U.S. Trade Policy Needs Revamping

A string of record trade deficits — including 2006’s — serves as a plaintive plea for Congress to adopt new policies

Pro: A Highway to Perdition

The U.S. is in a precarious position. In addition to geopolitical threats, we face a severe economic shock. We’ve already lost to foreigners trillions of dollars and millions of jobs. Our potential adversary is our largest creditor, and our country has lost every important large-scale economic weapon usable in thorny geopolitical situations. As argued by Princeton economist Alan Blinder, we stand at the beginning of a third industrial revolution. He says that out of about 140 million U.S. jobs, 42 million to 56 million could move offshore in the next decade or two: all 14 million current jobs in manufacturing and between 28 million and 42 million in the service sector. We will lose all manufacturing, an inalienable part of the country’s security. Education and skills may not help. U.S. wages will drop sharply.

All these devastating changes come from a blind following of an "orthodox," dogmatic free-trade policy currently used by the U.S. It brings great benefits to many but is very dangerous for both the American society and the world. Any absolute dogma constitutes a bad bedfellow for the economy. The Soviet Union on the left and free trade on the right make good examples. No society can prosper with extremism.

Can we constrain extremism and direct the economy to activities beneficial to society? Regardless of the objections of laissez-faire free-trade economists, the U.S. must seek low unemployment, a sufficient growth rate, stable prices, a healthy balance of payments, the preservation of the industrial base, the attainment of geopolitical goals, and the preservation of the middle class. Without a strong middle class, a country is polarized, and democracy cannot survive a polarized society. The current shift to the left in Latin America may have come from globalization.

The free-trade economists fail to understand or refuse to admit their approach to organizing international trade could succeed only under rare combinations of favorable conditions, which prevailed before World War I and shortly after World War II. Free trade is now as outdated as a dodo.

It has been rigorously proven that wages in all free-trading countries would be equalized at a sufficiently low level. Under persistent unemployment and the conditions of the new industrial revolution, it will grow much worse: In every category of labor, excessive supply will overwhelm any possible growth of demand. (The average U.S. wage is about $135 per day. The average Chinese wage is around $135 per month—for 14 to 16 hours of work a day, seven days a week. Some factories pay as little as $50 to $80 per month. For political stability, China needs 15 million to 20 million new jobs per year, with about 700 million standing in wait just in China, and about 2.3 billion in other countries. Again, the U.S. has only about 140 million jobs, about 50 million of them transferable.

Economists keep mum about all these results, which would make free trade unacceptable to Americans. An enormous, relentless, and shameless propaganda machine brainwashes the country into believing that free trade and uncontrolled globalization are theoretically sound, remain the only rational or even unavoidable options, and are good for the U.S. This is wrong. Free trade and globalization are not good even for Big Business; they are good only for its top executives and investors.
(This article presents results obtained in joint work with the late Mark Perlman, the professor of economics {emeritus} at the University of Pittsburgh.)

Con: Don’t Let the Deficit Deceive You

International trade has seen remarkable changes over recent decades. Transport costs have dropped, telecommunications have opened trade in new sectors, and different countries have emerged as trading powers. The question at hand is whether these changes are so drastic as to require new trade restraints that would shake the foundations of the modern trading system.

Economists have been studying trade for quite some time, both to see what it does for countries and for the people within. Through all these studies, there is a central theme that emerges: Openness and economic integration have been prerequisites for economic growth and prosperity. Trade allows specialization, it increases the variety of products available to consumers, it spurs competition, and it helps spread technological innovation.

In dealing with trade deficits, it is essential to distinguish between bilateral and multilateral trade balances. We care only about the latter. Even if we had a world in which the value of U.S. imports equaled the value of its exports, there is no reason to think that trade could or should balance bilaterally.

What happens if the bilateral surpluses don’t offset the deficits and we have multilateral imbalances (as we almost always do)? Let’s pretend the U.S. and China are the only two countries in the world. What would the Chinese accept in exchange for their goods if they didn’t want any U.S. goods or services right now? They would take IOUs. We could call them "treasury bonds."

Is such borrowing and lending a good idea? As with an individual’s borrowing, it depends. It may be a very good idea to borrow for a new house or to launch a business. It may be a very bad idea to borrow to throw a wild party or to take a cruise.

