Globalization to The Rescue?

It's our versatile villain. Globalization has served as a whipping boy for politicians of both parties—particularly Democrats—and legions of pundits. We blame it for all manner of grievances: lost jobs, greater inequality, shoddy goods. But take this quiz as a reality check. What explains the resilience of the U.S. economy in the face of the deepening housing collapse? (a) Ben Bernanke's deft management of the Federal Reserve; (b) the tireless spending of consumers; (c) improving inflation, and (d) foreign trade.

The best answer is (d).

The trade deficit has been rising for so long and has reached such gigantic dimensions that people forget that it can also fall. Well, it can and it has—to good effect. Through August, the deficit in 2007 was $472 billion, down $46 billion (9 percent) from the same period in 2006. In the second quarter, the U.S. economy expanded at an annual rate of 3.8 percent, even though housing subtracted 0.6 percentage points from growth. But the improved trade balance added 1.3 percentage points, notes economist Edward Yardeni. That was double the loss from housing and also the largest contributor to growth.

Caterpillar, a mega-exporter, exemplifies the turnaround. From 2004 to 2006, its exports rose 44 percent to $10.5 billion. Since the start of 2006, Caterpillar says it has hired more than 11,000 new U.S. production workers. None of this guarantees that a U.S. export boom will prevent an American recession. But the mere possibility suggests that we need to be smarter about globalization—and not simply to parrot popular stereotypes. On the job front, for example, much of today's vitriolic anti-trade rhetoric is misleading and ill-timed.

Contrary to popular opinion, the trade balance (deficit or surplus) barely affects total U.S. employment over long periods. Domestic job creation and destruction ultimately overwhelm trade's effects. From 1991 to 2006, the trade deficit rose from $31 billion to $759 billion. In the same period, payroll jobs increased by 28 million and the unemployment rate fell from 6.8 percent to 4.6 percent. The domestic economy still dominates. Big job losses today relate to housing: construction workers, real-estate agents, mortgage bankers. In 2001, unemployment came from busted dotcoms and telecoms.

But trade—like any form of competition—does affect specific workers. Those vulnerable to imports naturally want to save their jobs, even if open trade is good for the country as a whole (it broadens choices, reduces prices). Although protectionism is a logical response, it's too late. The right time would have been 30 years ago before the trade deficit exploded. Those jobs are now gone, and most aren't coming back. Perversely, being anti-trade today will weaken the employment prospects of trade sensitive industries. A case in point: the Bush administration has proposed "free-trade agreements" with Peru, Panama, Colombia and South Korea. Together, they would bolster U.S. exports, though modestly. In today's anti-trade climate, none has yet passed Congress.