- The Washington Times - Monday, August 11, 2008

Foreign trade has played a key role in defining the economic policies of the presidential contenders, and the issue’s perceived impact on jobs and wages could be the determining factor in the election’s outcome.

The private sector of the U.S. economy has shed jobs during each of the past eight months. The unemployment rate, which has increased by one percentage point nationally in the past year to 5.7 percent, has been rising even faster in many states.

In recent months, voters consistently have ranked the economy, including jobs, as the most important issue of the presidential campaign. With economic growth much slower today than a year ago, the jobs-related battle over trade may become the most decisive issue of the presidential election.

This is especially true in pivotal states such as Florida, Pennsylvania, Ohio, Michigan, Missouri, Minnesota and West Virginia, where the unemployment rate has increased significantly during the past year.

On the margin, the increasingly popular perception that soaring trade deficits have caused unemployment to rise could flip one or more states from President Bush’s column in 2004 to Sen. Barack Obama‘s column in 2008.

On the other hand, the trade sector has become the principal factor that has kept U.S. economic growth positive in recent quarters.

“Over the past year, exports have accounted for two-thirds of our nation’s economic growth,” National Association of Manufacturers (NAM) chief economist David Huether told The Washington Times. “Rising exports are the brightest light for our economy right now.”

‘Stark distinction’

“On trade, there is a stark distinction between the two candidates,” said Sallie James, a policy analyst at the Cato Institute, which advocates unfettered trade.

Mr. Obama is “firmly in favor of government intervention,” while Sen. John McCain “has an excellent and consistent record” supporting free trade, she said.

“In Obama’s rhetoric, there are many signs that he understands the need for major surgery in U.S. trade policy,” said Alan Tonelson of the U.S. Business and Industry Council, a national organization of small and medium-sized manufacturing firms.

By “adopting a blame-America-first trade policy,” Mr. McCain “has no clue that countries sign trade deals with the United States to advance their own interests. He would be a dreadful bargainer,” Mr. Tonelson said.

Both candidates agree that more needs to be done to strengthen the safety net for workers who lose their jobs because of trade. Each wants to help the transition of those workers to new jobs through better training and through reforms in the unemployment-insurance system or the trade-adjustment assistance program.

But they agree on little else.

Mr. Obama, the senator from Illinoisand the presumptive Democratic presidential nominee, captured his party’s nomination after a fierce battle with Hillary Rodham Clinton over who would be a tougher negotiator with America’s trading partners.

Mr. McCain, the senator from Arizona and the presumptive Republican presidential nominee, is a full-throated free-trader, who, after clinching his party’s nomination, took international victory laps to Canada, Colombia and Mexico, extolling the mutual benefits of unfettered international commerce.

Battle over NAFTA

Disagreements between Mr. McCain and Mr. Obama over the costs and benefits of the North American Free Trade Agreement (NAFTA) have produced the most inflammatory rhetoric.

“I will make sure we renegotiate” NAFTA, Mr. Obama said in a debate before the Ohio primary. “I think we should use the hammer of a potential opt-out as leverage.” Throughout the primary fight, Mr. Obama characterized NAFTA as “devastating” and a “big mistake.”

“For all the successes of NAFTA, we have to defend it without equivocation in political debate because it is critical to the future of so many Canadian and American workers and businesses,” Mr. McCain told the Economic Club of Canada in June. “Demanding unilateral changes and threatening to abrogate an agreement that has increased trade and prosperity is nothing more than retreating behind protectionist walls.”

NAFTA, which passed Congress in bipartisan votes in 1993, became effective in 1994. Canada and Mexico have been America’s top two trade partners and export markets in the past decade, but America’s balance of trade with each country has deteriorated.

In 1993, U.S. merchandise trade totaled $212 billion with Canada and $82 billion with Mexico, and the United States had an $11 billion trade deficit with Canada and a $2 billion surplus with Mexico.

Last year, U.S. merchandise trade totaled $562 billion with Canada and $347 billion with Mexico, and the United States had trade deficits of $64 billion with Canada and $74 billion with Mexico.

Although Mr. Obama acknowledged to Fortune magazine in June that his anti-NAFTA rhetoric during the primaries was “overheated and amplified,” he still insists that NAFTA must be reopened. He has pledged to “amend” and “fix” it.

Everywhere else

Mr. Obama voted against the Central American Free Trade Agreement, while Mr. McCain voted for it.

Mr. Obama voted to impose a 27.5 percent tariff on imports from China if Beijing failed to revalue its currency. Mr. McCain voted against it.

Mr. Obama has consistently voted for farm subsidies, which have been a major stumbling block in the multilateral trade-liberalization negotiations in the Doha development round. (The purpose of Doha, whose latest talks recently collapsed again, is to bring billions of people out of poverty by opening the markets of wealthy nations to the food exports of developing countries.)

Campaigning in Iowa last year, Mr. McCain opposed farm subsidies and ethanol mandates. He has repeatedly voted against farm subsidies.

Both Mr. Obama and Mr. McCain supported the Peru free-trade agreement. However, Mr. Obama opposes the Colombia free-trade agreement and the South Korea free-trade agreement, both of which Mr. McCain supports.

