Topic: Trade and Immigration

The Good News behind This Morning’s Trade Deficit Report

This morning the U.S. Commerce Department reported another record deficit in the America’s broadest trade account with the rest of the world. In the July-September quarter of 2006, the U.S. current account deficit reached $225 billion, another record. The current account is the broadest measure of America’s international commerce, comprising not only trade in goods and services but also income flows from foreign investment and unilateral transfers such as foreign aid worker remittances.

The report is bound to throw more fuel on the debate over U.S. trade policy. Here’s how the Associated Press described the political fallout from the latest trade numbers:

“Democrats, who took over control of the House and Senate in the November elections, attacked President Bush’s trade policies, charging that the administration has run up record deficits for five straight years by failing to protect U.S. workers from unfair foreign trade practices.” 

To all this hand-wringing about the trade deficit, I say, “Bah Humbug.” The trade deficit itself tells us very little about the success or failure of U.S. trade policy. It is largely driven by differing rates of savings and investment in the United States and our major trading partners. (Check out http://www.freetrade.org for the details.)

Obsession with the trade deficit also obscures the real story behind this morning’s trade numbers: Both our imports and exports are rising at a healthy rate.

Compared to the third quarter of last year, U.S. imports of goods and services from the rest of the world are up 12.7 percent while our exports are up an even steeper 14.1 percent. America’s total two-way trade with the world, including income from investments, is up a spectacular 16.4 percent from a year ago. Imports, exports and investment income have all reached record levels.

The bottom line: Despite the complaints of politicians, Americans have never earned or spent a higher share of their income in the global economy than we do today. We are voting with our dollars every day for more trade and globalization.

What We Do Next Is Correct the “Powerful Perception”

Reihan Salam comments on Alan Reynolds’ important op-ed in yesterday’s Wall Street Journal:

Anyway, even if Reynolds is right and we haven’t actually seen as big an increase in inequality as most observers believe, we still have a powerful perception that is driving political outcomes, including the drift of centrist Democrats away from pro-market policies. Merely pointing out that the statistics are somehow misleading (an important and valuable contribution if it’s true) won’t change that. So even if Reynolds is right, the political question — what do we do next? — remains an open question.

I find this a puzzling statement. The “powerful perception” of outsized increases in inequality is driven in large measure by the drumbeat of media rhetoric played to the time of misread inequality stats. If correcting that mistake cannot change the false perception driving political outcomes, then what can?

If Reihan believes, as I do, that Reynolds is right, then he ought to use his voice as a political commentator to help try to correct the misperception. If the correct belief about inequality becomes more widespread, then inequality will be seen as less of a problem and demand for policies meant to “fix it” will start to dry up. Then, maybe, what we do next won’t be misguided or counterproductive.

Signs of Sanity at the International Trade Commission

Today is a pretty good day, as far as trade policy goes.

This morning, pursuant to a five-year “Sunset Review,” the U.S. International Trade Commission voted to revoke longstanding antidumping and countervailing duty restrictions against imported carbon steel plate and corrosion-resistant steel from 15 different countries.  The ITC also voted to continue the measures against corrosion-resistant steel from Korea and Germany for at least another five years.

While not perfect, today’s outcome is something to rejoice.  Revocation of trade remedy restrictions is rare, indeed, and rarer still where steel is concerned.

As described in this recent paper, the U.S. steel industry is doing phenomenally.  And given the dramatic growth in demand for steel in other regions of the world, today’s decision is unlikely to produce a significant surge in U.S. steel imports.  But at least now, U.S. steel consuming industries, which have been forced to endure some of the highest steel prices in the world on account of the limited competition, will have greater flexibility and negotiating leverage to counter the growing market power of the domestic steel industry.

WTO Membership Promotes a More Open China

Each year the U.S. Trade Representative’s Office issues a report on the status of China’s compliance with its obligations as a member of the World Trade Organization to open its market further to global competition. Mandated by law, the most recent report was issued yesterday, all 109 pages, and it is generating media buzz (check out this New York Times story, for example) for its critical comments about China’s failure to fully comply with its commitments.

The report was certainly well timed to make a spalsh. This week, a high-powered U.S. delegation is heading to China, led by U.S. Treasury Secretary Henry Paulson and including Federal Reserve Chairman Ben Bernanke. The delegation aims to cajole the Chinese to speed up not only trade liberalization but the flexibility of their currency.

This week also marks the 5th anniversary of China’s accession to the WTO as its 143rd member after 15 years of negotiations. As a condition of its entry, the Chinese government agreed to lower tariffs on imports and open its market further to foreign investment and services trade. After five years, the phased implementation process is officially over.

I’ve been reading through the USTR’s report today and I think the news media have been somewhat hyping its negative aspects (surprise, surprise). It does rightly criticize China for not doing enough to stop piracy of intellectual property and to freely allow certain imports and services. But the report also notes impressive progress.

