International trade is the framework upon
which American prosperity rests. Free trade policies have created a
level of competition in today's open market that engenders
continual innovation and leads to better products, better-paying
jobs, new markets, and increased savings and investment. Free trade
enables more goods and services to reach American consumers at
lower prices, thereby substantially increasing their standard of
living.
Moreover, the benefits of free trade
extend well beyond American households. Free trade helps to spread
the value of freedom, reinforce the rule of law, and foster
economic development in poor countries. The national debate over
trade-related issues too often ignores these important
benefits.
The positive effects of an open market are clearly
evident in the stellar growth of the U.S. economy over the past
decade. Since 1990, the U.S. economy has grown by more than 23
percent, adding more than $2.1 trillion to the nation's gross
domestic product (GDP) and raising the wealth of the average
American consumer by more than $5,500.2 The economy
responded well to the expansion of trade that occurred after the
signing of the North American Free Trade Agreement (NAFTA) in 1993
and the establishment of the World Trade Organization (WTO) in 1995
as a forum for settling trade disputes. For example:
-
Since 1990, imports of real goods and
services have increased 115 percent.
-
The number of full-time jobs has increased
by 13.4 percent since 1991. The share of the labor force that works
part-time because of an inability to find a full-time job is less
than 3 percent.
-
As of July 2000, the unemployment rate had
hovered within one-tenth of a point from 4 percent for almost a
year--the lowest rate in 30 years.3
-
The stellar record of growth has continued
in the United States at the end of the decade as well: Between 1998
and 1999 alone, total employment increased by 2 million.4
To
be sure, many more policymakers today acknowledge the benefits of
free trade than when Congress passed the Tariff Act of 1930 (the
Smoot-Hawley Act). The devastation wrought by these protectionist
tariffs led successive U.S. administrations to support free trade
after World War II. Their grand vision of a world comprised of
nations at peace who traded freely among themselves for the
prosperity of all has animated U.S. foreign policy and invigorated
efforts to facilitate the opening of markets in every region.
A
growing number of countries continue to share the benefits of
America's emphasis on trade. As noted in a recent report by the
International Financial Institution Advisory Commission chaired by
Allan H. Meltzer, a former member of the President's Council of
Economic Advisers and Professor of Political Economy at Carnegie
Mellon University:
The
Congress, successive administrations, and the American public can
be proud of these achievements. The United States has been the
leader in maintaining peace and stability, promoting democracy and
the rule of law, reducing trade barriers, and establishing a
transnational financial system. Americans and their allies have
willingly provided the manpower and money to make many of these
achievements possible. The benefits have been widely shared by the
citizens of developed and developing countries.
The
dynamic American economy benefited along with the rest of the
world. Growth of trade spread benefits widely. Per capita
consumption in the United States tripled. As in other countries,
higher educational attainment, improved health services, increased
longevity, effective environmental programs, and other social
benefits accompanied or followed economic gains.5
Despite these achievements, the United
States, with one of the world's most open markets, continues to
apply barriers to trade--most notably tariffs and quotas in the
apparel and textile industry and in agriculture--that increase the
cost of goods for consumers and harm people in developing countries
who rely on this trade for their meager incomes. In this respect,
the trade and Development Act of 2000 (P.L. 106-200) enacted on May
18, 2000, by lowering some of these barriers to trade, is a step in
the right direction.
Congress and the President should take
every opportunity to articulate the benefits of trade to the
American people and to expand international trade by any possible
means, such as the unilateral lowering of trade barriers, the
forging of regional and bilateral trade agreements, and working
within international trade forums like the WTO. Ultimately, the
straightforward and tangible benefits that derive from each of
these steps will help both hardworking American families and
impoverished people around the world.
BENEFITS OF FREE trade
The
benefits of free trade are many and far outweigh any risks that
foreign competition might pose to the U.S. economy. These benefits
fall into four major categories.
Benefit #1: Free trade promotes innovation and competition.
Few
people in America today sew all their own clothes, grow all their
own food, build their own houses, or buy only products made in
their own states. It would cost too much and take too much time,
especially since Americans can acquire such items on the open
market with relative ease. The same principle of practicality and
cost applies on an international scale. It makes economic sense to
buy a product from another who specializes in such production or
who can make it more easily or for less cost.