Despite Mr. Obama’s current opposition, Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, said, “Obama, once in office, would probably pursue the South Korean and Colombian agreements because failure to do so would hurt U.S. credibility.”

At home

In recent years, the United States has racked up record trade deficits.

From 1988 through 1997, the U.S. trade deficit in goods and services averaged $84 billion per year. From 1998 to 2007, however, the annual trade deficit averaged $489 billion. And during the past three years, it has averaged $727 billion.

Manufacturing employment remained virtually unchanged during the first 10-year period (1988- 97), when manufacturing output, according to the Federal Reserve, increased 43 percent as manufacturing productivity (output per hour) jumped 38 percent.

During the second 10-year period, however, as trade deficits have soared, manufacturing employment has plunged by 22 percent, falling from 17.6 million jobs to 13.8 million. Nonetheless, manufacturing output has risen 22 percent during the past 10 years, in large part because productivity improved by nearly 50 percent.

“Through the first five months of this year, U.S. manufacturers enjoyed a trade surplus with our free-trade agreement (FTA) partners,” said Mr. Huether, the NAM economist. “Contrary to the widely held view that our trade agreements are the cause of the U.S. trade deficit, FTAs are actually a bright part our current trade picture.”

While manufacturing jobs have disappeared, the U.S. economy has added more than 25 million jobs since NAFTA was implemented, NAFTA supporters argue. More than half of those jobs were created during the past 10 years, when the trade deficit began to soar.

NAFTA opponents have countered that many of those jobs were created in lower-paying service sectors, which did not provide benefits comparable to those in the manufacturing sector.

“The overwhelming majority of jobs created since NAFTA have had nothing to do with the global economy,” Mr. Tonelson said.

Meanwhile, the average U.S. unemployment rate declined from 6.6 percent during the 10 years (1984-93) before NAFTA became effective to 4.9 percent during the latest 10-year period (1998-2007). Since 1993, U.S. economic growth has averaged 3 percent per year, while the American economy has expanded by more than 50 percent.

“Since the mid-1990s,” Mr. Tonelson argued, “U.S. economic growth has been supported by bubbles. Since 2001, there has been a record swing in the budget deficit, the dollar has weakened considerably, and the Federal Reserve has kept short-term interest rates negative.”

Given those extraordinarily stimulative policies, Mr. Tonelson said, U.S. economic growth has been disappointing.

Negative view

Notwithstanding gains in overall employment and manufacturing output, the loss of millions of relatively high-paying manufacturing jobs during a period of soaring trade deficits has caused Americans to view globalization and the world trading system much more skeptically in recent years.

The fact that median family income was lower in 2006, the most recent year available, than in 1999 hasn’t helped.

According to a 2008 poll by the Pew Global Attitudes Project, Americans were the least supportive of international trade among 24 countries surveyed. Only 53 percent of Americans (distributed evenly among Democrats, Republicans and independents) said trade with other countries has had a good effect on the United States. In 2002, 78 percent said trade had a positive impact.

For 20 years, the New York Times/CBS News poll has been asking people whether free trade should be allowed even if domestic industries are hurt by foreign competition. This year, the largest proportion ever - 68 percent - said import restrictions are necessary, while only 24 percent advocated free trade.

Democratic legacy

Mr. Obama’s rhetoric makes him the most protectionist presidential candidate that his party has opted for in recent election cycles.

Consider that the Clinton-Gore administration worked hard to pass NAFTA in 1993, the World Trade Organization in 1994 and permanent normal trade relations for China in 2000.

And Sen. John Kerry, the 2004 Democratic nominee, voted for those three proposals.

Jason Furman, economic policy director of the Obama campaign, said it is difficult to compare Mr. Obama with previous nominees because “the world has changed, economic challenges have changed and globalization has changed.”

To mitigate the public’s increasing skepticism about trade, Mr. Obama would “break from the trade-policy failures of recent years,” including its contribution to rising inequality, Mr. Furman said. Mr. Bush exacerbated that inequality through his tax cuts, he added. Continuing the Bush tax and trade policies, Mr. Furman said, “would deepen the public’s skepticism.”

Mr. Obama would implement three changes in trade policy, Mr. Furman said. He would better enforce existing agreements. He would include strong labor and environmental standards to produce better trade agreements in the future. And he would pursue comprehensive, complementary domestic policies, from expanded trade-adjustment assistance to more affordable health care, to reduce trade’s contribution to rising inequality.

“Ninety-five percent of the world’s consumers live outside the United States,” said Douglas Holtz-Eakin, the chief economic policy adviser to the McCain campaign. It is imperative for long-term economic growth and job creation that American businesses and workers have access to these markets on a level playing field, he said.

“McCain believes in trade and actively supports it,” he said.

In contrast, Mr. Obama’s opposition to numerous free-trade agreements and his support of trade-distorting farm subsidies would deny or reduce American businesses and workers access to these foreign markets, he said.

Eighty-seven percent of U.S. exporters are small businesses, which are responsible for one-third of total U.S. exports and the vast majority of new jobs, Mr. Holtz-Eakin said. He warned that increased taxes, expensive health-care mandates and other burdens proposed by Mr. Obama could cripple a large part of the U.S. economy’s export sector, which has been the principal contributor to U.S. growth during the past year.

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