Wednesday, April 16, 2008

Samuelson On Trade

Robert Samuelson is the latest economist to rip Congress for delaying, maybe permanently, the Columbia free trade agreement:

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.

As Samuelson points out, our manufacturing base is not as bad as it seems. And exports are a major source of growth:

Look at the numbers. From 1998 to 2007, total non-farm payroll employment rose 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 loss, 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 used for kitchen equipment, packaging machinery and medical devices. Since 2006, exports have increased from about 20 percent to 30 percent of total sales, says 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.

The rejection of the Columia free trade agreement is not a major economic hit. Trade with Columia is relatively small and even with the agreement is not likely to become all that large - unless we include cocaine. The problem is that other countries will now be less likely to negotiate these agreements with us and export growth is now very important to our economic well being.

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