Copyright 2000 Federal News Service, Inc.
Federal News Service
March 30, 2000, Thursday
SECTION: PREPARED TESTIMONY
LENGTH: 6696 words
HEADLINE:
PREPARED TESTIMONY OF DANIEL T. GRISWOLD ASSOCIATE DIRECTOR CENTER FOR TRADE
POLICY STUDIES CATO INSTITUTE
BEFORE THE HOUSE
WAYS AND MEANS COMMITTEE
SUBJECT - "AMERICA'S ECONOMIC STAKE IN
OPEN TRADE"
BODY:
Street protestors in
Seattle during the World Trade Organization meeting last November delivered a
long indictment against the organization and its guiding principle of trade
liberalization. Union leaders, environmental activists, and protectionists such
as Pat Buchanan charged that international agreements to expand trade have
systematically undermined employment, wages, environmental standards, democracy,
and national sovereignty. It seemed that whatever discontent anyone may have had
with the state of the world today, trade was the culprit.
Meanwhile,
defenders of trade liberalization were either silent, on the defensive, or
overshadowed by the televised spectacle of chanting crowds, tear gas, and
shattered store windows. Lost somewhere in the noise and the fog was the reality
of what trade expansion and the WTO have accomplished for the United States and
the global economy. One fact that friends and foes of trade can agree on is that
America is becoming more open to the global economy. Since passage of the
Reciprocal Trade Agreements Act in 1934 and the founding of the General
Agreement on Tariffs and Trade in 1948, American tariff barriers have been on a
downward trend, from an average of more than 40 percent in the 1930s to 2.8
percent today.1 In addition to entering into multilateral trade commitments, the
United States joined with Mexico and Canada in 1994 to form a free-trade area
through the North American Free Trade Agreement. The result of those policy
initiatives has been a steady expansion of America's integration into the global
economy. The two-way flow of trade has now reached more than 25 percent of gross
domestic product, a record high for this century and up sharply from the 1960s.
The United States today is both the world's largest importer and its largest
exporter.2
The WTO has also played an important role in facilitating
trade liberalization in the rest of the world. Since the late 1940s, barriers
against the free flow of goods and capital have been failing, with average
global tariffs on manufactured goods down among industrialized countries from an
average of more than 40 percent to under 4 percent today.3
Meanwhile,
developing countries have been unilaterally lowering their own barriers to trade
and investment and now are 80 percent of the WTO's membership
of 135. The result of that sea change in policy has been a geometric leap in
global trade flows. The volume of world merchandise trade today is 16 times the
volume in 1950, a rate of growth three times faster than the growth of global
output.4 The global flow of foreign direct investment (FDI) has more than
quadrupled in the past decade, from $206 billion in 1990 to
$827 billion in 1999.5
To the opponents of trade, of
course, that is all bad news. They trace the beginning of America's alleged
economic decline to the early 1970s, when the pace of our integration into the
global economy quickened.6 From their perspective, the creation of NAFTA and the
WTO have only compounded our troubles. Their case against the WTO, free trade,
and globalization rests largely on convincing us that we are worse off today
than we would be if we had more vigorously resisted closer economic ties with
the rest of the world.
The Link between Trade and Prosperity
Trade promotes efficiency, the spread of new ideas and technology, the
more efficient allocation of capital, and a greater international division of
labor. Trade allows Americans to increase their overall productivity by shifting
capital and resources to sectors of the economy where we are more productive
relative to other industries. By specializing in what we do best--for example,
growing wheat, designing computer chips, and building aircraft--we can trade our
surplus production for the goods and services that people in other nations are
best at producing. The result of international specialization is that countries
that trade enjoy higher productivity and higher living standards than they would
if they did not trade.
Along with specialization, trade brings the
dynamic blessing of competition. Competition spurs innovation, controls costs,
and keeps downward pressure on prices. For consumers, enhanced competition means
lower prices, better quality, and wider variety, raising the real value of their
wages. For example, the quotas and tariffs the U.S. government maintains against
imported textiles and clothing impose an estimated net cost on the U.S. economy
of $10.4 billion a year.7 The burden of this protectionism
fails disproportionately on lower-income families, who spend a higher proportion
of their incomes on essentials such as food and clothing. Fortunately, those
quotas are scheduled to be phased out by 2005 under a WTO agreement.
