Special Report

End of a Free-Trade Era

The president's "fast track" negotiating authority expires tomorrow. It will require bipartisanship to get it back. Otherwise, chock up another Bush-era casualty.

By 6.29.07

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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.

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About the Author
Doug Bandow is a senior fellow at the Cato Institute. A former Special Assistant to President Ronald Reagan, he is the author and editor of several books, including The Politics of Plunder: Misgovernment in Washington (Transaction).