Indeed, access to a greater variety of
goods and services is the purpose of trade. Imports, then, are not
a sacrifice, a necessary evil for the good of exporting. One
exports so that one may acquire goods and services in return. This
logic is evident on a personal level as well: A person works so
that he has the means to buy necessities and possibly even
luxuries. One does not make purchases in order to justify
working.
Free
trade is the only type of truly fair trade because it offers
consumers the most choices and the best opportunities to improve
their standard of living. It fosters competition, spurring
companies to innovate and develop better products and to bring more
of their goods and services to market, keeping prices low and
quality high in order to retain or increase their market share.
Free
trade also spurs innovation. The U.S. market has demonstrated
repeatedly, particularly over the last decade, that competition
leads to increasing innovation. This is evident, for example, in
the intense competition to create the latest personal computer at
the lowest cost. With the growth of electronic commerce has come
unlimited choices of goods and services and lower prices for
products. Computers are now available for free just for signing an
annual Internet provider service agreement.6
In
fact, America's greatest advantage lies in its ability to innovate
and to build upon that continually expanding knowledge base.
According to The Economist , the
United States "has an `innovational complex'--those thousands of
entrepreneurs, venture capitalists, and engineers--unmatched
anywhere in the world."7 This resource
results in an ever-growing number of new products and services that
bolster America's competitive advantage in the global market and
greater prosperity at home.
This
competitive advantage derives largely from America's open market
practices. Free trade promotes innovation because, along with goods
and services, the flow of trade circulates new ideas. Since
companies must compete with their overseas counterparts, American
firms can take note of all the successes as well as the failures
that take place in the global marketplace. Consumers then benefit
because companies in a freely competing market must either keep up
with the leader in order to retain customers or innovate to create
their own niche.
In
contrast, protectionist policies designed to restrict foreign
competition exact a heavy cost on consumers. This is perhaps best
demonstrated by the European Union (EU), which protects, for
example, its members' agriculture industries from foreign
competition through such policies as restricting imports of beef
and maintaining a protectionist regime on bananas.
In
June 1999, testifying before the Senate Committee on agriculture,
Nutrition and Forestry on the need to reform the European Common
Agricultural Policy (CAP), U.S. Trade Representative Charlene
Barshefsky observed that
The
European CAP, including $60 billion in trade-distorting subsidies,
and 85 percent of the world's agricultural export subsidies, is
among the largest distortions of world trade in any sector. Reform
is in everybody's interest. The combination of high tariffs and
subsidies make European consumers pay prices far above world
markets for food. Export subsidies, in particular, place an immense
and unfair burden on farmers in other countries, especially
developing countries.8
The
end result of these policies has been to deprive consumers across
Europe of access to more goods at fairer prices.
Though Ambassador Barshefsky's statement
demonstrates that the Clinton Administration has recognized the
negative impact of protectionist policies, protectionism continues
to thrive in America's own agriculture sector, perpetuated by
federal subsidies on products such as peanuts and sugar.
The
common misperception that American farmers need subsidies to
survive belies the evidence that American farmers themselves have
amassed--evidence that is a tribute to their efficiency and hard
work. By using the innate talent to innovate that Americans have
developed so well, farmers have vastly increased productivity over
the years. In fact, between 1948 and 1996, U.S. agricultural labor
productivity increased more than eightfold, and agricultural
production doubled, even as total input use (including labor, land,
and machinery) declined.9
Benefit #2: Free trade generates economic growth.
By
fostering opportunities for American businesses, free trade rewards
risk-taking by increasing sales, profit margins, and market share.
Companies can choose to build on those profits by expanding their
operations, entering new market sectors, and creating better-paying
jobs. According to U.S. Trade Representative Barshefsky, U.S.
exports support over 12 million jobs in America, and trade-related
jobs pay an average of 13 percent to 16 percent higher wages than
do non-trade-related jobs.10
Opponents of free trade fear that efforts
to remove protectionist barriers to foreign competition will result
in the loss of blue-collar jobs in America, especially in the
manufacturing sector. They believe that the North American Free
Trade Agreement in particular threatens these jobs. Yet, as Chart 1
(page 5) shows, the facts belie this fear.