For
domestic producers, trade allows access to lower-cost inputs and more
sophisticated machinery. For example, the U.S. textile industry-- even as it
stifles foreign competition for its customers---has raised its productivity by
importing state-of-the-art capital equipment from overseas suppliers. One reason
U.S. computer makers are so competitive on world markets is that they can import
a range of intermediate inputs, such as disk drives, monitors, semiconductors,
and motherboards, from suppliers in Asia.
For exporters, trade expands
markets abroad, making possible larger production runs and cost savings through
economies of scale. Two sectors with the most to gain from liberalization are
agriculture and services. In 1998 American farmers exported $54
billion in products, accounting for about a quarter of their cash receipts,
despite relatively high trade barriers against farm imports worldwide. U.S.
service providers accounted for 29 percent of total U.S. exports in 1998, up
from 17 percent in 1950, again despite relatively high trade barriers.8 WTO
negotiations in agriculture and services set to begin this year are aimed at
reducing the persistently high barriers to U.S. exports in those sectors.
The WTO has worked to open markets for U.S. exporters and to keep them
open. During the financial turmoil abroad in 1997 and 1998, WTO commitments
helped discourage countries in distress from reverting to protectionism under
domestic political pressure. This helped to avoid a destructive cycle of trade
retaliation such as the one that plagued the global economy in the 1930s. In
addition, the United States has been the most frequent user of the WTO's dispute
settlement mechanism, prevailing in 23 of 25 cases it has brought against other
members. These cases have prompted the removal of discriminatory barriers
against U.S agricultural, services, and manufacturing exports. Also, if China is
allowed into the WTO, its potentially huge market will be much more open to U.S.
exporters. And since 1997 WTO members have negotiated three sectoral agreements
that lower barriers to U.S. exports of information technology, financial
services, and basic telecommunications services.
An open economy also
provides additional capital from abroad, lowering domestic interest rates,
expanding the nation's stock of capital, and raising the productivity of
American workers. Japanese investment in U.S. auto plants, for example, has
raised the productivity of American autoworkers by providing new plants and
equipment and introducing new production techniques. An open economy has allowed
American investors, including workers vested in pensions, individual retirement
accounts, and 401(k) retirement plans, to earn higher returns abroad and to
spread, and thus reduce, the risk in their portfolios.
All these
advantages of openness predicted by economic theory have been realized in the
countries that practice open trade. The world's most prosperous countries are
those that are relatively open to trade with other nations, while the poorest
nations are those that remain relatively closed. If the protectionists were
right, just the opposite would be true. In fact, according to a study by the
Organization for Economic Cooperation and Development, nations relatively open
to trade grow about twice as fast as those that are relatively closed--for all
the sound economic reasons listed above?
When the WTO agreements from
the Uruguay Round of trade talks are fully implemented in 2005, their potential
benefit could be an increase to global income of between $171
billion and $214 billion annually. The gains for the United
States alone could amount to from $27 billion to
$37 billion a year (in 1992 dollars)/10 --- impressive return
compared to the $19 million Congress appropriates annually for
our membership in the WTO.11
By encouraging trade liberalization, the
WTO helps to raise living standards in the United States and the rest of the
world. It encourages more vigorous global competition among producers, leading
to lower consumer prices, rising worker productivity, and higher living
standards.
Trade, Jobs, and Wages
One of the oldest charges
against free trade is that it destroys jobs. The charge contains a grain of
truth. Like technology, expanding the freedom of Americans to trade can
accelerate the shift of employment from one industry to another. While trade is
responsible for destroying some jobs, it also creates new jobs. The result is
not more or fewer jobs in the U.S. economy but a better mix of jobs.
The
notion that expanded international trade causes general unemployment in an
economy is obviously false. In the past decade, as U.S. trade barriers have
fallen and two-way trade has expanded, total civilian employment in the United
States surged by 16 million, from 117 million jobs in 1989 to 133 million in
1999.12 That explosion of job creation helped to push the unemployment rate down
to just above 4 percent by the end of 1999, the lowest level in 30 years?
