When it comes to trade across borders, the more things change, the more they remain the same. President Obama recently traveled to Mexico to assure NAFTA trading partners about the U.S. “commitment to trade.” However, those reassurances are likely to ring hollow against the backdrop of opposition from his own party to fast-track authority for new trade agreements, as well as echoes of protectionism in his recent State of the Union address.
Lower-income Americans are likely to emerge the biggest losers in a policy that results in restricting trade, contrary to rhetoric about saving or creating jobs, or increasing the production of “goods stamped ‘made in the USA.’ ” That is because trade restrictions can raise prices for goods, which hit poorer people harder, reducing growth and limiting employment opportunities. The best policy is to refrain from giving in to special interests, and to strive to expand opportunities for trade.
Mr. Obama has called for fast-track authority that would impact ratification of two pending trade agreements: the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership. The first includes not just NAFTA partners Canada and Mexico, but also Chile, Peru, Australia, New Zealand, Japan, Brunei, Malaysia, Singapore and Vietnam, and would cover some 75 percent of U.S. agricultural exports. The latter covers the 28-member European Union — America’s largest trading partner — and has the goal of eliminating all tariffs for U.S. exports and reducing the cost of differences in regulations between the United States and the EU.
In contrast to this push to free trade, Mr. Obama also called for frankly mercantilist policies in the State of the Union address, seemingly adhering to an archaic view that exports are desirable but imports are not. He said he wants to “close those loopholes, end those incentives to ship jobs overseas, and lower tax rates for businesses that create jobs here at home.” This is simply another version of “more exports are good, but more imports are bad,” with the added twist of meddling with the tax code. Picking winners and losers through the tax codes does not work, least of all for trade, where increasing both exports and imports are necessary for increasing growth and prosperity.
The myth that exports are good and imports are bad is an enduring one, and entirely false. Both imports and exports increase economic well-being. As George Mason University economist Donald Boudreaux points out, freer trade increases prosperity by allowing consumers to buy higher-quality goods at lower prices. In a study published in the Journal of Monetary Economics, economists Raphael Auer and Andreas M. Fischer found that prices in the United States are held down 2 percent for every 1 percent share of the import market that originates in countries like China and Mexico. Lower-income Americans, who spend a larger share of their income on consumption goods, benefit disproportionately from such imports. Current trade barriers also impose greater harm on lower-income Americans in more direct way, because goods they are more likely to consume are often subject to higher tariffs. The progressive economist Edward Gresser points out that, for example, plain drinking glasses face a tariff of nearly 30 percent, while expensive crystal glasses are allowed into the country with a mere 3 percent tax.
Freeing trade through eliminating tariffs and increasing trade volume will benefit not just American consumers, but also producers. According to the Bureau of Economic Analysis, about one-half of American imports are actually inputs for U.S.-based producers. These businesses will benefit from lower-priced imports, which would lower their production costs.
Nonetheless, Senate Majority Leader Harry Reid opposes fast-track authority, and many labor unions oppose the trade agreements altogether, arguing that the result will be more lost jobs. This, in fact, echoes part of Mr. Obama’s own desire to encourage growth in the “Made in the USA” label and punish businesses who choose to invest overseas.
It is not trade that has driven most of the changes in the labor force composition during the past several decades but technological innovation. Arguably, the rise of the computer and succeeding rounds of innovation have driven more change than increased trade. After all, decades of protection of the steel industry have not saved the large steel mills from completion from smaller firms, both domestic and foreign. The tariffs that legacy steel firms, which employ fewer than 200,000 Americans, have managed to extract, however, have imposed significant costs on the steel-consuming industries, which employ 12 million Americans.
If the goal is to increase prosperity generally, and to improve the welfare of lower-income Americans in particular, then U.S. policy should be to lower barriers to trade across the board.
Nita Ghei is policy research editor at the Mercatus Center at George Mason University.
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