Making the Case for Free Trade

Based on Remarks at Cato University, Quebec, Canada, October 30, 2004.

I’m happy to talk about how to explain the benefits of free trade to the public. It took me until I was about 35 years old to figure out that that is my calling in life, explaining free trade, and doing it not just to the high and mighty in Washington, but to people around the country and hopefully around the world. I’ve spent two thirds of my adult life outside of Washington, D.C. Twelve of those years were in Colorado Springs, Colorado, as an editorial page editor, writing daily editorials for 100,000 different households in a community that’s very much a slice of Middle America.

How we explain the benefits of free trade is hugely important today. Trade and globalization are being debated on cable TV every night. The expansion of trade and foreign investment is determining the shape of our world. And it is controversial among the public if not in the economics profession. Surveys of economist show that a large majority free trade is the right policy. Study after study confirms what theory has long taught, that countries open to trade grow faster and achieve higher incomes than those that are closed.

The public does not share the view of the economics profession on trade. People have a general notion that trade is good for the country, but then they have all sorts of qualifications. Most people will accept trade as a general principle as long as we require minimum labor and environmental standards in poor countries and protect U.S. workers. So you see this gap between the economics profession and the public.

This gap persists despite 200 plus years of having “The Wealth of Nations” by Adam Smith. If you haven’t read “The Wealth of Nations,” I would highly recommend it, especially Book IV. Adam Smith’s writing is so lively and applicable to today. Then we have the French economist Frederic Bastiat. I’m not sure how anybody could explain free trade better than Bastiat. And yet, here we are, 150 years later, still debating and trying to explain free trade.

The Free Trade is an Uphill Battle

Why is it such an uphill battle? There are a number of reasons. One reason is that, and Bastiat himself noted this, we have “what is seen and what is unseen.” The “cost” of free trade is quite visible. It’s that textile factory in North Carolina that gets shut down or the call center that gets moved to India. In contrast, the benefits of free trade – the lower prices, the new opportunities created – tend to be spread out and harder to see, posing more of a challenge for a TV news crew to find compelling footage.

A second reason is that the political scales are imbalanced. The benefits from trade are diffused. It’s saving $10 when you go to Wal Mart because of free trade. You’re hardly aware of it. But the costs are concentrated. The textile industry in the United States, for example, believes it has a lot to lose from free trade. They will hire the lobbyists. They will fly off to Washington. They’ll buy the ads in the newspaper. The people who benefit from protectionism tend to be more noisy and more influential.

A third reason is that, in some ways, we’re victims of our own success. Free trade has been on the ascendancy in the postwar era. It’s the rule rather than the exception in countries like the United States and Canada. And therefore, everything that people have a gripe about, they blame it on free trade. “Yes, we’ve opened up our economy, and look at all these problems we face” – even if none of them are caused by expanding trade.

Five Tactical Ways to Highlight the Benefits of Trade

Enough of my whining about the difficulties of explaining free trade. What do we do about it? Let me suggest four or five tactical approaches – pointers for when you’re talking about trade in that cocktail party or over the lunch counter, or with your mom and dad or your uncle on the phone. Then I will discuss three battle grounds, or how to choose your terrain.

Here are some tactical approaches:

Know your facts. There is no substitute for being informed about an issue. Having that well chosen, appropriate statistic or number, that illustration, puts teeth into your argument. Read the newspaper or the Economist magazine. Go to www​.free​trade​.org, the web site for Cato’s Center for Trade Policy Studies. You will find all sorts of good facts and figures and information about trade. Reality is on our side on this issue, and we should know that reality well.

Talk in concrete language. Use lively, real life, flesh and blood examples. Yes, the theory is on our side. Yes, there are abstract arguments for trade, and they are wonderful to explore. But put flesh on the bones. For example, when you are talking about the trade deficit, you can say, “I run a trade deficit every year with my dentist. I buy services from my dentist, and she doesn’t buy a thing from me. And yet I am better off.” That’s the kind of example that often works.

Put protectionists on the defensive. Instead of defending free trade from all of these different angles, point to the visible costs of protection. And there is still plenty of protectionism around in the United States, in Canada, on textiles, apparel, agriculture goods, and steel. Point the spotlight on those and describe what protectionism is doing to the people who are forced to pay higher prices or who lose their jobs because of trade barriers. Put them advocates of protection on the defensive, and ask them how they can you defend this protectionist regime?

Acknowledge the short‐​term pain up front. Yes, some people lose their jobs when we lower trade barriers. Some domestic companies and sectors cannot compete against foreign competition. Not every single person or every single company wins from more global competition. To acknowledge that up front is intellectually honest. It also makes you look more compassionate and credible.