Critics of trade mistakenly assume that imports raise the unemployment
rate by displacing Americans who would otherwise make the same products
domestically. In reality, import growth and the unemployment rate are negatively
correlated. The more we import, the more jobs there are for Americans; or, to
phrase it more precisely, the more Americans who hold jobs, the more we can
afford to import.
Since 1973 the unemployment rate has tended to fall
more rapidly in years with strong import growth and to rise in years when import
growth was weak or negative (Figure 1). In fact, every percentage point increase
in the rate of import growth during that period is associated with a 0.1 point
drop in the unemployment rate. A 15 percent increase in real imports will
typically be associated with a 0.9 point drop in the unemployment rate during
the year (December to December), while a smaller 10 percent increase in real
imports is associated with a 0.4 point drop in unemployment. A 5 percent fall in
real imports is typically matched by a 1.1 point increase in unemployment.
The connection between the unemployment rate and imports offers no
comfort to protectionists who promise to drive down the unemployment rate by
restricting imports. Since 1973 there has not been a single year in which
falling imports have been associated with a falling unemployment rate. The empty
lower-left quadrant in Figure 1 shows the hollowness of the protectionists'
argument. The debate over trade should not be about the number of jobs in our
economy; it should be about the kind and quality of jobs.14
The Real
Story of Real Wages
Even though trade does not reduce the total number
of jobs in our economy, what about the quality of the jobs and the wage gap
between high- and low-skilled workers? Critics of trade expansion contend that
we are trading away good-paying jobs in manufacturing for lower-paying jobs in
the service sector. As evidence, they point to widely quoted figures that are
purported to show that the average real wage in the United States has fallen
since 1973, and that trade with low-wage countries is primarily to blame.
The argument that trade liberalization through the GATF/WTO has made
Americans poorer contradicts the most obvious facts about the U.S. economy in
the year 2000. Americans today are much better off than they were in the early
1970s by virtually every economic measure available. Americans are living
longer, enjoying better health, and consuming more goods and services per capita
than ever before.
The claim of declining real wages is misleading for
two reasons: it overstates inflation, and it does not acknowledge the growth of
nonwage benefits. In the past few years economists have reached a consensus that
the official consumer price index systematically overstates inflation; the 1996
Boskin Commission estimated the overstatement to be about 1.1 percentage points
a year? Compounded over 25 years, an annual 1 percentage point overstatement of
inflation would cause a 26 percentage point understatement of the growth in real
wages--which would mm the alleged 4 percent drop in real wages into a 22 percent
gain in purchasing power?
The commonly cited real wage numbers also fail
to include such nonwage benefits as health insurance premiums, retirement
account payments, eye and dental care, stock options, and paid maternity leave.
Nonmonetary benefits as a share of wages have risen by one-third since 1973:
from 32.7 percent in 1973 to 42 percent in 1995.17 Failure to account for
nonwage benefits makes the real wage numbers grossly misleading.
Even
those flawed numbers indicate that the angst over real wages is misplaced. In
the past three years real wages have begun to rise strongly again in step with
rising productivity. According to the Bureau of Labor Statistics, real wages
rose by an annual average of 2 percent in 1997, 1998, and 1999, during a period
in which imports and foreign investment in the United States were rising to
record levels? Real per capita disposable income is up 17 percent in the past
decade.19
This rising tide of real compensation has lifted all boats,
including those of less-skilled workers, as the expanding U.S. economy has
raised demand for all types of labor. According to the Council of Economic
Advisers, "Between 1993 and 1998, real average household incomes have grown
between 9.9 and 11.7 percent for every quintile of the income distribution, and
the median African American household has seen a 15 percent increase in real
income. Between 1993 and 1998, family incomes in the lowest quintile rose at a
2.7 percent annual rate, slightly faster than the 2.4 percent rate recorded by
the top quintile."20
If the critics of trade were right--that more open
trade drives down real wages, especially for low-skilled workers--then none of
those developments should be happening.
Who's Flipping Hamburgers?
Predictions that trade would mm us into a nation of hamburger flippers
have proven to be ludicrous. That myth is built on the misconception that
service jobs are somehow inherently inferior to those in manufacturing, which
gives rise to the erroneous assumption that the ongoing growth of the service
sector has caused a decline in real living standards.
