Brad Setser Says I Am Wrong

He writes:

RGE - Are all beneficiaries of trade diffuse and unorganized?: I suspect the Wall Street firms now snapping up mortgage brokers (verticle integration?) are very aware who buys the repackaged mortgages they are putting together. And those Wall Street firms aren’t exactly an unorganized constituency.

The same holds even more strongly for actual trade in goods. Walmart’s customers are diffuse and unorganized. Walmart itself is not. The customers of US electronics firms that source production in China are diffuse. But the US firms that make money off the China trade, and benefit from China’s willingness to sell its “assembly services” on the cheap, are a rather concentrated interest.

And when it comes to the politics of trade, it seems to me like the customer – represented by the firms that organize global supply chains – usually win, at least on the big issues of real importance to global firms (liberalizing agricultural trade isn’t one of them). Those firms are looking out for their shareholders (and their CEOs) but in the process, they effectively represent their customers as well. Relatively unrestrained trade with China hasn’t come up for a vote recently.... Over the past four years, global markets have remained open even as Chinese exports basically tripled, going from a bit over $300b in 2002 to a bit under $900b (on current trends) in 2006. Judged by outcomes, the “losers” from the China trade haven’t dominated the politics of trade.

Indeed, what has been striking – at least to me – is that the winners from this trade haven’t really had to even compensate the losers. I wouldn’t want to take bets if that trend would hold if Schumer-Graham comes up for a vote this fall though ...

At the same time, it isn’t obvious to me that all the losers from trade – particularly trade with countries that artificially maintain undervalued exchange rates – are concentrated and organized.... The terms of the manufactured goods for commodities trade – and the manufactured goods for housing services trade – have moved against them. Yes, there are other effects which help to mitigate the adverse shift in the terms of trade for this group of workers. But that is the one that dominates. Are those workers a concentrated and organized group? Or a diffuse and organized group? I would argue increasingly a diffuse and unorganized group....

DeLong argues that the US taxpayers are among the biggest beneficiaries of the current US-China trade. And given that the US exports far more securities than goods to China (the ratio is probably about 3: 1 right now) it is hard to challenge his argument.... But... I could argue that US taxpayers – at least future taxpayers -- are actually among the losers, as China’s current willingness to subsidize the US Treasury masks the real costs of running up the US debt stock....

And what of China? The usual argument is that the gains from the central bank’s de facto subsidy of Chinese exports to the US are widely shared among workers in China’s export sector. I would frame it a big differently though. There are a lot of concentrated interests in China –including foreign firms that use China as an export base – that benefit very directly from China’s dollar peg.... The internal politics of China are hard to decipher, but my sense is that the ministries that represent China’s exporters have played a big role in the internal Chinese debate.... And the costs of this de facto export subsidy? They are both hidden and diffuse. Hidden because very few understand the risks associated with lending to the US in dollars (effectively overpaying for US treasuries).... [T]he cost of this subsidy will ultimately be born by a very diffuse group – China’s future taxpayers. And those losses may never even show up as a line item. They may just show up in the form of smaller central bank profits.... But they are losses all the same.

I understand Mancur Olsen’s argument [that the benefits from trade are diffused and the costs of trade concentrated, hence political pressures for protection]. But to me, it seems a bit dated. Trade now generates concentrated as well as diffuse winners and concentrated as well as diffuse losers.

Back to tracking global reserves...