999, page A1

"Eating Chicken Dust"
Peter S. Goodman
Washington Post, November 28, 1999, page A23

"Immigration Transforms a Community"
Gabriel Escobar
Washington Post, November 29, 1999, page A1

"Workers Answer to Multiple Names"
Gabriel Escobar
Washington Post, November 30, 1999, page A1

"Chicken Plant Jobs Open U.S. Doors for Koreans"
Peter Pae
Washington Post, December 1, 1999, page A1

This series provided an in-depth examination of the poultry industry in the eastern counties of Delaware, Maryland and Virginia. The series examined the wages and working conditions in the industry and the changing ethnic composition of the workforce and the communities in which they live.

"When Physicians Double as Entrepreneurs" Kurt Eichenwald and Gina Kolata
New York Times, November 30, 1999, page A1

This article examines the conflicts of interest that can arise when doctors have a financial stake in medical devices that they use on their patents.

"Post-Mortem of a Highflier: Boston Market"
Floyd Norris
New York Times, December 2, 1999, page C2

This article examines the history of Boston Market in the aftermath of its purchase by McDonald's. Before it was forced into bankruptcy, the company was able to use creative accounting techniques to convince investors that it had enormous growth potential. At one point, its stock had a market value of $3.2 billion, an amount that is greater than the market value of many large established companies.

"World Bank Economist Felt He Had to Silence His Criticisms or Quit"
Louis Uchitelle
New York Times, December 2, 1999, page C2

This article discusses the factors that led to the resignation of Joseph Stiglitz as the World Bank's top economist. Stiglitz has been harshly critical of many of the policies being pursued by the World Bank and the IMF. The article indicates that he left his position because he was not going to be allowed to continue to make such criticisms.


Dean Baker is an economist and the co-director of the Center for Economics and Policy Research (CEPR). His latest book (co-authored with Mark Weisbrot) is Social Security: The Phony Crisis (University of Chicago Press). ERR is a joint project of FAIR and CEPR.

ERR is edited by Jim Naureckas.

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