The
nature of employment in the United States is indeed evolving away
from manufacturing and toward more service-oriented and
high-technology jobs. However, the record shows that trading freely
with America's NAFTA partners, Canada and Mexico, has not resulted
in an aggregate loss of manufacturing jobs. Instead, since
1994:
-
14 million new American jobs have been
reported;
-
The unemployment rate in America has
fallen from 6 percent to 3.9 percent (as of April 2000); and
-
The number of manufacturing jobs in
America has remained steady, employing 18.3 million people in 1994
and 18.4 million in 1999, which represents 14 percent of the total
American workforce.11
On
balance, not only has NAFTA not
resulted in a loss of factory jobs in the United States, but it has
not led to a loss in real wages for manufacturing workers. The
average real wage in the manufacturing sector rose from $8.03 per
hour in 1994 to $8.26 per hour in 1999 (in constant
inflation-adjusted dollars).12
Moreover, saving just one job in America's
declining apparel and textile industry is estimated to cost the
taxpayers more than $100,000 each year.13 The workforce in
this sector, which has declined by approximately 30 percent since
1989, comprises just 1 percent of total non-farm employment. The
decline is a natural outcome, considering that the industry pays
far less than the average national wage--nearly 20 percent less in
textiles and 33 percent less in apparel.14 Such lower-paying
jobs become marginal as workers move to better-paying jobs in the
broader market. In fact, over the past decade, 19 million more jobs
have become available,15 demonstrating that
there are many opportunities for American workers to find jobs.
Since NAFTA took effect, total U.S. trade with Canada and Mexico has risen more than 86 percent--from $299 billion in 1993 to more than $550 billion in 1999. U.S. exports surpassed $2,350 billion in 1999, making up slightly more than 25 percent of overall GDP and more than 15 percent of all global trade.16
The
growth in the U.S. economy also benefits people in poor countries
who have access to the U.S. market, where both the demand for goods
and services and levels of remuneration are much higher than they
would be at home. To trade at this level enables their nascent
businesses to acquire capital, fueling production and fostering the
development of new industries. Impoverished people gain the
opportunity to earn better wages, acquire more goods, and raise
their standard of living.
In
other words, this is a win-win scenario for Americans and people of
countries that have been mired in poverty despite years of foreign
aid.17 The advantage for
poor countries in being able to trade for capital--rather than
having to rely on ineffective assistance programs that are subject
to waste or fraud--is that the payoff is more immediate in their
private sectors. Foreign investment allows their domestic
industries to develop and provide better employment opportunities
for local workers. This dynamic makes an increase in foreign direct
investment one of the most important benefits of free trade for
developing nations.18
Benefit #3: Free trade disseminates democratic values.
Free
trade fosters support for the rule of law. Companies that engage in
international trade have reason to abide by the terms of their
contracts and international agreed-upon norms and laws. The World
Trade Organization, for example, compels its member countries to
honor trade agreements and, in any trade dispute, to abide by the
decisions of the WTO's mediating body.
By
supporting the rule of law, free trade also can reduce the
opportunities for corruption. In countries where contracts are not
enforced, business relationships fail, foreign investors flee, and
capital stays away. It is a downward spiral that especially hinders
economic development in countries where official corruption is
widespread. As Alejandro Chafuen, President of the Atlas Economic
Research Foundation, has noted, "True economic freedom is possible
only under a system of limited government with a strong rule of
law. Economic freedom has little value if corruption in government
means that only a few will enjoy it."19
trade likewise can falter quickly in
countries where customs officials expect kickbacks at every
checkpoint. In Western Africa, customs officials can stop trucks
carrying goods as often as every hundred yards just to collect
another bribe, as Mabousso Thiam, executive secretary of the West
African Enterprise Network, testified at a 1999 Organisation for
Economic Co-Operation and Development (OECD) conference on
corruption.20 Such arbitrary
checkpoints spring up when countries cannot pay their customs
officials livable wages, forcing them to choose between remaining
honest but failing to bring home enough money to feed their
families or taking an illegal bribe, as others often do. As U.N.
Secretary General Kofi Annan has observed,
Corruption is built on everything being in
the hands of the government. So for everything you want, you need a
permit. The person who gives you the permit wants a bribe. The
person who's going to make the appointment for you wants a bribe.
