In the last few weeks debate has resumed about the benefits of expanding international trade. It’s about time.
Last week, former Treasury Secretary Larry Summers gave a major speech challenging the views of anti-trade leaders, such as (but not limited to) Bob Lighthizer. Ambassador Lighthizer’s recent book “No Trade Is Free” posits that, until the Trump administration, policy elites had led the nation astray in an orgy of outsourcing manufacturing jobs. Many politicians, who consider themselves part of that very elite, have joined the chorus.
Frequently debates center on the preconceived conclusions of a debater, who cites cherry-picked evidence in support of the view he or she espouses. Both sides do it, and reality’s subtleties rarely intervene.
Let’s look at some evidence and draw conclusions from it in keeping with my complaint.
First, trade is and always has been about mutual benefit. Summers started with this point in his speech, and it is still true. With certain exceptions (more about those anon), increasing trade has the following benefits:
- More competition leads to lower prices for consumers
- More choices
- For manufacturers in the US, trade leads to reduced costs at home and export opportunities abroad
Lighthizer and others argue, however, that increased trade has hollowed out American industry. But has it? We need an acceptable way of measuring that. Here are three: (1) gross domestic product growth, adjusted for inflation; (2) wage growth; and (3) growth in industrial production.
Since 2000, the year the Uruguay Round tariff cuts took effect, real GDP (constant 2012 dollars) of the United States has grown from $13 trillion to $20 trillion, an increase of more than 50%.
Average real wages in the United States for the same period have increased from $334 per week to $365 per week, an increase of about 10%. The road has been bumpy. In late 2020 the average weekly wage was $393, but wages have come off that heady level.
Industrial production has increased from an index of 91 in 2000 (100 is the 2017 figure) to 103. Not as impressive as the other numbers but remember two “episodes” in 2008 and 2020, which tanked the economy during that period, and can hardly be blamed on trade liberalization.
Compared to other economies, the United States remains at the top. No other country, apart from China, has seriously challenged the US as the top economy in the world.
Now, let’s look at the arguments that trade has injured the United States. First, the decline in manufacturing employment. Second, international competition has stolen American jobs. And third, that other countries don’t play by the rules, and steal American knowledge.
There has clearly been a decline in manufacturing employment. According to Federal Reserve statistics, manufacturing employment has declined from about 17 million in 2000 to about 13 million today, a decline of more than 20%. To blame trade for the decline in manufacturing employment requires ignoring a lot of evidence concerning automation, productivity gains, and changing consumer tastes. Trade has also led to increasing employment in sectors other than manufacturing, such as services of all sorts.
If trade expansion were a curse, as Ambassador Lighthizer asserts, then there should be little or no effort to increase it. While the President advocates creating jobs at home by building infrastructure and electric vehicles, look who is going overseas to link with foreign businesses. In just the last month, the Governors of Maryland, Pennsylvania, Nebraska, New Mexico and Missouri announced overseas trips to stimulate investment in these states, which are, of course, part of the US.
And investment is the obverse of the trade deficit. When money flows out of the country to pay for imported goods, it comes right back in the form of investment. Investment is roaring into the United States. Governors are aware and are trying to steer it to their states.
Politically, the federal government is picking favored industries, such as steel, aluminum, electric vehicles, clean energy, and semiconductors. Another industry I would focus on is modernizing the electric grid. But that requires goods that are not made in the US in sufficient quantity, which complicates things.
To upgrade the grid, many thousands of transformers (both power transformers and distribution transformers) must be purchased. American producers can’t make enough of them. The grain-oriented electrical steel that goes into them is not produced in sufficient quantities to manufacture them. So, the transformers must be made overseas.
Solving many of our most pressing problems, therefore, requires expanding trade. If we embrace the real challenges, it becomes apparent that trade is not a bug, but a feature.
As the world changes, it does some things better than it used to. With competition comes advances in technology and innovation. Those advances themselves create challenges, such as the decline in manufacturing employment. So other sectors will need to take up the slack. A dynamic economy with expanding opportunities will do that better than government edicts.
Government is important in redirecting energy in the private sector—but government has its limits. In a dangerous world, innovation is our most powerful weapon.
One metric that does not seem to matter much is the magnitude of the trade deficit. Here, Ambassador Lighthizer is just wrong. Trade deficits are the difference between national savings and net national investment. If we want to reduce them, the American people will need either to save more or invest less. As the Trump tariffs demonstrated, tariffs will not shrink the trade deficit. And, in that period, as former Senator Pat Toomey wrote this week, the US economy vaulted ahead of the total GDP of the European Union, which has 100 million more people than we do. In 2008, the US economy was 10% smaller than the EU’s. Now it is 50% larger.
I hope Larry Summers keeps talking up the benefits of trade in keeping the US the bastion of innovation and productivity that it has been for 200 years.
Editor’s note: This is an opinion column. The views in this article are those of an experienced trade attorney on issues of relevance to the current steel market. They do not necessarily reflect those of SMU. We welcome you to share your thoughts as well at firstname.lastname@example.org.
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