The evidence shows that there’s not much correlation between trade deficits and the things we really care about—prosperity and jobs. In 1960, the U.S. ran a small trade surplus and enjoyed an unemployment rate of 5.5%; there were just about 65 million civilian jobs. In 2005, the U.S. ran a large trade deficit and enjoyed an unemployment rate of 5.1%; there were more 140 million civilian jobs. Over the same time span, imports grew from 4.3% of GDP to 16% of GDP. Per capita income rose from roughly $15,600 per year to just past $42,000 per year (in 2005 dollars).

It is unreasonable to suppose that all job loss, or even all manufacturing job loss, is attributable to imports. People lose jobs for a number of reasons. One of the biggest culprits in manufacturing-sector job loss is technological change. The steady fall in manufacturing employment has not been matched by an equivalent fall in output.

We need a Federal Reserve to oversee monetary affairs, just as the government needs to provide a range of public goods. This is quite different from a centralized decision that steel production should exceed a set number of tons each year, or that the bilateral trade balance with China should be zero. With a centrally planned allocation of bilateral trade balances, inflation would be the least of our worries.

Under such a plan, the U.S. would not only lose in the classical trade sense but also experience macroeconomic agony as our existing economic relationships unraveled. The job losses from skyrocketing interest rates, withdrawn foreign investment, and suspicions about U.S. economic policy would easily save the Fed from any concerns about labor market overheating. Be careful what you wish for.

Reader Comments

Derek Perkins

Vladimir is simply a sensationalist trying to attract media attention by preaching Malthusian doom. Apparently every economist in the world is conspiring to destroy the U.S. economy, and he is the only one with the answer.

Dave Williams

China and India are clients and competitors. They represent a real threat to U.S. industrial power. What we need is great productivity. The number of jobs lost is not as relevant as the type of jobs lost. When Microsoft, Intel, and Google all decide that they want to establish research centers overseas and not in the U.S., that is a loss of jobs to the U.S. economy. This is due in part to stringent caps on immigration. It begs a question: Can we really have too many PhD students in this country? High skilled workers are in short supply. High skilled workers from overseas will do one of three things: take a job, create a job, or leave. That seems pretty beneficial to the U.S. economy.

William Jorgensen

There is no such thing as "free trade"; the term is nearly as much an oxymoron as "sustainable growth," which is limited by the finite resources nature has endowed the planet, as can be seen by shortages in supply of metals such as copper, gold, silver, platinum, gallium, etc. and in energy stocks (oil and gas).

There has never been "free trade" with any other country that has signed with the U.S. America will never forgo protection of its agriculture or any other industry that can bribe its way into a Congressman's good books.

The economic security of the U.S. is wholly within the hands of the debtor nations that hold U.S. currency in reserve, and for only two purposes. One is the use of the petrodollar for buying oil (which is threatened by the petroeuro), and the second is to maintain the value of the massive earnings these countries would lose were their dollar assets to crash.

America is bankrupt, and the contradictory numbers coming from the cabal of the PPT (plunge protection team) will not be able to keep the crash from coming much longer. The two points of view above are actually just one point of view and both have an overly optimistic slant. "Transport costs have dropped." Maybe that's why the U.S. trucking report for December contradicted the retail numbers, and oil now hovers around the $60 a barrel mark.

"Standing at the beginning of a third industrial revolution..." is also a laughable idea as is the assumption that "education and skills may not help the U.S." I would ask, what education and skills are you talking about? The American standard of education is extremely poor, especially in math and science. And the only change in the industrial age I see is an end to it all as the peaking of oil production is now almost certainly here.

The "highway to perdition" is how we got to where we are right now, and it was a one-way road.

Harshit

Free trade is not a problem so long as the U.S. is the largest economy in the world and the Fed has the license to print dollars.

The way things are going, the dollar should lose 50% to 60% of its value in the next 10 to 12 years. What I fear is a crash. If it goes down slowly, it's OK. Otherwise people at the top like Hank Paulson know that if China doesn't make any financial blunders, everything can collapse like a house of cards. I also dream of a JP Morgan who saved us in 1907 in a similar panic.

Lou Carney

Free Trade is simply a race to the bottom. Comparative advantage doesn't work today, if it ever did. I don't see the Dorgan bill as an answer, but at least it's the start of a discussion, which I hope will come soon.

It's a laugh to read most of the comments posted above. They probably show best your readership types and their complete disregard for the average U.S. working family and the consistent loss of opportunity confronting the decreasing middle class. Even advanced degrees provide little protection for the worker in our ever-globalizing society.