China’s market is significantly more open today than it was even five years ago. For example, before its accession, China did not allow foreign-owned companies to freely import, export, and distribute goods within China. Today those so-called trading rights are widely permitted. China’s tariffs on goods of the greatest importance to U.S. industry have fallen from an average of 25 percent in 1997 to 7 percent. Tariffs on information technology goods from the United States have fallen to zero. Overall U.S. exports to China are up 35 percent so far in 2006 compared to last year and are up 158 percent since 2000.

My Cato colleague Daniel Ikenson goes beyond the USTR report in an op-ed titled “Toasting China: Why Their WTO Membership is a Blessing,” to show that China’s entry into the WTO has been good for the U.S. economy.

All in all, this should be a happy anniversary for everyone who supports freer markets and expanding trade.   

More Trade, More Jobs, Higher Wages

Critics of international trade argue that imports mean fewer jobs and lower wages for American workers. They repeat this mantra despite plain evidence to the contrary.

The latest evidence comes this morning with another U.S. Labor Department report that the U.S. economy continues to create new jobs at a healthy clip. U.S. payrolls grew by another 132,000 in November. The unemployment rate ticked up slightly to a still relatively low 4.5 percent because new workers surged into the labor market.

In the past year, total payroll employment has jumped by 1.8 million. Since mid-2003, payroll jobs have grown by 6.2 million, and since 1990 total payroll jobs have grown by 27 million. That impressive job growth has occurred against a backdrop of rising U.S. trade with the rest of the world, so clearly trade does not mean fewer jobs for American workers.

What about wages? They too are rising again, according to the same labor-market reports this morning. Average wages are up 4.1 percent from a year ago, ahead of inflation. When benefits are added, total compensation for U.S. workers continues to rise faster than inflation and is up significantly in real terms compared to previous years.

Like technology, trade can cause turnover in the labor market. But also like technology, trade raises the overall productivity of American workers, leading to better jobs and higher real wages.

The best analysis on this subject remains the 2004 Trade Briefing Paper, “Job Losses and Trade: A Realty Check,” by my Cato colleague Brink Lindsey.

Lou Dobbs Watch

The “Lou Dobbs Tonight” show on CNN long ago ceased to be a serious news program and has become a nightly screed against free trade, immigration, and a competitive, market economy. The opinions expressed by Lou Dobbs, his “correspondents,” and the large majority of his guests are typically based on questionable and selective facts that miss the real story.

Consider a “Lou Dobbs Tonight” segment the other night on how a “flood” of imports into the United States has caused “the incredible deterioration of the manufacturing industry.” The program’s anchor that night, Kitty Pilgrim, blamed the development on “the commitment of successive administrations to so-called free trade policies.”

The segment featured two biased CNN correspondents plus three guests who are all professional critics of trade: Alan Tonelson of the U.S. Business and Industry Council, an organization of generally declining, protectionists industries; Robert Scott of the Economic Policy Institute, a labor-union backed research group; and Bob Baugh of the AFL-CIO, the largest union umbrella organization.

As for the facts, nowhere in the segment was it mentioned that American factories are producing more goods than ever as measured by inflation-adjusted volume. U.S. manufacturing capacity and production have actually increased by 50 percent, in real terms, since the early 1990s, when such important trade agreements as the North American Free Trade Agreement and the Uruguay Round Agreements Act went into effect. Domestic output of automobiles and parts, a special focus of the CNN segment, is also much higher than in the earlier, pre-NAFTA, pre-WTO days.

As Cato research has shown, imports of manufactured goods and domestic output of manufactured goods tend to rise and fall together along with the overall health of the U.S. economy. When we prosper, we trade; when we trade, we prosper.

Apparently the “Lou Dobbs Tonight” program won’t let a few basic facts get in the way of a sensationalized story. Perhaps CNN should change its name to the Cable Opinion Network, or CON for short.

A Timely Chiding from the Washington Post

Today’s editorial in the Washington Post is a timely reminder of the negative consequences if Congress does not renew certain non-reciprocal trade preference deals (mainly allowing developing countries to import certain goods to the United States tariff free).

Although it strikes a somewhat mercantalist tone (e.g., it seems to imply that there may be reason to block trade deals if they do not “save American jobs”), the editorial board is right to say that the benefits to the United States from renewing these deals, both economic and political, certainly outweigh any “costs” from opening up trade that some members of Congress usually get upset about. Extending permanent normal trade relations to Vietnam (a topic I have blogged about here and talked about in this podcast) should be an especially simple matter.

I am a little skeptical about the long-term benefits of non-reciprocal trade preferences; they can lead to a culture of dependency and concentration in certain industries, and create political constituencies against multilateral trade liberalization, for example. But I wouldn’t go so far as to say that the problems related to these types of deals generally are sufficient to outweigh the benefits of approving the particular deals under consideration. In any case, somehow I doubt that the nuanced arguments against development-related unilateral preferences are the reason behind failure to pass the deals. The Washington Post suggests the inertia may be due to simple laziness. Surely not?