Since the passage
of NAFTA and the Uruguay Round Agreement, the service sector in the United
States has expanded so much that, today, service-producing industries account
for more than 80 percent of all jobs in the United States. It is true that a
significant number of service jobs are relatively low paying, in particular
those in the retail trade, but the fastest-growing sectors of service employment
are on the high end. According to a study by the U.S. Department of Labor, 81
percent of the new jobs created since 1993 have been in industry/occupation
categories paying above-median wages, and 65 percent are in the highest-paying
third of categories?
Those new jobs are in communications, computer
programming, finance, teaching, management, and other white-collar professions.
Overall, the typical manufacturing job pays only about 1 percent more than the
typical service job, and that gap is about to vanish. For nonretail service
jobs, the average pay is now about 5 percent higher than for manufacturing
jobs.22
It would be wrong to describe the lower-paying service jobs as
dead- end work. Many workers prefer those kinds of jobs for the flexible hours
and work experience they offer.
The fast-food industry, to cite the most
obvious example, has become a virtual training program for the American
workforce, with millions of workers gaining their first on-the-job experience in
the industry. Today nearly 70 percent of workers flipping burgers and performing
other tasks in the fast-food industry are under the age of 20.23 For most of
those workers, low-end service jobs are a valuable but temporary step on the
ladder to greater economic success.
Critics of trade tend to romanticize
the appeal of manufacturing jobs. This sector of the economy also has its share
of low-end jobs that pay below-average wages, in particular in the textile and
apparel sectors. Working conditions can also be less pleasant, safe, and secure
than in the large majority of service jobs. The shift from manufacturing to
service jobs partly explains the dramatic decline in the death rate from
on-the-job accidents in recent decades.
It is simply a myth that an
economy cannot prosper if the share of jobs in manufacturing is falling. The
current U.S. economy is proof.
The Gap between Rich and Poor
Another charge against open trade is that it has widened the gap between
rich and poor in America. The claim rests on the theory that trade with low-wage
countries has driven down the wages of low-skilled domestic labor. According to
the theory, competition with poor countries causes U.S. industries to shift
production away from labor- intensive goods, thus reducing the demand in this
country for low- skilled workers. The result is what economists call "factor
price equalization"--U.S, wages for low-skilled labor are dragged down toward
the level in less-developed countries.
The theory sounds plausible on
its face, but it fails to explain what has actually been occurring in the U.S.
economy. It is true that, until the mid-1990s, the wage gap had been growing
between workers with a college degree and those with only a high school
education. But the evidence points to technological change, not international
trade, as the primary reason for the widening gap between wages of skilled and
unskilled workers.
If trade were the dominant factor, then most
industries should be increasing their percentage of low-skilled workers to take
advantage of lower wages. But, in fact, U.S. industries across the board have
been shifting their workforces toward higher-skilled positions. This
demonstrates that the rising wage premium for college degrees has been due, not
to external competitive pressures, but to broader internal changes in the
American economy. Specifically, a more information- based, technologically
driven economy needs relatively more brains and less brawn than did the more
manufacturing-based economy of the past.
It is true that, although
technology has provided the much bigger shove, technology and trade have been
pushing in the same direction- toward greater reliance on high-skilled workers.
Anti-trade critics try to twist this into a black mark for globalization, but
would they really prefer the opposite? Would anybody really want to see an
American economy that relied increasingly on low-skilled workers? The increasing
premium on education, skills, and training is surely good news for America's
future. If some Americans lack the skills to take full advantage of the promise
of that future, the proper response is to improve our public policies on
education and training-not to dumb down the American economy by blocking
technological progress or erecting trade barriers.
America's Thriving
Manufacturing Base
Despite predictions of its imminent doom,
manufacturing in America today is thriving. American factories are producing
more goods than ever before. Healthy gains in efficiency have kept American
manufacturers competitive in international markets, maintaining America's
position as the world's no. 1 exporter of manufactured goods. The resurgence of
U.S. manufacturing comes against a backdrop of record imports.
Far from
deindustrializing, America in the past decade has experienced a robust expansion
of industrial output. Since 1992, during a period in which the WTO and NAFTA
have both been in operation, industrial production--which includes the output of
U.S. mines, utilities, and factories--has increased 37 percent. Manufacturing
output by itself has risen even faster, by 42 percent (Table 1).