Perry

Vladimir Masch is basing his arguments on some fundamentally flawed assumptions, namely that:

1) The U.S. is "losing" millions of jobs to other countries.

2) It is somehow possible, never mind desirable, that the U.S. Congress involve itself in micromanaging the U.S. economy.

3) Due to free trade policies, wages in the U.S. will fall to current Chinese wage levels.

As Phillip Levy pointed out, many of the "lost" jobs were due to rising productivity. The total U.S. manufacturing output has not decreased to the extent that some might assume.

The Communist Russian experience should have proven the futility of trying to micromanage an economy.

The historical experience of Japan should show that wages in a developing country will rise rather than wages in the developed country falling.

What will undoubtedly happen is that the relative economic position of the U.S. compared to other countries will fall, unless the U.S. focuses on leading the way rather than trying to protect its current status.

hamid reza

Benjamin Franklin said it:" No nation was ever ruined by trade."

But what the U.S economy is experiencing now is not trade. Trade means getting something and giving something instead. The Chinese sell manufactured things, but they get more greenbacks, because they produce many things more cheaply than the U.S does.

America itself prospered because of its huge amount of trade with European and Japanese partners.But that was a multilateral profit, which means all sides got richer because there was a tangible growth of productivity for all partners involved.

Americans get richer because of their bright new ideas and Japanese get richer because of their more productive methods of production, and in West Europe there was a good balance of both. But here there is a Chinese syndrome or at least an American productivity syndrome.

bryan

If the deficit is a result of a savings problem in the U.S. and a consumption problem in China and Japan, how can you culturally change the two? Raising taxes to decrease disposable income won't necessarily improve savings despite theoretically lowering demand for imports. Also, even if the yuan appreciates, Chinese individuals and firms won't necessarily consume U.S. goods because they're cheaper in comparison. China, like Japan, has a high savings rate because consumers won't buy goods. Therefore, the deficit to me is more of a cultural problem within the U.S. and China. Luckily, I'm not worried, because in the end, both countries mutually benefit from the opening of markets and a possible currency crisis.

John Tamny

All trade must in the end balance. I run a trade deficit with my dry cleaner, my bartender, and my clothier, but I run a trade surplus with my employer.

Thank goodness I do, because if I had to iron and clean my laundry, make my scotch in a bathtub, and sew my own clothes, I would have no time for productive wealth-enhancing activity.

Just as Californians shouldn't care that their vegetables come from Iowa, they shouldn't care that their socks and shoes are made in China. When people make things for us and fulfill their speciality, we are allowed to fulfill our own.

Brandon W

All markets are legal structures bound by particular laws. Thus, "free trade" cannot truly be free trade, an impossibility. "Free trade" is merely a marketing slogan—now think about what you're being sold.

Even playing by the "free traders'" rules, we can see how it will destroy employment. "Free trade" drives all costs down; i.e., the price of supply is pushed down to its absolute minimum. Let us not forget that labor is a "supply."

Andreas

Is there anything besides guns and rockets the U.S. can still produce?

Steve

I wonder how many Americans want to make socks and underwear and Barbie dolls for $5/hour, which is 10 times what Chinese workers make. Does that sound like a middle class lifestyle to you?

We should worry about $60/hr IT jobs going overseas more than the dead-end manufacturing jobs. What will we advocate when manufacturing jobs are one day performed by robots? Stop technological progress? You can retrain blue-collar workers to take up white-collar jobs, but what are you going to retrain engineers and scientists to do?

chamnan.t

It's time to reduce the U.S.'s trade deficit with China and Japan.

anagitator

Proof is in the puddin'.

Thirty-five years of ever-increasing trade deficits should prove that U.S. policy in this regard is either an abject failure or exactly what the U.S. commercial interests want...profits above U.S. financial health.

Steve

I wonder how many Americans want to make socks and underwear and Barbie dolls for $5 an hour, which is 10 times what Chinese workers make. Does that sound like a middle class lifestyle to you?

We should worry about $60 an hour IT jobs going overseas more than the dead-end manufacturing jobs. What will we advocate when manufacturing jobs are one day performed by robots? Stop technological progress? You can retrain blue-collar workers to take up white-collar jobs, but what are you going to retrain engineers and scientists to do?

