Since the end of World War II, the United
States has promoted free trade in the General
Agreement on Tariffs and Trade, the World Trade
Organization (WTO) and regional pacts such as the
North American Free Trade Agreement.
The
objective is to promote growth by encouraging
trade based on comparative advantage. The logic:
let national economies specialize in what they do
best, higher productivity and lower prices will
follow, and everyone can live better.
Now,
thanks in significant measure to resistance from
developing
countries led by China, India
and Brazil, the Doha Round of WTO negotiations is
almost certain to fail. US President George W Bush
faces tough resistance in Congress to new trade
agreements with Latin American and Asian
countries.
The reasons are simple. China
is doing well playing by mercantilist rules, and
other developing countries know it. Trade
agreements are destroying more good-paying jobs
than they are creating for many ordinary
Americans.
In the United States, the
current free-trade regime is creating peculiar,
unintended inequalities. Large US multinationals
can grow their profits more rapidly by investing
in highly protected foreign markets such as China
and India than by building new facilities in such
US states as California and Indiana. This creates
high-paying jobs for business- and law-school
graduates who manage globalized enterprises;
however, it pushes many ordinary Americans, whose
jobs are outsourced, into low-paying employment
waiting tables in restaurants and cleaning
offices.
Annually, the United States
exports about US$1.5 trillion in goods and
services, and this finances a like amount of
imports. So moving workers from import-competing
to export industries pushes up gross domestic
product (GDP) by about $160 billion, thanks to
higher productivity in export industries. However,
US imports exceed exports by an additional $800
billion, and many workers released from making
those imports go into activities that do not
compete in trade, where productivity is at least
50% lower. That slashes GDP by between $400
billion and $500 billion.
Netting out the
effects of the trade deficit, free trade is
pushing down GDP by at least $250 billion
annually, and those losses are mostly visited on
ordinary workers. It is easy to see why workers
displaced by imports are getting jobs that pay
less, and Congress members representing them are
getting heat about approving new free-trade
agreements.
The root causes are badly
negotiated agreements - the United States has
opened its markets more than its trading partners
- and opportunities for currency manipulation,
unforeseen when the Western economies moved away
from a system of fixed exchange rates in the
1970s. These permit some countries to accomplish
unfair advantages if their aggressive actions go
unanswered.
US trading partners in Asia
have suppressed the values of their currencies
against the US dollar and the euro, maintain very
high tariffs, have imposed arcane regulations on
foreign investors, and have perfected various
mercantilist devices to create a $435 billion
annual trade surplus with the United States.
Annually, China prints and sells in
foreign-exchange markets more than $200 billion
worth of yuan to keep its currency and goods cheap
in North American and European markets. Other
Asian governments must follow similar strategies,
lest their exports become uncompetitive against
Chinese products.
The Bush administration
reasons that China will eventually conclude that
these practices do not serve its self-interest and
quit them, because Western economists theorize
that printing so many yuan will create inflation
in China and protectionism will undermine growth.
Unfortunately, China has figured out how
to make mercantilism work like no other nation
since 18th-century France. While growth slows to
less than 2% a year and inflation remains a
nagging problem in the United States, growth rocks
along at 10% and inflation at about 2% in China.
China's strategy is simple. It subsidizes
exports into Western countries' open markets while
locking out imports, tightly regulating foreign
investment and permitting the theft of
intellectual property on a scale the Dalton
brothers [1] would envy. If the United States and
the European Union behaved as China does, China
would not be enjoying the success it does. If
fact, unemployment would likely break the Chinese
Communist Party's grasp on power.
Instead,
as the United States touts market reforms and free
trade around the globe, developing countries look
at China with amazement and aspire to emulate its
accomplishments. At home, US workers are losing
good jobs and confidence in free-market policies -
they have just elected a Democratic majority to
Congress with decidedly left-leaning,
anti-business leadership.
Six years of
Bush administration diplomacy have failed to
persuade China to change, and the only option left
to the United States is to impose tariffs on trade
with China to offset the unfair advantages its
currency and trade protectionism have created. Yet
anyone who proposes such a policy is branded a
protectionist by the Bush administration, large
multinational corporations and the business press.
Unfortunately, if the United States does
not confront Chinese mercantilism directly, China
will never change, and free trade will surely be
the casualty. Developing countries will emulate
China's example, and populist politicians will
turn American voters away from the market
deregulation and pro-growth strategies that have
served so well since presidents Jimmy Carter and
Ronald Reagan. Stagnation will follow as
surely as night follows day, and keeping free
trade alive will be the least of our problems.
Note 1. The brothers
Gratton, Bob and Emmett Dalton, all former lawmen,
led an infamous outlaw gang of train and bank
robbers in the western US in the 1890s.
Peter Morici is a professor at
the University of Maryland School of Business and
former chief economist at the US International
Trade Commission.