Consider the example of the U.S. auto industry. Domestic output of motor
vehicles and parts has shot up 51 percent since 1992. Total domestic output of
cars and light trucks reached 12.6 million in 1999, a record high and up more
than 3 million since 1992. Strong domestic demand for new cars, light trucks,
and sport utility vehicles has helped to boost profits and employment in the
industry. In 1998 domestic automobile employment approached 1 million, an
increase of 177,000 since 1992. Industry profits were healthy in 1999. Those are
not the signs of an industry that has been destroyed.
Contrary to what
the critics of trade predicted, American industry has not been losing ground,
either in absolute terms or relative to the rest of the world. America remains
the world's top exporter of manufactured goods, with exports in 1998 worth
$528 billion.24 America's share of global manufacturing exports
held steady in the 1990s at about 13 percent.25 Among America's leading exports
in 1998 were aircraft, computer equipment, telecommunications equipment, valves
and transistors, passenger cars, and motor vehicle parts. Compared with the
other major industrial powers, including the once feared Japanese juggernaut,
the United States has been widening its lead in industrial output in the past
decade (Figure 2).
Open U.S. markets have been essential to the
competitive strength of America's most dynamic high-tech manufacturing
industries. For example, U.S. personal computer manufacturers are among our
leading exporters. But open up one of those PCs and you'll find a microcosm of
the global economy: operating system and microprocessor from the United States,
memory chips from Japan and Korea, a disk drive made by a U.S. company in
Singapore, a motherboard and peripherals from Taiwan. Any attempt to closeoff
the American economy with tariff walls would be a disaster for the U.S. computer
industry.
Free trade has been a tonic for American industry.
International competition has spurred innovation, efficiency, and customer
satisfaction. The biggest winners have been American families, who benefit from
the lower prices, greater variety, and higher quality of products that
international competition makes available. Not all industries benefit from open
competition, of course. Output and employment in the domestic apparel sector
continue to fall as production shifts to lower-cost producers abroad. But, for
the health and vitality of the American manufacturing sector as a whole, not to
mention the overall economy, international trade has been a blessing?
Warnings about deindustrialization tend to focus, not on output, but on
jobs. But even here, the worries are based on an irrelevant half- truth:
manufacturing employment has not been growing. The number of Americans employed
in manufacturing at the end of 1999 was about 18.4 million, up slightly from
1992 but down from the all-time peak of 21 million in 1979. Before the downturn
in exports hit in 1998, in the wake of the East Asian economic crunch, the
number of manufacturing jobs in the United States had actually increased by
700,000 from the first quarter of 1993 through the fourth quarter of 1997.
In the end, the debate over jobs is irrelevant because the real measure
of a nation's industrial might is not the number of people employed in this or
that sector but the value of what they produce. The fact that American
manufacturers can produce 42 percent more than they could in 1992 with about the
same number of workers is a testament to rising efficiency--"competitiveness,"
if you will--not industrial decline.
The shift to service-sector jobs is
a natural consequence of a more advanced and prosperous economy. As incomes
rise, families tend to spend a smaller share of their income on goods and a
correspondingly larger share on services. We spend relatively more than we used
to on such services as travel, eating out, recreation, lawn care, entertainment,
and financial advice. It only makes sense that, as our relative consumption of
manufactured goods falls, so too will our relative production--even as our
absolute production continues to climb. Virtually all the other advanced
economies in the world have undergone the same transition. The relative decline
of manufacturing is a sign not of national decline but of a nation reaching a
higher stage of economic development.
No Giant Sucking Sound
More than half a decade after congressional approval of NAFTA and the
WTO, domestic investment in the United States is booming.
The same open
economy that has benefited American consumers and workers has created a
profitable climate for new business investment. As a result, more than a
trillion dollars was spent in the United States last year on fixed
nonresidential private investment.
The record expansion now heading into
its 10th year has been marked by a healthy growth in investment. Since 1992 real
nonresidential private investment in the United States has almost doubled, from
$630 billion to more than $1.2 trillion ('m
1996 dollars). Real investment in information-processing equipment and software
has more than tripled.27 The surge in investment and new technology has led
directly to the rise in worker productivity that in mm has fueled economic
expansion and rising living standards.