Dinesh Chaudhari

Steve, you are so right. If the U.S. wants to remain the sole superpower in the world and an economic leader, it cannot do so by making underwear, pencils, or bedroom slippers. Let low cost countries like China and India make such products, and let the U.S. focus on much higher-value-added products.

The U.S. is well placed to make high tech products, because for a hundred years or more, the U.S. has invested in the greatest universities in the world, the best research centers, the most admired financial institutions, and the greatest democratic system. Let's focus on further building on these foundations of a great economy and look ahead to creating the most innovative products and ideas in the world instead of trying to snatch back "underwear" jobs from China.

There must be something wrong with an economist who thinks the only way to survive is to compete with the Chinese for jobs. If this is his prescription for American greatness, America has a serious problem.

harshit

You are right, Dinesh. We should give up any ideas of protectionism completely. We should also open up sectors like financial services, oil, agriculture, defense, health care, education, and government procurement to foreign competition. But we should invest in research and find areas that can create higher-paying jobs, and not cry for what has gone away. Nobody wins by thinking they are going to lose.

harshit

Globalization has been present since early ages. That is, Europeans changed their number system and Asians started eating potatoes. The real goal of globalization is complete and unrestricted mobility of goods, services, capital, technology, and people.

Nathan Phipps

The U.S. still exports agricultural products (due to subsidies), airplanes, manufacturing equipment, chemical products, and services. I think it will be quite some time before we see Bangladesh taking our airplane jobs.

Eric

A country that has open trade with foreign producers has an obvious downside and a not-so-obvious upside. The competition arising from the free trade creates lower prices for the consumer. Thus increasing consumers' surplus and willingness to pay for other commodities and services. Granted, most of these consumer dollars are going outside of our country, but some are still staying within. A lower price acts, in a way, as a subsidy. If consumers go out to buy a shirt they expect to cost $30, but instead find it for $20 due to cheap outsourced labor, then those consumers will have an extra $10 to spend. That $10 can go toward products possibly made within our own country.

Making our trade policy much more strict would put a strain on our own economic growth.

john

The role of technology and its impact on productivity is ever increasing. Whether we "protect" low cost manufacturing jobs here or not is almost moot. Technology will eventually replace the need for people in low cost "jobs." Investment in new technologies (for example, nano) is resulting in business processes that are eliminating the need for human intervention. In the U.S. alone, new manufacturing plants are being built that require fewer and fewer low-cost line workers. What good, then, is an economic policy trying to protect jobs that in time are going away? Perhaps our focus should be elsewhere.

Scott

The purported advantages of free trade rely on a fallacy. It is called the theory of comparative advantage. Imagine a world in which only two products, tomatoes and semiconductors, are produced. Mexico produces tomatoes but has no hope of being able to produce semiconductors. The U.S. produces both semiconductors and tomatoes. Hybrid seeds, advanced fertilizers, satellite technology, and modern capital markets enable the U.S. to produce tomatoes far more efficiently than Mexico. However, the theory of comparative advantage states that the U.S. would still be better off allowing Mexico to produce all tomatoes so that the U.S. can concentrate on semiconductors where it has a comparative advantage over tomatoes. In other words, while U.S. growers can make money growing tomatoes, they can make more money by switching to making semiconductors. Now, does anyone really believe this works in the real world? In reality, family farms that have produced tomatoes for generations will continue to produce tomatoes as people aren't always motivated solely by money as economists wrongly assume.

If the U.S. were to conclude a free trade agreement with Mexico, U.S. tomato growers would export to Mexico and put inefficient Mexican growers out of business. Faced with the choice between starvation and seeking work on U.S. tomato farms, Mexicans would cross into the U.S. in huge numbers. Is any of this sounding familiar? The resulting influx of labor would drive down wages of native tomato farm laborers, forcing them onto Social Security disability. Bells should be ringing by now.

Bob Walters

I believe the benefits of free trade are obvious every time a U.S. resident buys a piece of clothing or electronic equipment. The dollars saved allow consumers to spend on new goods, like cable TV and broadband Internet. Savings from one sector create new demand in an entirely new one...and so the overall economy continues to grow and along with it, wealth.

However, the downside of free trade is the lack of global standards and regulations that companies must conform to, namely environmental standards. Many fail to realize that a significant portion of manufacturing cost savings are achieved by avoiding costly environmental regulations. The Japanese are being inundated by acid rain spewing from Chinese factories, where the environmental standards are extremely lax relative to First World countries.

