The Wrong Trade Wars

NAFTA and globalization aren't totally to blame.

Almost everyone wishes for a renaissance of American manufacturing, and none say so more loudly than the Democratic presidential candidates and Democratic members of Congress. The trouble is that their deeds don't match their words. They have blamed trade for almost anything that might ail the U.S. economy—in particular, manufacturing—when the opposite is now true. Only through expanded trade can the economy thrive and manufacturing stage a comeback.

The latest evidence of the gap between political rhetoric and economic reality is the Democratic-controlled House's decision to set aside, indefinitely, the free-trade agreement negotiated with Colombia by the Bush administration. On economic grounds there's no reason to reject the agreement. Colombia's exports already enter the U.S. market duty-free under the 1991 Andean Trade Preference Act. Meanwhile, many U.S. exports to Colombia face stiff tariffs—up to 35 percent on autos, 15 percent on tractors and 10 percent on computers—most of which would ultimately go to zero under the agreement.

The tariffs dampen demand for U.S. exports by raising their price and putting them at a competitive disadvantage. Whirlpool annually exports about $50 million worth of refrigerators, washer-dryers and dishwashers to Colombia from plants in Ohio, Arkansas and Iowa. On a $1,000 refrigerator, a 20 percent tariff raises the retail price $200 in a fiercely competitive market with appliances also supplied by local firms and imports from Korea and elsewhere. (Why does Colombia want the agreement? Answer: Congress has to renew Colombia's present duty-free status periodically. The agreement would make it permanent.)

Yet, it's politically convenient to oppose the trade agreement, because the popular imagery is that trade destroys U.S. jobs. The loss of almost 4 million U.S. manufacturing jobs since 1998 seems easy to explain by cheap imports or the flight of plants to Mexico, China and other poorer countries. The truth is murkier. Although this has occurred, job losses also stem from greater efficiency (fewer workers producing more goods) and slumping domestic demand (for communications equipment and computers after the dot-com bust and for housing materials and vehicles now). Nor has falling factory employment crippled overall U.S. job creation.

Look at the numbers. From 1998 to 2007, total nonfarm payroll employment rose by 12 million, and unemployment averaged only 4.9 percent—despite the 4 million lost factory jobs. In that period, U.S. manufacturing output rose 22 percent.

No matter. Globalization and trade have become lightning rods for myriad grievances (job insecurity, wage inequality, eroding fringe benefits). But even if trade caused all the factory job losses, its impact is shifting. The dollar's dramatic depreciation (down an inflation-adjusted 20 percent since early 2003 against a basket of currencies) has enhanced the competitiveness of U.S. exports. Their growth now looms as a major source of job creation and economic expansion.

The overall trade deficit is dropping and, except for higher oil prices, would be dropping faster. In 2007 manufacturing exports rose 10.9 percent, double the 4.9 percent for manufacturing imports. At some companies the effect is already noticeable. Consider Bison Gear and Engineering, a medium-size firm near Chicago that makes electric motors for kitchen equipment, packaging machinery and medical devices. Since 2006 exports have increased from about 20 percent to 30 percent of total sales, says company chairman Ron Bullock. Bison has hired about 50 workers, bringing total employment to 250.

It is no longer necessary to rely on elegant theories of comparative advantage, more consumer choice or greater competition to favor open trade. Jobs and economic growth will suffice. Indeed, without export-led growth the economy may face a sluggish future.

Even after today's slowdown (recession?) ends, the outlook is worrisome. Consumers are heavily indebted. Housing will recover and reach previous highs, but probably not for many years. Government spending is constrained by growth in the rest of the economy, unless Congress sharply raises taxes or deficits. Exports and related investments are the best hopes.

What House Democrats did was particularly perverse. They suspended trade promotion authority, which mandates that Congress vote up or down on trade agreements within 90 days of their submission. TPA gives other countries a reason to negotiate in good faith. They can make politically difficult concessions without fearing that Congress will ignore the agreement because it dislikes the U.S. concessions.

Americans do have legitimate trade complaints. China manipulates its currency to aid exporters; other countries restrict imports. It's in the U.S. interest to dismantle these obstacles. Now the suspension of TPA can serve as an excuse—symbolically and substantively—for other countries not to negotiate, just when U.S. firms can most benefit from market openings.

What matters for workers and manufacturers is not what politicians say. It's the consequences of what they do. On trade many Democrats—and some Republicans too—are fighting the last war.

What the World Is Hearing

A senior Latin American diplomat says, 'We might find ourselves nostalgic for Bush, who is brave on trade.'

Despite their spirited squabbling, the two Democratic candidates are united in the view that one of the big benefits of electing either of them would be an improvement in America's reputation and relations with the world. Hillary Clinton promises to send special envoys to foreign capitals the day after she's elected. Barack Obama offers to reach out to America's foes as well as friends. Unfortunately none of this will matter if they continue to spout dangerous and ill-informed rhetoric about trade.