The predicted flight of capital
to countries with lower costs and standards never materialized. In fact, during
the past decade the United States has been the world's largest recipient of
foreign investment. Year after year the United States has run a net surplus in
its capital account, with foreign savers investing more in the United States
than American savers sent abroad. This inflow of foreign capital has kept
interest rates down, built new factories, and brought new technology and
production methods to our economy. If there has been any giant sucking sound
since 1993, it has been the rush of global capital to the safe and profitable
haven of the United States.
American manufacturers continue to be net
investors in Mexico and China, but the relative magnitude of the investments
remain small. From 1994 through 1998 the annual net outflow of FDI in
manufacturing to Mexico averaged $1.7 billion; the net annual
outflow of manufacturing investment to China has been even smaller, averaging
$661 million (Table 2). Those sums are inconsequential in a
U.S. economy that averaged almost $8 trillion in annual GDP
during the same period. In contrast to the relative trickle of outward
investment to Mexico and China, domestic investment in U.S. manufacturing in
1997 totaled $192.3 billion.28 In fact, from 1994 to 1998, the
United States received an average annual net inflow of manufacturing FDI of
$12 billion.29
While anti-trade polemicists focus all
their attention on jobs shipped overseas, they ignore the jobs shipped here.
Today some 12.3 percent, or almost one in eight, of manufacturing workers in
America are employed by a U.S. affiliate of a foreign-owned company.30 Honda,
Toyota, DaimlerChrysler AG, BMW, Fuji, and other foreign-owned companies have
become major employers in the United States.
As is the case with trade,
most of America's foreign investment dealings are with other advanced economies.
According to a study by the Deloitte & Touche consulting firm, 80 percent of
FDI by U.S. manufacturing firms in 1998 was in other high-wage countries.31 The
top five destinations for U.S. manufacturing FDI in 1998 were the United
Kingdom, Canada, the Netherlands, Germany, and Singapore-- 1 high-wage economies
with labor, health, and environmental regulations comparable to or more
restrictive than those of the United States.32
Outward U.S. foreign
investment is not drawn primarily by low wages and lax regulations in poor
countries. "Contrary to common belief, cheap labor does not drive U.S.
manufacturing FDI," the Deloitte & Touche study concluded. "Indeed, global
expansion strategies are driven in large part by relative economic stability,
well-developed infrastructures, lucrative market potential, and talented and
skilled workers. Access to lower cost labor and raw materials are important, but
not the primary driver."33
By focusing on low wages in less-developed
countries, the opponents of openness miss the crucial fact that workers in poor
countries are much less productive than workers in the United States. Their
wages are lower, not because they are inherently lazy or incapable, but because
they lack the human and physical capital and the pro-market institutions that
foster higher productivity. Their countries have historically followed unsound
economic policies: punishing tax rates, heavy market regulation, neglect of
education, traditional hostility to foreign investment, high import barriers,
and inflationary monetary policy. The policy mistakes that have kept wages low
in poor countries also discourage foreign investment.
The United States
has nothing to fear from openness to trade and investment with less-developed
countries. Global trade liberalization encouraged by the WTO promotes
investment, growth, and development in the United States as well as our trading
partners.
America's Benign Trade Deficit
With the U.S. economy
performing so well during a period of record trade expansion, complaining about
the trade deficit has become the last refuge of the enemies of openness, who
routinely point to the record deficit as prima facie evidence that global trade
is undermining the U.S. economy. They argue that future trade agreements
threaten to "worsen" the deficit and therefore should be opposed.
America's trade deficit is not the result of unfair trade barriers
abroad; it is the result of our continuing surplus of foreign investment. The
net inflow of capital allows Americans to import goods and services in excess of
what we export--hence the trade deficit. As long as our level of domestic
investment exceeds our level of domestic savings, the United States will be a
net recipient of foreign capital and will run a trade deficit. In contrast,
nations such as Japan will routinely run trade surpluses because their level of
domestic savings exceeds domestic investment.