And so on.21
Free
trade, reinforced by the rule of law, removes such incentives for
corruption by spurring economic growth, increasing the number of
better-paying jobs, and ultimately increasing the level of
prosperity.
But
free trade transmits more than just physical goods or services to
people. It also transmits ideas and values. A culture of freedom
can flourish whenever a great society, as 18th century economist
Adam Smith termed it, emerges with the self-confidence to open
itself to an inflow of goods and the ideas and practices
accompanying them. A culture of freedom can become both the
cornerstone and capstone of economic prosperity.
Benefit #4: Free trade fosters economic freedom.
As
the foregoing discussion shows, the ability to trade freely
increases opportunity, choices, and standards of living. Countries
with the freest economies today22 generally have
adopted a capitalist model of economic development, remaining open
to international trade and investment. These countries include the
United Kingdom and many of its former colonies and dominions: Hong
Kong, Singapore, New Zealand, the United States, Australia, and
Canada.
Chile, which benefits from a diverse
European heritage, likewise demonstrates that basing economic
policies on a capitalist free-market model brings good results in
that region as well.
Heritage's analysis of the 161 countries
covered in the Index of Economic
Freedom , published annually with The
Wall Street Journal , indicates that free trade policies can
foster development and raise the level of economic freedom. Every
day in the marketplaces of free countries, individuals make choices
and exercise direct control over their own lives. As economic
growth occurs, note World Bank economists David Dollar and Aart
Kraay, the poorest people can benefit just as much as--and in some
cases more than--the wealthy.23 With a sound
infrastructure based on economic freedom, assured property rights,
a fair and independent judiciary, the free flow of capital, and a
fair system of low taxation, poor countries can create an
environment that is friendly to trade and inviting to foreign
investors.
Consider the experience of China and Taiwan. In 1960, real per capita income in the People's Republic of China tracked closely with that of the Republic of China on Taiwan. In the late 1960s, however, the government in Taipei chose to institute widespread reforms to guarantee private property, establish a legal system to protect property rights and enforce contracts, reform the banking and financial systems, stabilize taxes, distribute public land to individuals, and allow the market to flourish. The result for Taiwan has been an astounding record of economic growth. (See Chart 2.)
The
2000 Index of Economic Freedom ranks
Taiwan as the 11th freest economy in the world. With its economic
freedom came the rise of democratic institutions. For the first
time since the ruling party (the Kuomintang, or KMT) established a
government in Taipei 50 years ago, a democratic transition of power
took place in Taiwan as Chen Shui-bian, a candidate from a
previously outlawed opposition party, assumed the presidency on May
20, 2000.
Despite this success, opponents of
permanent normal trade relations with China argue that trade and
economic liberalization will not bring democracy to mainland China
or improve its human rights record. These critics assert that
democracy is simply too foreign to the mainland--an argument that
ironically echoes the mutterings of Asian authoritarian regimes
about "Asian values." The development of political and economic
freedom in Taiwan refutes such claims and points to the potential
that more political and economic freedom can develop in China. Such
an outcome would be in America's best interest> because it would
enhance regional stability, increase prosperity for the Chinese,
and open China's immense market to Americans.
The
U.S. trade agreement with China signed by the Clinton
Administration in November 1999 is a step in the right direction.
It will help open the Chinese market to American exports and
foreign direct investment to an unprecedented degree. Economic
freedom is the biggest benefit of trade extension, both for
American companies looking to invest in China and for the Chinese
people themselves. These foundations of economic freedom not only
will allow the Chinese people to gain access to the outside world,
but also will expose the Chinese government to--and compel it to
enforce--the international consensus on the rule of law. Such
issues as property rights and honoring contracts, which companies
historically have found to be a problem when trying to make deals
in China, will be subject to a higher force.
