Commentary

America Today Mixes Trade and Prosperity

By Daniel Griswold
February 17, 1999

If the American economy were a person, it would blush at all the praise lavished upon it in recent days. In his State of the Union speech on January 20, President Clinton hailed “the longest peacetime expansion in our nation’s history.” The next day, Federal Reserve Chairman Alan Greenspan told a House committee that our economy entered the New Year performing “in an outstanding manner.”

This is not mere flattery. The unemployment rate, at 4.5 percent, is at its lowest level in more than 25 years. Real wages are rising smartly all up and down the income scale. Since the expansion began in 1991, the economy has created 18 million net new jobs, manufacturing output is up 40 percent and real business investment is up 75 percent (see chart).

Behind this full-throttle expansion is an almost imperceptible inflation rate of 1.5 percent. In fact, last year the sum of the annual inflation and unemployment rates — the famous “misery index” — was only 6 percent, the lowest it has been since the early 1950s.

One aspect of our economy today that has attracted far less attention is America’s growing — and now unprecedented — integration with the global economy. At no time in the last 130 years have Americans spent and earned so much money abroad in relation to the size of our economy. In both 1997 and 1998, for the first time since before the Civil War, the two-way flow of trade and investment income across our borders reached 30 percent of gross national product. Last year (based on figures through November), two-way current account transactions totaled an estimated $2.5 trillion. Exports of goods and services amounted to more than $930 billion and imports $1,100 billion, with investment income paid on American assets abroad and on foreign-owned assets in the United States combined topping $500 billion. By comparison, in the mid-1960s the ratio of trade and investment income flows to GDP was only 10 percent. Simply put, the economic prosperity America is enjoying today comes at a time when trade has never been more important to our economy.


Far from being the ruin of our economy, expanding trade has been an integral part of its current success.


The juxtaposition of these two undeniable facts — economic prosperity and record trade — places protectionists in an uncomfortable box. After all, the Pat Buchanan-Ross Perot-Ralph Nader-labor union coalition has been preaching that free trade and mobile capital cause (a) unemployment; (b) falling wages; (c) deindustrialization; (d) investment flight; or (e) all of the above. Yet the patient has drunk a full chalice of the free-trade poison, and it not only lives, it thrives!

This inconvenient reality has reduced anti-free-trade activists to a form of denial. While most Americans see an economy headed in the right direction, the protectionists want us to see dislocation, decline and defeat. Labor and Naderite opponents of the North American Free Trade Agreement, for example, are forced to argue on its fifth anniversary that NAFTA has eliminated a huge number of jobs, when in fact the U.S. economy has reached full employment by just about anybody’s definition. Pat Buchanan’s nostalgic 1998 book on trade, The Great Betrayal, seems especially ill-timed. Buchanan yearns for a golden past when Americans were so much better off because we could not buy televisions made in Mexico, shoes made in Brazil, cars made in Japan, toys made in China and computer chips made in Malaysia. Instead of seeing a dynamic and deregulated American economy that today is leading the world into the information age, he points to the trade deficit, the rise of Wal-Mart, falling union rolls, and the decline of manufacturing jobs since 1980 as evidence of “a nation that has begun its descent.” In the face of a steady drumbeat of positive economic news contradicting his thesis, Buchanan has turned in his syndicated columns to the mantra, “We shall see.”

Far from being the ruin of our economy, expanding trade has been an integral part of its current success. American companies consume more than half of the trillion dollars of goods and services we now import annually. More open access to raw materials (including oil), capital goods and intermediate inputs reduces production costs, allowing U.S. firms to price their final goods more competitively at home and abroad. Competition from foreign producers spurs American firms to greater innovation and efficiency, rewarding consumers with better products at better prices.

Of course, trade leads to the elimination of some jobs as it creates other (usually better paying) jobs. In this way, trade is like technology. It shifts employment, capital and resources from less productive to more productive sectors — enhancing the general prosperity of society even as it causes some painful dislocations.

The dynamic impact of trade can be seen readily in places such as the Interstate 85 corridor that runs through Virginia, the Carolinas and Alabama. In the last five years, the region has lost an estimated 35,000 jobs in the apparel, furniture and textile industries. But that is less than half the story. Today, according to a recent report in the Wall Street Journal, “the corridor is booming with semiconductor plants, pharmaceutical companies, auto-assembly operations and new steel mills that export to markets around the globe. In all, the corridor has added about 65,000 new manufacturing jobs despite the losses in textiles and furniture.”

In his testimony, Greenspan warned that any drift in Congress toward protectionism would blunt the expansion and could send the stock market reeling by undermining expectations for future profits. “Protectionism was a threat to standards of living when capital asset values [read: stock prices] were low relative to income. It becomes particularly pernicious in an environment, such as today’s, when that is no longer the case.”

In America today, trade and prosperity are a package deal. Americans who are tempted to follow the protectionist pied pipers should ask themselves if they really want to put at risk the unprecedented prosperity now benefiting the vast majority of Americans.

Daniel T. Griswold is the associate director of the Center for Trade Policy Studies at the Cato Institute, and co-editor of the forthcoming book Economic Casualties.