Wednesday, February 21, 2007

The Democratic leadership in Congress tells a convincing story about American anxiety over trade and globalization. And why shouldn’t they be nervous? The public is subject to a continuous barrage of hyperbole and misinformation about trade and its relationship to jobs and economic growth, a lot of which originates or metastasizes on Capitol Hill.

In a letter dated Feb. 13, House Speaker Nancy Pelosi, Majority Leader Steny Hoyer and other Democratic members chide the president for his trade policies, which they claim have led to an unsustainable U.S. trade deficit: “The consequences of these persistent and massive trade deficits include not only failed businesses, displaced workers, lower real wages and rising inequality, but also permanent devastation of our communities.” That’s an unreasonable burden for trade policy to bear — particularly since it is dead wrong. Regrettably, Ways and Means Committee Chairman Charles Rangel, whose opinions and positions will shape the House trade agenda for at least the next two years, lent his signature to the letter.

Too many in Congress view exports as good, imports as bad, and the trade account as the scoreboard. Because the United States has a large and growing trade deficit, they reckon we are losing at trade. The reason we are losing, the story goes, is because our trade partners are cheating, and the Bush administration has turned a blind eye. The Democrats therefore intend to reverse our eroding economic standing through greater enforcement of our trade agreements.

An honest discussion about trade would note that as imports and our trade deficit have increased over the past year, five years, 10 years and 25 years (take your pick), the economy has expanded, creating an average of 1.8 million net new jobs each year since 1981. There is very clearly no inverse relationship between the level of imports and U.S. job creation. And in the sectors that compete most directly with imports, productivity gains (not import competition)account for the preponderance of job attrition.

Imports are crucial to the U.S. economy. They create competition, which makes businesses more innovative and productive. But imports also keep prices lower, increasing real wages and expanding family budgets.

U.S. industries rely on imported components and raw materials in the production of their final products. Such importation accounts for nearly half of all U.S. imports. According to the research of my Cato colleague Dan Griswold, in periods when the gross domestic product has contracted, the current account deficit has declined. When GDP expanded moderately, the current account deficit increased. And when GDP grew robustly, the current account deficit increased more rapidly. The same relationship holds with respect to the current account deficit and U.S. manufacturing output. Higher levels of imports are associated with more economic activity, which is integral to job creation. The deficit is quite clearly pro-cyclical.

In 2006, the economy grew an additional 3.4 percent, creating 2 million net new jobs, and closing the year with an unemployment rate of 4.5 percent. Increased trade (both imports and exports) has been an important ingredient in the remarkable success of the U.S. economy. On what grounds should the record trade deficit be allowed to overshadow those real economic numbers? What’s so desirable about balanced trade or a trade surplus? Japan has run a large trade surplus since time immemorial. Yet, its economy was moribund for 13 years, growing at barely over 1 percent per year between 1991 and 2004.

Likewise, Germany has run a large trade surplus for many years, but until less than one year ago, it remained afflicted with a double-digit unemployment rate. (Today it is just under 10 percent). What would Mrs. Pelosi prefer: a trade surplus or real economic growth and opportunity? Mrs. Pelosi and the other signatories single out China, Japan and Europe as responsible for our growing deficit because of their “numerous trade barriers and unfair trade practices.”

The solution, therefore, is to increase U.S. exports to those regions by breaking down those persistent impediments. However, the Census Bureau data show that U.S. export growth was phenomenal in 2006, increasing by 14.5 percent (as compared to 10.8 percent for imports). Exports to Europe increased by 15.2 percent and to China by nearly 32 percent. The growth in exports to Japan was a slower 7.5 percent, but it grew. Since 2001 U.S. exports have increased by more than 42 percent, and that growth reflects, more than any discernible trade policy measure, the fact that the world economy has been growing handsomely during that period. As foreign demand rises, foreigners are demanding more American-made products.

There is no compelling reason to change course on trade policy. If the Democrats in Congress are willing to conduct an honest inquiry into the relationship between trade, jobs and economic growth, policy-makers will be less tempted by ruinous policy options.

Daniel Ikenson is associate director of the Cato Institute’s Center for Trade Policy Studies.

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