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Weak Trade Week

Wednesday, May 28, 2008

The number of U.S. politicians willing to speak clearly and forthrightly about free trade is depressingly small.

In case you missed it, from May 18 to May 24 the U.S. government celebrated “World Trade Week.” According to the Commerce Department, it was a chance to recognize the many ways in which international trade contributes to the U.S. economy. Unfortunately, it also provided an opportunity to reflect on the nationwide backlash against free trade.

Consider a recent poll conducted by the Pew Research Center. Most respondents agreed that free trade agreements cost jobs (61 percent) and reduce wages (56 percent); half said that free trade agreements slow the economy (50 percent); and a plurality (39 percent) claimed that free trade agreements actually raise prices for American consumers.

How do we account for this? Could the wisdom of crowds reveal truths that have eluded economists? No. The arguments cited above contradict each other. Free trade agreements may cost jobs by increasing imports that undercut the prices of domestic producers. We can argue about how much that happens—but how could one then believe that trade also increases costs for consumers?

Much of the liberalization that people attribute to free trade agreements actually took place long before those agreements were signed. For example, even prior to the still-controversial North American Free Trade Agreement of 1994, U.S. average tariffs on Mexican goods were roughly 2 percent. So was the drop from 2 percent to zero percent the dramatic liberalization that is alleged to have cost a million American jobs?

Not only does trade reduce prices, preliminary research by University of Chicago economists Christian Broda and John Romalis shows that it disproportionately lowers the prices of goods that are important to poorer Americans. Broda and Romalis find that, between 1994 and 2005, trade with China managed to trim the poor’s cost of living substantially more than it helped the rich. (After all, it is not the wealthy who are buying up Chinese-made products at dollar stores and discount clothiers.) Indeed, they estimate that “the rise of Chinese trade has helped reduce the relative price index of the poor by around 0.3 percentage points per year. This effect alone can offset around 30 percent of the rise in official inequality we have seen over this period.”

Not only does trade reduce prices, preliminary research shows that it disproportionately lowers the prices of goods that are important to poorer Americans.

Exports have been one of the few bright spots in America’s recent economic performance. At a time when overall economic growth has slumped, exports have not. According to the Commerce Department, exports accounted for over 40 percent of U.S. GDP growth in 2007.

So why have public misperceptions about free trade been allowed to fester and grow?

First, there’s the nature of U.S. trade. Americans notice the surge of low-cost manufacturing imports and assume that it has caused the decline of U.S. manufacturing. In fact, it is only manufacturing employment that has declined, not output. Americans also generally discount the large (and growing) share of petroleum products among U.S. imports.

In turn, polling shows that Americans often have a difficult time identifying anything that their country exports. The United States does very well in exporting capital goods and high-end services, but these are largely invisible to the average consumer.

Second, the very academic stars who might help to clear up uncertainties about trade imbalances are themselves stoking the skepticism. They have found it useful to dabble in xenophobia to support a cause. Paul Krugman identified this tendency over a decade ago when he warned that it was dangerous to reach the right policy conclusion for the wrong reasons. But lately he has succumbed to it, along with economists such as Larry Summers, Alan Blinder, and even the great Paul Samuelson.

Trade is not all it is cracked up to be, they write. It can have alarming side effects. Therefore, we must…coordinate our taxes with foreign countries! Boost education spending! Pretty much do anything except embrace protectionism, which they all piously reject. However, anti-trade passions can be difficult to control, once unleasheded.

Finally, trade is a useful scapegoat for politicians. It is far easier to promise a crusade against the perfidious dealings of foreigners than to grapple with job retraining, the business climate, and inadequate national saving. All will be well, the populists reassure us, as soon as we rewrite other countries’ labor laws.

The resulting dialogue about trade is often distressingly introspective. Rather than striking mutually beneficial deals with other sovereign nations, we demand that the rest of the world adopt arbitrary labor and environmental standards. Yet even if Senator Barack Obama personally rewrote Mexican and Canadian labor laws, this would be unlikely to restore any lost factory jobs in Ohio.

We need our political and intellectual leaders to speak clearly on trade. The alternative may be a dalliance with truly damaging protectionism. In that case, future World Trade Weeks may be spent reminiscing about the lost benefits of an open trading system.

Philip I. Levy is a resident scholar at the American Enterprise Institute.


Image by Shutterstock/Dianna Ingram.

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