Trade: Globalization Isn't to Blame

Almost everyone wishes for a renaissance of American manufacturing, and none say so more loudly than the Democratic presidential candidates and Democratic members of Congress. The trouble is that their deeds don't match their words. They have blamed trade for almost anything that might ail the U.S. economy—in particular, manufacturing—when the opposite is now true. Only through expanded trade can the economy thrive and manufacturing stage a comeback.

The latest evidence of the gap between political rhetoric and economic reality is the Democratic-controlled House's decision to set aside, indefinitely, the free-trade agreement negotiated with Colombia by the Bush administration. On economic grounds there's no reason to reject the agreement. Colombia's exports already enter the U.S. market duty-free under the 1991 Andean Trade Preference Act. Meanwhile, many U.S. exports to Colombia face stiff tariffs—up to 35 percent on autos, 15 percent on tractors and 10 percent on computers—most of which would ultimately go to zero under the agreement.

The tariffs dampen demand for U.S. exports by raising their price and putting them at a competitive disadvantage. Whirlpool annually exports about $50 million worth of refrigerators, washer-dryers and dishwashers to Colombia from plants in Ohio, Arkansas and Iowa. On a $1,000 refrigerator, a 20 percent tariff raises the retail price $200 in a fiercely competitive market with appliances also supplied by local firms and imports from Korea and elsewhere. (Why does Colombia want the agreement? Answer: Congress has to renew Colombia's present duty-free status periodically. The agreement would make it permanent.)

Yet, it's politically convenient to oppose the trade agreement, because the popular imagery is that trade destroys U.S. jobs. The loss of almost 4 million U.S. manufacturing jobs since 1998 seems easy to explain by cheap imports or the flight of plants to Mexico, China and other poorer countries. The truth is murkier. Although this has occurred, job losses also stem from greater efficiency (fewer workers producing more goods) and slumping domestic demand (for communications equipment and computers after the dot-com bust and for housing materials and vehicles now). Nor has falling factory employment crippled overall U.S. job creation.

Look at the numbers. From 1998 to 2007, total nonfarm payroll employment rose by 12 million, and unemployment averaged only 4.9 percent—despite the 4 million lost factory jobs. In that period, U.S. manufacturing output rose 22 percent.

No matter. Globalization and trade have become lightning rods for myriad grievances (job insecurity, wage inequality, eroding fringe benefits). But even if trade caused all the factory job losses, its impact is shifting. The dollar's dramatic depreciation (down an inflation-adjusted 20 percent since early 2003 against a basket of currencies) has enhanced the competitiveness of U.S. exports. Their growth now looms as a major source of job creation and economic expansion.

The overall trade deficit is dropping and, except for higher oil prices, would be dropping faster. In 2007 manufacturing exports rose 10.9 percent, double the 4.9 percent for manufacturing imports. At some companies the effect is already noticeable. Consider Bison Gear and Engineering, a medium-size firm near Chicago that makes electric motors for kitchen equipment, packaging machinery and medical devices. Since 2006 exports have increased from about 20 percent to 30 percent of total sales, says company chairman Ron Bullock. Bison has hired about 50 workers, bringing total employment to 250.

It is no longer necessary to rely on elegant theories of comparative advantage, more consumer choice or greater competition to favor open trade. Jobs and economic growth will suffice. Indeed, without export-led growth the economy may face a sluggish future.

Even after today's slowdown (recession?) ends, the outlook is worrisome. Consumers are heavily indebted. Housing will recover and reach previous highs, but probably not for many years. Government spending is constrained by growth in the rest of the economy, unless Congress sharply raises taxes or deficits. Exports and related investments are the best hopes.

What House Democrats did was particularly perverse. They suspended trade promotion authority, which mandates that Congress vote up or down on trade agreements within 90 days of their submission. TPA gives other countries a reason to negotiate in good faith. They can make politically difficult concessions without fearing that Congress will ignore the agreement because it dislikes the U.S. concessions.

Americans do have legitimate trade complaints. China manipulates its currency to aid exporters; other countries restrict imports. It's in the U.S. interest to dismantle these obstacles. Now the suspension of TPA can serve as an excuse—symbolically and substantively—for other countries not to negotiate, just when U.S. firms can most benefit from market openings.

What matters for workers and manufacturers is not what politicians say. It's the consequences of what they do. On trade many Democrats—and some Republicans too—are fighting the last war.