Unless a policy addresses
the balance of savings and investment, it will have no ultimate effect on the
trade deficit. Protectionism aimed at reducing the trade deficit would only
deprive foreign producers of the dollars they would otherwise earn by exporting
to the United States. The resulting reduction of dollars in the international
currency markets would then drive up the dollar's value, making U.S. exports
less attractive abroad and imports more attractive at home-- offsetting the
effects on the U.S. trade deficit of a protectionist tariff.
Under
current conditions, the U.S. trade deficit is actually a sign of America's
relative economic health compared with that of our major trading partners. The
deficit reflects the attractiveness of U.S. investments and the spending power
of U.S. consumers, whose rising employment and real wages have spurred demand
for imports. This is why, as a general rule, the U.S. trade deficit grows during
periods of economic expansion and shrinks during periods of sluggish growth or
recession?
Trade liberalization through the WTO will not have a
significant effect on the U.S. trade deficit in either direction. It will make
the countries that participate in the liberalization more prosperous by allowing
their citizens to reap the productivity gains from the spread of technology,
more efficient production, and a more economical division of labor.
Conclusion
America's membership in the WTO has been a double
blessing for the United States. The liberalization of markets abroad has created
export opportunities for U.S. companies, raising profits, employment, and wages
in industries that serve expanding global markets. Meanwhile, WTO
membership exerts pressure on the U.S. government to keep our own
market open to the global economy, which gives American families access to a
wider range of affordable goods and services, thus raising the real value of our
paychecks. The competition from abroad spurs domestic producers to keep prices
down, develop new and better products, and adopt more efficient production
methods. The ability to import raw materials, capital equipment, and
intermediate inputs, such as competitively priced steel and semiconductors,
lowers the cost of production for U.S. producers and keeps them competitive in
global markets.
All the economic arguments against the WTO agenda of
trade expansion have proven to be hollow in practice as well as in theory. The
U.S. economy is thriving at a time of record trade and international investment.
America's unprecedented integration into the global economy has been accompanied
by record low unemployment, booming investment and industrial production, and
rising real wages up and down the income scale.
Granted, open trade is
not the only, and may not even be the chief, cause of the long boom we are
experiencing, and a policy of open trade does not guarantee unbroken prosperity.
Ultimately, the argument for free trade does not depend on current economic
conditions. If the United States were mired in recession, free trade would still
be the best policy both in theory and in practice. But at the very least,
today's juxtaposition of trade and economic expansion disproves the
protectionist argument that open trade is a recipe for unemployment and falling
living standards.
In testimony before the Senate in February, Federal
Reserve Board chairman Alan Greenspan reminded senators that America's openness
to imports and immigration has fueled the U.S. economy, prolonging our record
expansion. "As we are creating an ever more complex, sophisticated, accelerating
economy, the necessity to have the ability to bring in resources and people from
abroad to keep it functioning in the most effective manner increasingly strikes
me as relevant," he testified. The Fed chairman then went on to warn that,
unless fears about trade and openness are addressed, "I do think the forces
against globalization can significantly undercut this remarkable surge in
prosperity that we are observing."35
By encouraging governments around
the world to liberalize trade, the WTO enhances the individual freedom as well
as the material well-being of Americans. Through a rules-based approach to trade
policy, the WTO discourages governments from exercising self-defeating power
over the economic lives of citizens. Because of the WTO, Americans are not only
better off materially; they are also a bit freer from the power of government to
decide what they produce and consume.
FOOTNOTES:
1 Council of
Economic Advisers, "America's Interest in the World Trade Organization: An
Economic Assessment," November 16, 1999, http://www.whitehouse.gov
WHEOP/CEA/html/wto/,p.1.
2 Ibid.
3 Organization for Economic
Cooperation and Development, Open Markets Matter: The Benefits of Trade and
Investment Liberalization (Paris: OECD, 1998), p. 31.
4 Ibid., p. 25.
5 United Nations Conference on Trade and Development, "World FDI Grows
25 Percent in 1999, Surpassing U.S.$800 Billion," Press
release, February 8, 2000, http://www.unctad.org/en/press/pr_2837.en.htm.