Establishing the backbone of property
rights and free-market policies is essential for creating the sort
of market stability that is important to foreign investors. In
countries with an established rule of law that does not ebb and
flow from one leader to the next, foreign investors are more
confident and willing to take risks in bringing businesses into
developing nations. It is one reason Taiwan and Hong Kong, for
example, have flourished over the past few decades.24
Taiwan's success demonstrates that if
China opens its market, economic and political freedom will have a
real chance to develop. Members of the U.S. House of
Representatives, by approving permanent normal trading relations
(PNTR) with China on May 24, 2000, demonstrated their confidence in
economic freedom by voting to lend U.S. assistance to this endeavor
through freer economic exchange. Members of the U.S. Senate will
have the same opportunity to endorse economic freedom when they
vote on the matter in September.
It
is reasonable to wonder how the concept of economic freedom, the
fruits of which are so easily identified in wealthier countries,
can apply to desperately poor countries that are concerned
primarily with food supplies and access to running water and
electricity. How does one draw conclusions from an
apples-to-oranges comparison of prosperous high-technology
countries, where children surf daily on the Internet using the
family computer, and low-income nations like Burkina Faso where
most children live in families that scrape by on little more than
subsistence-level farming.
Indian economist Barun Mitra explains it
succinctly: "Traders in the marketplace are like voters in a
democracy. If [the] free flow of ideas is essential to sustain
political freedom and a democratic polity, then free trade is
critical to sustain economic freedom and an efficient marketplace.
Liberty, after all, is indivisible."25 Countries that
suffer under overregulation, corruption, and the lack of the rule
of law benefit by removing barriers to trade and allowing their
citizens to participate directly in the global marketplace.
Often, countries in Asia and the West can
be widely disparate in the cultural and political realms, with
economic repression and economic freedom existing in both regions.
Nonetheless, a basic structure upon which to build economic freedom
can be found in countries as different as Bahrain (an Arab
monarchy), Singapore (an authoritarian city-state), the United
States (a constitutional democracy), and Switzerland (a federal
system of cantons encompassing at least four different
cultures).
As a
whole, sub-Saharan Africa remains the most economically unfree and
poorest area in the world; but as the Index analysis shows, its poverty is not
the result of insufficient levels of foreign aid: On a per capita
basis, many sub-Saharan African countries receive the world's
highest levels of economic assistance.26 Rather, the main
causes of poverty in sub-Saharan Africa are the lack of economic
freedom embodied in self-imposed policies, and systemic and rampant
corruption.
In
fact, corruption is a cancer on the most legitimate efforts to
promote economic development in many of these countries. While this
is hardly a problem unique to Africa or developing nations, it is
all the more damaging to them. The outlook for this region is not
hopeless, however: Mauritius, which received the highest Index ranking in the region, has had some
success in adopting free-market practices. Compared with other
countries in its region, it merits relatively favorable scores in
black market activity and regulation.
The
Index findings for sub-Saharan Africa
cast doubt on the assertion that huge transfers of wealth from
industrialized nations to the less developed world will result in
economic growth. The people of Zimbabwe and Congo, to name just two
examples, are not poor because people in the West do not share
enough of their wealth with them. They are poor because their
governments pursue destructive economic policies that depress free
enterprise or allow corrupt practices to derail the rule of law.
Only when their ruling regimes increase economic freedom and
unleash the power of the free market can these people embark on the
road to prosperity. Anything short of free trade policies will
continue to be both economically unwise and inhumane.
The
United States can promote economic freedom in these countries
through more effective means than economic assistance. As noted
above, the United States imposes tariffs that add to the cost of
selling products in the U.S. and makes imported goods less
competitive with domestic products. Although America's average
tariff rate of 2 percent is low by global standards,27 the United States
does not apply its tariff rate evenly on products that it purchases
from its trading partners. Instead, it applies the tariffs
according to the types of goods that reach America's shores.
Regrettably, the goods that face the
highest U.S. tariffs are precisely those produced by the poorest
countries, such as agricultural goods, textiles, and apparel. The
high level of tariffs combined with the impact of quotas is
prohibitive for countries struggling to create a presence in the
global marketplace and lift their people out of decades of
poverty.
This
disparity in tariff rates exists primarily because poor countries
tend to export more of the types of commodities that are subject to
high U.S. tariffs. Low-income countries develop industries that
meet the basic needs of their people and for which they have a
comparative advantage. The textile and apparel industries and
agriculture are key economic activities because they satisfy
domestic needs and do not require sophisticated machinery or large
amounts of capital to turn a profit. What they do require--and what
these nations have--is a large labor force.
