- The Washington Times - Monday, May 7, 2007

Federal Reserve Chairman Ben Bernanke delivered a passionate endorsement of free trade last week and warned that “a retreat into protectionism and isolationism would be self-defeating and, in the long run, probably not even feasible.” Explaining that the benefits of trade are “widely diffused and often indirect,” he acknowledged that the more easily identified “job losses and worker displacement sometimes associated with expanded trade are a legitimate economic and social issue.” He concluded that America needs to “continue to find ways to minimize the pain of dislocation without standing in the way of economic growth and change.”

The income gains from trade, even if they are not readily apparent because so many of them are “diffused and indirect,” are truly astonishing. Since World War II, expanded trade has increased average annual household income by $10,000, according to several studies, including one that projects further annual household-income gains between $4,000 and $12,000 if all remaining trade barriers are removed. Alluding to Wal-Mart, Mr. Bernanke noted the role of “large, import-intensive retail chains,” whose wide varieties of lower-priced goods deliver huge trade benefits to low- and moderate-income consumers. Competition from trade also is associated with huge productivity gains. Over the last 10 years, manufacturing productivity, which is very exposed to foreign competition, has increased by 55 percent, reflecting an average annual productivity increase of 4.5 percent. This miracle explains why manufacturing output has increased by nearly 40 percent since 1996.

Mr. Bernanke argued that trade’s overall effect on employment is “essentially none.” While imports as a share of gross domestic product (GDP) increased from 4.4 percent in 1965 to 16.8 percent last year, total U.S. payroll employment increased from 64 million to 136 million; and the 1965 unemployment rate of 4.5 percent is virtually identical to last year’s 4.6 percent. Moreover, average inflation-adjusted compensation per hour has nearly doubled since 1965, although the gains were not evenly distributed.

The Fed chairman convincingly argued that free trade is “even more important for developing nations.” A World Bank study comparing two groups of developing countries — “globalizers,” whose ratio of trade to GDP doubled over 20 years, and “nonglobalizers,” whose trade to GDP ratio declined — found that annual economic growth among the globalizers accelerated from 2.9 percent in the 1970s to 5 percent in the 1990s. The growth of nonglobalizers declined from 3.3 percent in the 1970s to 1.4 percent in the 1990s.

As Mr. Bernanke concluded, “We need to continue to find ways to minimize the pain of dislocation without standing in the way economic growth and change.” Advocates of free trade would do well to keep that in mind if they want to allay the concerns of workers negatively affected by trade.

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