"Jobs may be at Risk, But Protectionism is Riskier"

Sydney M. Williams

Thought of the Day

“Jobs may be at Risk, But Protectionism is Riskier”

August 31, 2010

The good news is that by 2008 exports over the previous fifty years, as a percent of GDP, rose from just over 5% to 12.1% in 2008. The bad news is that imports, over the same period increased from just under 5% to 17.2%. During the recession (current, just ending, or starting over?) both numbers fell, but exports fell more than imports, so that June’s trade gap, reported last week, was the highest in two years.

A widening trade gap has devastating effects on GDP, as exports are added and imports subtracted. According to Mark Trumbull, writing in the Christian Science Monitor: “Without the import boom, GDP would have been 4.45% higher in the quarter.” A focus on exports should be critical. Overall, exports declined 1.3% in June to $150.5 billion, the biggest month-to-month decline since April 2009, led by categories such as capital goods, materials, food and beverages. However, U.S. automotive exports were the highest since October 2008 – lending proof to the concept that we can manufacture things people want.

Trade, however, is a complicated issue. To the extent that foreign businesses compete with domestic producers, there will always be issues of “fairness”. When union workers are involved the issue becomes even touchier, especially for Democrats who are beneficiaries of their enormous cash contributions. Whenever we trade with a mercantilist state (such as China), it can always be assumed that subsidies play a role; however, they also do in our country through tax credits and incentives. Virtually all interest groups with an agenda, such as “Green’s”, union representatives or xenophobes, get involved, pressuring politicians to further their own narrow interests. For example, it is expected that today the U.S. Commerce Department will find that $550 million of imported aluminum from China was illegally subsidized by the Chinese government, possibly leading to higher import duties.

Exports of goods and services doubled in the 1990s and grew from $1 trillion in 2003 to $1.8 trillion in 2008. Highlighting the importance of free trade, according to data from the U.S. International Trade Commission, U.S. exports to eighteen Free-Trade Agreement countries grew at 8.6% from 2007 to 2008, a time when U.S. GDP expanded 2.6%. This has not gone unnoticed by the administration. In a March 10th speech at the Export-Import Bank conference, President Obama vowed to double exports over the next five years. He should be more ambitious. With more than a billion people entering the middle classes in places like China, Indonesia, Vietnam, India and Brazil, the opportunity for exports over the next several years is extraordinary.

Trade has always drawn strong supporters and equally vociferous opponents. The pros and cons for free trade can be distilled to pretty simple terms. Supporters point out that trade is essential for long term growth; they mention NAFTA which has created an estimated 20 million jobs world-wide. Opponents argue that lower costs, including living standards, have driven jobs overseas.

The global reach of the internet, though, is not to be denied. Microsoft estimated two years ago that there were 182 million websites around the world, doubling every couple of years, providing easy access for consumers in all corners of the globe. The logical conclusion is that free trade is happening and we are better off embracing it than opposing it. Advocates of free trade, however, must recognize that concomitant to trade agreements must be an emphasis on training for those whose jobs are being exported. Robert Barro, in yesterday’s Wall Street Journal, in a compelling op-ed “The Folly of Subsidizing Unemployment”, criticized the almost four-fold extension of unemployment benefits (26 weeks to 99), arguing that that decision “almost surely” caused the share of long-term unemployment to reach 46.2% versus an average of 25% in post-Word War II recessions. The money would be better spent in training.

Nevertheless, it is disappointing that the President and Senate Democrats have not more aggressively pushed to complete pending free-trade agreements with Panama, South Korea and Colombia. Negotiations are also in progress with Malaysia, Thailand, the United Arab Emirates and SACU (the Southern Union African Customs Union). Those negotiations should be fast-tracked.

A disturbing cloud of doubt, creating unnecessary uncertainty, hovers over the question of free trade, though. Perceiving themselves as protectors of domestic jobs, unions remain the most obdurate obstacle to the furtherance of free trade. They are strong supporters of Democrats. According to the American Institute for Economic Research, 92% of the $667 million given by unions to political campaigns between 1990 and 2008 have gone to Democrats, creating sycophants of their beneficence. Mr. Obama, as would be expected, has acquiesced to many union demands. During negotiations with General Motors, in early 2009, he chose to subsume the rights of bond holders to the demands of union members. And, as Thomas Cooley and Lee Ohanian wrote in Friday’s Wall Street Journal, “Like FDR, Mr. Obama has advanced unionization through his recess appointments to the NLRB and his support for ‘card check’”.

Facing anemic economic growth, exports should be (and hopefully will be) our “ace-in-the-hole”. Germany is an example of a developed nation whose actions should be studied and emulated. The country induced austerity measures, including a reduction in unemployment benefits, and a focus on exports. Germany has performed what Larry Summers refers to as “escape velocity”, ratcheting out of recession, while recognizing that part of the cure involves pain, but the important thing is to get well.

Trade is an emotional issue, fraught with risk. Countries’ attitudes can easily slip into “beggar-thy-neighbor” policies, especially during recessions. The high-water mark for protectionism in the United States in the 20th century occurred in 1930. While the Smoot-Hawley Tariff Act, signed in June of that year by President Hoover, may not have caused the Depression, it certainly prolonged it. U.S. exports to Europe declined from $2.341 billion in 1929 to $0.784 billion in 1932 – a 67% drop. It is highly unlikely that anything similar will be implemented today, but we need to be ever watchful.