For the rest of the world—particularly poorer countries—nice speeches about multilateralism are well and good. But what they really want is for the United States to continue its historic role in opening up the world economy. For a struggling farmer in Kenya, access to world markets is far more important than foreign aid or U.N. programs. If the candidates think they will charm the world while adopting protectionist policies, they are in for a surprise.

Already the mood is shifting abroad. Listening to the Democrats on trade "is enough to send jitters down the spine of most in India," says the Times Now TV channel in New Delhi. The Canadian press has shared in the global swoon for Obama, but is now beginning to ask questions. "What he is actually saying—and how it might affect Canada—may come as a surprise to otherwise devout Barack boosters," writes Greg Weston in the Edmonton Sun. The African press has been reporting on George W. Bush's visit there with affection and, in some cases, by contrasting his views on trade with the Democratic candidates'. The Bangkok Post has compared the Democrats unfavorably with John McCain and his vision of an East Asia bound together, and to the United States, by expanding trade ties.

For Obama, the backlash could be greatest because he's raised the highest hopes. A senior Latin American diplomat, who asked to remain unnamed because of the sensitivity of the topic, says, "Look, we're all watching Obama with bated breath and hoping [his election] will be a transforming moment for the world. But now that we're listening to him on trade—the issue that affects us so deeply—we realize that maybe he doesn't wish us well. In fact, we might find ourselves nostalgic for Bush, who is brave and courageous on trade and immigration."

The facts about trade have been too well rehearsed to go into them in any great detail, but let me point out that NAFTA has been pivotal in transforming Mexico into a stable democracy with a growing economy. And, in Lawrence Summers's words, "[it] didn't cost the United States a penny. It contributed to the strength of our economy because of more exports and because imports helped to reduce inflation." Trade between the NAFTA countries has boomed since 1993, growing by about $700 billion. There are no serious economists or experts who believe that low wages in Mexico or China or India is the fundamental reason that American factories close down. And labor and environmental standards would do very little to change the reality of huge wage differentials between poor and rich countries' workers.

An argument one often hears from the candidates' supporters is that they don't really mean what they say, that their actual proposals on trade agreements involve only minor tinkering. It is an odd defense of candidates promising change, honesty and a new approach to politics to say that they are being cynical and hypocritical. Besides, both candidates are proposing to renegotiate NAFTA, which is a terrible idea. (And one that has prompted the Canadian prime minister to retort that if that happens, his country, too, would like to get more concessions from the United States.) Hillary Clinton has proposed that free-trade deals be re-evaluated every five years, which is absurd. The benefits of trade deals rest on the fact that they are permanent.

But both candidates surely know that no one is really paying attention to their policy papers on the topic. It is their general attitude and rhetoric that matter. And on this crucial topic they are pandering to the worst instincts of Americans, encouraging a form of xenophobia and chauvinism and validating the utterly self-defeating idea of protectionism.

I know, I know. This is all about the Democratic primaries in states like Ohio and the support of unions. But you can't target these messages so easily anymore. What is said in Ohio is heard in Ghana and Bangladesh and Colombia as well. And isn't the point of leadership to educate and elevate people, not to pander and drag them into the swamp of ignorance and fear? There is a way to speak about the pain of globalization—and about the need for investments in retraining, education, health care and infrastructure—so that we can both compete but also absorb the shocks of a changing global economy. Unfortunately that is not what the Democratic candidates are talking about.

I'm not even sure that protectionist rhetoric works that well in a general election. Americans like optimists. They want leaders who look out at the world and see broad, sunlit uplands. Railing against Mexicans, Chinese and Indians for stealing American jobs smacks of anger, paranoia and fear of the future. Americans want hope, as Obama says, "hope in the face of difficulty, hope in the face of uncertainty, the audacity of hope." Where is that courage now?

  A common perception that we Americans have today is the idea that free trade agreements are hurting the American economy. The loss of manufacturing jobs as companies  shut down American factories and open new ones  outside the country has become linked somehow to free trade agreements. However if we think a little, free trade  with other countries have nothing to do with businesses moving factories outside the country. Corporate taxes and/or tax breaks is primarily what encourages businesses to move outside the country, not free trade agreements. Free trade agreements open up new markets for American made products, where even the devalued American dollar is a plus. Protectionism and fear of free trade with other nations such as Mexico, Canada and Columbia is very likely hurting America. Both Hilary Clinton and Barack Obama seem to be taking a protectionist rhetoric and stance against NAFTA and other free trade agreements. The Democrat candidates and all American citizens need to take time and do some more homework on the pros and cons of free trade. Future American prosperity will depend on such education, in my opinion.

tags: nafta  free trade  protectionism  economy  free enterprise  us  2008  takebackamerica  politics  president  

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