It is the responsibility of world governments to set the "rules of the global business game" that would help level the competitive playing field for all. These rules include standards for the environment and human labor laws.

Saul Korn

Low-tech from China? Yes indeed: My 50-inch plasma TV, 1,000-watt surround-sound system, Fuji 6.2-meg digital camera, 1-gig photo chip, all made in China like my 20-inch PC monitor. Low-tech indeed. Wake up and ask about how Boeing has its jetliner tail sections made in China also.

Michael Tuchman

If innovation is our chief competitive advantage, what are we doing to stay competitive? Educating foreigners to go home and take high-skill jobs at low wages? We need to keep our best cards closer to our own chest. That doesn't mean keeping foreigners out of our universities. It does mean persuading them to stay here and help power the American economy.

Eric

If one country sees competition coming from abroad, then it will work harder to shorten the competitive gap, either using cost-efficient production techniques or investing in more capital advancements.

John L.

When free trade is used to increase the real velocity of money in our society, it is not only good but also promotes real U.S. prosperity.

The velocity of money in the U.S. does not work well when the money goes outside of the U.S. entirely. Thus, sending money to China and to Central and South America means that it will no longer be circulating here and promoting our economic well-being.

This has meant that people for a decade have been moving their home equity into cash and then sending it overseas. Thus, we have been spending our economic well-being for this entire decade.

Our trade agreements have not only supported this outflow of our economic well-being but also accelerated an existing outflow used by other countries to feather their own nests at out expense.

I believe all of our trade treaties and government finance laws that support business moving off shore should be re-evaluated with this cash flow in mind, and then re-written to adjust their performance so that we in the USA gain from them rather than lose.

Only a few changes in these treaty provisions would ensure that there would be these changes in our good fortunes.

To date, we have sent several trillion dollars to China, Central and South America, Japan, Vietnam, Iraq and other places.

Happy summertime.
John L.

shadow

Yeah, we invested in our colleges and are blessed with such good education, but who is benefiting from it?

Mainly people from other countries, and more than we realize it, they are the only ones who can afford it. More and more Americans can't go to college or finish it because there are no jobs for them even if they do finish it.

We could stop trying to police the entire world, stop giving so much aid to everyone else, and start focusing on ourselves and our internal problems.

We might consider giving companies who totally manufacture their products here in the USA a tax break, and if it's totally USA parts, put together here or wholly USA made, don't tax it, whereas items that are foreign-made to any degree are taxed.

That's an incentive for some companies to consider bringing home some of the manufacturing jobs and incentives for Americans to buy American.

It's time to wake up, people. We'd better try to do something soon or we will be a Third World country long before I'm gone.

Ames Tiedeman

Wake up people:

"The truth is, our massive trade deficit killed the dollar. Never before in history has one nation done more to destroy its own currency than the United States of America. Trade away your currency and you trade away your solvency."

-Ames F. Tiedeman, November 20, 5:35 GMT.


The trade policies of the United States are nothng less than self inflicted genocide. Do we hate outselves?

antijap

Remember Pearl Harbor. Buy American. Boycott Japanese goods and capitals!

Mike

As always there are various sides to it.

First of all, consider (what sometimes has been mentioned here already) why the situation with China is the way it is:

China is mainly manufacturing goods at a price much lower than American, European, or even Mexican businesses could. But how do lower costs of production in another country lead to a problem for an economy?

(Foreign) goods are imported (still cheaper) and offered on the domestic market. Consumers, heavily relying on the price when buying, switch to the cheaper products. So instead of paying (using the above mentioned example) $30 for a T-shirt, they pay $10. Increase in consumer surplus: $20. That is comparative advantage reflected in prices. Somehow China is able to offer products for a lower price (among other reasons: through the law of supply and demand). But it cannot force anyone to buy them. That is the voluntary decision of all American consumers. What is guiding that decision: (semi)rational calculation, considering the price as they main indicator.

Now, it does not matter to any of the consumers why prices are lower. To the above-mentioned, other reasons have to be added: ignorance of labor laws, environmental standards, or a social system.

Do not worry, the Chinese will start to demand soon--private and public goods. Opening a huge market and driving production costs upwards--to a more sustainable level, also for the workers in the sweatshop.

Let's dream and not blame and hate.

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