Consider Nepal and Bangladesh, in which
textile and apparel products make up 85 percent and 77 percent of
total exports, respectively.28These countries,
with per capita GDPs of less than $300 each, face significant
obstacles in trying to sell their products in the U.S. market. The
average U.S. tariff rates on their products are 13.2 percent and
13.6 percent, respectively--more than six times the U.S.
average.
The
impact of these tariffs depends on their size and the
responsiveness of U.S. consumers to the price changes on the
products. In the case of some textile and apparel29 and
agricultural imports, consumers are highly sensitive to price
changes and will buy a domestic product rather than an imported one
should the latter become too expensive. For example, for every 1
percent increase in the tariff rate for imported knitted fabrics,
consumption of domestic knitted fabrics increases by over 2.9
percent.30 Thus, even a small
increase in the tariff rate will discourage the purchase, and
ultimately the production, of these imports, restricting primarily
the access of developing countries to America's large market.
Ironically, any benefits that the tariffs
may produce for the U.S. economy are miniscule compared with the
total cost Americans pay for this protection. Economists at the
Institute for International Economics estimate that consumers would
save $70 billion if the United States eliminated all tariffs and
quantitative restrictions on imports--or about $750 per American
household.31 Approximately 35
percent of these gains--or $24.4 billion--would accrue from
liberalizing the apparel and textile sector. This is the purpose of
the Agreement on Textiles and Clothing, which requires that all
quotas on textile imports must be eliminated by 2005.
In
the end, tariffs the United States applies to protect a sector that
is naturally in decline will impose a significant cost on American
consumers and the people of the low-income countries who make the
products and lack other job opportunities. When a factory shuts
down in Bangladesh or Nepal (in part because of the impact of
prohibitive U.S. tariffs on its products), the unemployed have no
safety net and few alternatives.
By
comparison, the United States offers displaced workers numerous
opportunities to find new jobs. The trade Adjustment Assistance
program, for example, helps people who lose their manufacturing
jobs as a result of foreign imports to apply for welfare benefits
and receive job training and job search and relocation assistance.
The unemployed in America are able to find a new job in a median of
6.4 weeks.32
Reducing America's tariffs, promoting
bilateral and regional free trade agreements, and working within
the World Trade Organization to promote economic freedom through
international trade is the best way to help Americans and the
peoples of the developing world. The September 2000 vote in the
U.S. Senate on granting China permanent normal trade relations will
be both a key test of America's commitment to free trade and a
crucial opportunity to improve economic freedom and choice for
people in both the United States and China.
Conclusion
Societies that enact free trade policies
create their own economic dynamism--fostering a wellspring of
freedom, opportunity, and prosperity that benefits every citizen.
In recent years, the United States has demonstrated the power of
this principle. Nor are American citizens alone in benefiting from
those free trade policies that the U.S. enacts. By breaking the
cycle of poverty, America's free trade policies can enable even the
most impoverished countries to begin to create their own dynamic
toward prosperity.
Nevertheless, despite all the evidence to
the contrary, the opponents of free trade will continue to espouse
the old argument that "the jobs created by globalization are often
less sustaining and secure than the livelihoods abolished by it [in
poor countries]."33 Such a claim
presupposes that some sort of agrarian utopia previously existed in
these countries and that their peoples will not reap the benefits
of economic development.
Clamoring to stop this wave of economic
progress carried forward by technology and innovation is akin to
arguing that the United States, to cite just one example, was
better off before the Industrial Revolution. While one might argue
that this was true of the white male members of the landed classes
(although even then such a claim is dubious), for the majority of
the population that did not enjoy such luxury, quality of life has
improved immeasurably.
The
Industrial Revolution brought freedom of movement and increased
opportunity to all economic levels of society. It also set the
stage for social and democratic progress of a magnitude that would
have been impossible earlier. And although history suggests that
this new era of market globalization may well be accompanied by new
problems for which the solutions once again will lie in the power
of human ingenuity and innovation, it also presents an
unprecedented level of opportunity for people to achieve economic
freedom and greater prosperity.
Denise H. Froning is a
former Trade Policy Analyst in the Center for International Trade
and Economics at The Heritage Foundation.
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