6 Pat Buchanan, in his anti-trade manifesto, The Great Betrayal (New
York: Little, Brown, 1998), p. 53, marks the beginning of the "free- trade era"
as the conclusion of the Kennedy Round of GATT negotiations in 1967. His allies
on the left, Loft Wallach and Michelle Sforza, Whose Trade Organization?
(Washington: Public Citizen, 1999), p. 156, date "the onset of globalization in
its current form" to 1973.
7 U.S. International Trade Commission, The
Economic Effects of Significant U.S. Import Restraints: Second Update 1999,
USITC investigation n. 332-325, publication 3201, May 1999, p. 36.
8
Council of Economic Advisers, "America's Interest in the World Trade
Organization," p. 9. The leading U.S. service exports are travel and
transportation services; royalties and licensing agreements; business,
professional, and technical services; and financial services.
9
Organization for Economic Cooperation and Development, p. 10.
10 Council
of Economic Advisers, "America's Interest in the World Trade Organization," U.S.
Trade Representative, "1999 Annual Report of the President of the United States
on the Trade Agreements Program," March 2000, Annex II, p. 10.
12
Council of Economic Advisers, Economic Report of the President 2000 (Washington:
Government Printing Office, 2000), p. 348.
13 Ibid., p. 354.
14
Total employment in an economy is determined by labor market flexibility and by
broader, macroeconomic factors such as monetary policy. This means,.of course,
that proponents of trade expansion who argue that it will "create jobs" are
propagating the same fallacy as opponents who argue that it will "destroy jobs."
15 The main reason why the CPI systematically overstates inflation is
that it fails to capture the beneficial impact of new products on the purchasing
power of our paychecks. Americans today can buy a minivan full of products--such
as personal computers, VCRs, microwave ovens, cellular telephones, and digital
cameras--that simply were not for sale in 1970, at least not a price any of ns
could afford. And when those new products are finally added to the CPI shopping
basket, the most dramatic price reductions have already been realized.
16 Author's calculation, based on an average annual CPI increase of 5.4
percent from 1973 to 1998.
17 W. Michael Cox and Richard Alm, Myths of
Rich and Poor: Why We're Better Off Than We Think (New York: Basic Books, 1999),
p. 18.
18 Council of Economic Advisers, Economic Report of the President
2000, p. 360.
19 Ibid., p. 341.
20 Ibid., p. 27.
21
Council of Economic Advisers and U.S. Department of Labor, Office of the Chief
Economist, "20 Million Jobs: January 1993-November 1999," December 3, 1999, p.
5. 22 Cox and Alto, p. 146.
23 Ibid., p. 147.
24 United Nations,
Monthly Statistical Bulletin, March 2000, p. 275.
25 U.S. Bureau of the
Census, Statistical Abstract of the United States: 1999 (Washington: Government
Printing Office, 1999), Table 1243, p. 755.
26 For a more detailed
analysis of the impact of international trade On domestic manufacturing and
employment, see Daniel T. Griswold, "Trade, Jobs, and manufacturing: Why (Almost
All) U.S. Workers Should Welcome Imports," Cato Institute Trade Briefing Paper
no. 6, September 30, 1999.
27 Council of Economic Advisers, "America's
Interest in the World Trade Organization," Table B-17, p. 327.
28 Joint
Economic Committee of Congress, p. 10.
29 U.S. Department of Commerce.
30 William J. Zeile, "Foreign Direct Investment in the United States:
Preliminary Results from the 1997 Benchmark Survey," Survey of Current Business
79, no. 8 (August 1999):32.
31 Deloitte Consulting, "Foreign Direct
Investment Trends of U.S. Manufacturers: 1999 Annual Report," Deloitte &
Touche, New York, 2000, p. 1.
32 Ibid., p. 12.
33 Ibid., p. 1.
34 For a more detailed discussion of the causes and consequences of the
U.S. trade deficit, see Daniel T. Griswold, "America's Maligned and
Misunderstood Trade Deficit," Cato Institute Trade Policy Analysis no. 2, April
24, 1998.
35 Alan Greenspan, "The Federal Reserve's First Monetary
Policy Report to Congress for 2000," Testimony before the Senate Banking
Committee, February 23, 2000. The quote was in response to questions from Sen.
Robert Bennett (R-Utah).
END
LOAD-DATE: April
20, 2000 
