Support for free trade long has transcended party. But that era
officially ends with the expiration of presidential “fast track”
negotiating authority on June 30. Lest the U.S. give up on its
effort to continue liberalizing the international economy, the Bush
administration and Congress need to set aside manifold differences
on other issues to renew what is formally known as “trade promotion
authority” (TPA).
Mutual reductions in trade barriers offer enormous economic
benefits. Over the years large-scale negotiations, such as through
the World Trade Organization, have dramatically opened the world
economy. Unfortunately, the so-called Doha round has stalled over
farm subsidies, with the latest attempt to break the deadlock
collapsing in late June.
Another option is unilateral dismantlement of trade barriers, a
strategy followed by Hong Kong, New Zealand, and Singapore. Indeed,
most U.S. reductions in tariffs and quotas have been unilateral. As
Daniel Ikenson of the Cato Institute points out, “the primary
benefits of trade come from liberalization at home.” Unfortunately,
such a proposal would likely win little political support.
The best strategy today is bilateral and regional agreements.
Four free trade agreements (FTAs) current await congressional
approval. But the newly empowered Democratic majority has been
critical of the accords and TPA, under which they were negotiated.
TPA, which expires on June 30, requires that Congress hold an up or
down vote on FTAs without amendment.
The administration agreed with House Democratic leaders on a
new, supposedly bipartisan trade policy incorporating enhanced
environmental and labor regulation. House Ways and Means Committee
Chairman Charles Rangel (D-N.Y.) argues that the agreement “will
remove the excuse of the ILO” for trade opponents. But any
restrictions are likely to sharply limit the benefit of any
resulting FTAs.
The benefits of free trade are significant. By basing production
on “comparative advantage,” that is, allowing people in different
lands to produce the goods and provide the services at which they
are most proficient, free trade benefits both buyers and sellers.
Moreover, note Richard Fisher and Michael Cox of the Federal
Reserve Bank of Dallas, “Larger markets give companies a wider
field to search for scarce capital, cheaper inputs and human
talents. They provide added impetus for innovation, business
formation and risk-taking.”
In this way trade creates wealth, and ultimately more, and
better, jobs. Indeed, with the world’s largest and most productive
economy, the U.S. is well positioned to take advantage of a freer
global trading environment.
Overall, trade, production, and employment tend to expand
together. An expanding economy raises demand both for imports and
domestic products. Consumers with rising incomes buy more goods,
both imported and domestic. American producers also import more
intermediate goods, such as auto parts, computer components, and
capital goods.
PERHAPS THE BEST EVIDENCE of the benefits of trade is the marked
increase in prosperity over the last two or three decades, during
which globalization has intensified and technology has transformed.
Writes Fareed Zakaria of Newsweek:
Over the past 20 years, as these forces have
accelerated, the United States has benefited enormously. Its
companies have dominated the new global economic order; its
consumers have reaped the lion’s share of the resulting price
reductions. America has grown faster than any larger industrial
economy during these years: over the past two decades, American per
capita GDP has roughly doubled. The median income of a family of
four rose 23 percent between 1985 and 2005.
Americans have done better economically even as both imports and
employment have exploded since 1980. Dan Griswold of the Cato
Institute observed in 2000:
During the last five years, living standards have been
rising for low-and high-income workers alike. More than 80 percent
of the jobs created since 1993 are in occupations that pay above
the median wage. Figures on the alleged decline of real wages are
misleading because they overstate inflation and do not include the
growth of nonwage benefits.
Further liberalization would yield substantial additional gains.
Federal Reserve Chairman Ben Bernanke estimates that dropping all
trade barriers would increase household income in the U.S. by
between $4,000 and $12,000, a particularly notable gain for
lower-income families.
The fall in manufacturing employment is a global phenomenon. At
the same time, American manufacturing output continues to grow.
Indeed, average factory worker productivity increased two and a
half times from 1979 to 2005. The U.S. accounts for one-fifth of
manufacturing value-added, more than any other country; real output
has increased seven-fold since 1950 with no increase in
employees.
America’s trade deficit remains high, but it is counterbalanced
by the inward flow of economic investment. Far from costing the
U.S. jobs, explains Griswold, “As a reflection of continued
domestic demand and the desire of foreign investors to acquire U.S.
assets, large trade deficits are typically associated with more
output and more jobs.”
Free trade has non-economic benefits as well. It is widely
recognized that incorporating such nations as South Korea and
Taiwan into the international economy raised their incomes and
moderated their politics, encouraging democratization. Although
economic freedom does not guarantee political freedom, it does
create a positive environment for incubating liberal democratic
values. Moreover, trade provides a positive form of cooperation
which may ease some ethnic and religious tensions.
FTAs sometimes yield geopolitical benefits as well,
strengthening economic ties with nations in sensitive regions.
NAFTA has aided Mexico, America’s next door neighbor and source of
substantial illegal immigration.
The recently negotiated FTA with South Korea is particularly
important since Seoul has been moving closer to China. Agreeing to
a FTA with Taiwan could help ease that country’s increased sense of
isolation.
DESPITE THE MANY AND POSITIVE benefits of free trade, it obviously
leaves some losers. The greatest fear from imports is job loss, yet
U.S. employment has been rising even as globalization has
increased. Between 1993 and 2002 there was a net private sector job
increase of 17.8 million in America. Over the last decade there has
been an annual loss of 16 million jobs but creation of 17
million.
“Off-shoring” has become politically contentious, but economist
Jacob Funk Kirkegaard figures that this process is responsible for
only about five percent of lay-offs. Moreover, notes Fed chairman
Bernanke, “for some considerable time, outsourcing abroad will be
uneconomical for many types of jobs, particularly high-value
jobs.”
That the number of job losses is small in a macro-economic sense
obviously does not lessen the pain for those who end up unemployed.
But attempting to preserve jobs with trade barriers costs on
average more than $230,000 per job; in some industries American
consumers have effectively paid nearly $1.4 million per job
“saved.”
If there is a role for government, it should be to provide
modest, temporary income support, such as wage insurance. That is,
the goal should be to ease people’s transition as they find new
employment, not to close off the extraordinarily beneficial process
of economic change.
Unfortunately, growing numbers of Republicans and Democrats
alike have abandoned their past support for open international
markets. Even though the House Democratic leadership has committed
to work with President George W. Bush, it might not be able to
deliver its party. Moreover, incorporating expensive First World
environmental and labor standards into FTAs will simply create
another form of trade barrier.
The reason low-income countries don’t meet Western standards is
that they are poor, and until they begin to escape poverty they
will be unable to meet Western standards. Keeping people out of
work in the name of improving their employment conditions is false
charity. Indeed, had the United Kingdom or other wealthier states
applied such a rule to the U.S. 200 years ago, America might not
have turned into today’s global economic powerhouse.
If there is one incontestable axiom of economics, it is that
open markets yield growth and prosperity, rising employment and
income, and accelerating technological advance. Thus, it is
imperative that the Republican president and Democratic Congress
cooperate in support of an open international economy. That means
extending presidential trade promotion authority. America’s
prosperity is too important to sacrifice for the political
advantage of either party.