And, finally, go with the prejudices of your audience. Use their language and values to make your case. Go with what works, what resonates with people, using facts, using appropriate arguments, but working with what you’ve got. I’ll expand on this point in a moment. Two Approaches that Often Fall Flat

There are two approaches that I’ve found less persuasive. They are perfectly legitimate, but for some reason they just don’t resonate with people. One is the individual rights argument. “What right does the government have to tell me how I spend my money? If I want to buy something in China or Africa or India, that’s my basic right. Government should stay out.” To me, that would be reason enough to support free trade and oppose trade barriers, but most people just don’t buy that. They want to hear something more concrete.

The other approach that doesn’t seem to work that well is touting the consumer benefits. Any economist will tell you that consumer benefits are the big payoff from trade – lower prices, better quality, more choice. But for some reason that argument doesn’t arouse the passions of people. People have a sense that consumption is sort of grubby and selfish. We think of two Lexuses in the driveway and eating too much. Lou Dobbs, in his little 2004 book, Exporting America, dismisses the consumer benefits of trade as “saving a few cents on tee shirts and trinkets.” People just can’t relate to saving $20 here, $30 there, when they see a factory shutting down and 4,000 people laid off.

Choosing Your Battle Ground

The key to communicating the benefits of free trade is to move the debate to our strongest ground. What is important to people in the trade debate? They want to talk about exports. They want to talk about production. They want to talk about jobs. Let us talk about each of those three prejudices in terms of free trade.

Yes, free trade is good for consumers, but it is also good for most producers. Obviously, free trade creates export opportunities. Seventy‐​five percent of the world’s spending power is outside of the United States. When it comes to farming, 96 percent of the human stomachs in the world are outside the United States. Our producers need to export. And when you export, you can specialize. You can enjoy economies of scale. People can immediately grasp that. Yes, exports are good. Reaching new markets is good. And wages are higher in export industries. These are good jobs that are typically created that pay 13 to 18 percent more than your typical job in the domestic, non‐​exporting industries.

Trade Benefits for Producers

Another point is that companies and businesses are huge importers. Half of what we import to the United States each year is imported for businesses. They import raw materials, energy and lumber and cement and that sort of thing. They import intermediate components, parts, auto parts, computer parts, that go in for final assembly. And then of course they import re is capital machinery, machines that come in that make U.S. companies more competitive.

Here are some examples: A typical American computer has “Dell” or “Hewlett Packard” stamped on it, but most of it is made overseas. Maybe some of the most important parts are made in the United States, the brains of it, but the components, the hard drives, the flat panel display screens are made abroad. In fact, 60 percent of a typical American computer is made in the Far East. We are much better off because of that. We can afford computers in our homes, in our businesses. Our whole economy is more productive.

Consider steel. It was not one of President Bush’s finest moments when he imposed tariffs on steel in March of 2002. Yes, it probably kept one or two aging steel mills in business, but it raised the price of steel for a broad swath of U.S. industry – the automobile industry, the tool and die industry and other metal fabrication businesses, the construction industry. Those sectors use a lot of steel, and they paid a price for those tariffs.

One of the arguments the Cato Institute made that was quite effective in Congress in stopping steel protection was we pointed out that for every job in the steel industry, there are 40 jobs in the United States in industries that use steel as a component in its production. This was a perfectly legitimate free trade argument that also playing on this public desire to defend jobs. You want to protect jobs? There are more jobs in jeopardy from higher steel prices than are protected by higher steel prices.

Sugar is yet another example. Yes, sugar quotas cost costs U.S. consumers almost $2 billion a year, or $20 a year to a typical American household. But the quotas also cost jobs. Chicago used to be ringed by confectionery companies that would take sugar in as an important input and crank out Lifesavers and candy bars. In 2002 a Lifesaver factory in Holland, Michigan, announced it was moving to Canada because Canada allows sugar to be bought at the global price. We’re losing jobs because of sugar protection.

So again, you’re emphasizing the producer. You’re putting protectionists on the defensive. The sugar program is costing manufacturing jobs. The steel tariffs are costing manufacturing jobs.

When foreigners sell us something, they earn dollars, but then they have to do something with those dollars. They can’t pay their workers and suppliers back in Japan or China with dollars. They exchange the dollars they earn for their local currency, and then those dollars come back to the United States to buy our goods and services. They also come back to buy investment assets.

So what happens when we raise trade barriers? It’s harder for foreigners to earn those dollars to spend in our markets. So when you suppress imports into the United States through trade protection, you’re also going to see exports fall. You’re going to see foreign investment fall. And of course you invite retaliation, too. If we raise our trade barriers, other countries raise theirs. So import barriers put exports at risk. It’s a very important point to make.

Let me add a concluding word about production. We hear the charge that America is “de industrializing.” Here is where some simple facts can work so well. I just love to point out that, in the United States, we are manufacturing 50 percent more stuff than we were a decade ago. According to the Federal Reserve, manufacturing output in the United States is up 50 percent in the past ten year, double what it was in 1980, and triple what it was in the good old 1960s. We’re producing more stuff with fewer workers because they are so much more productive. Is that bad that our workers are more productive?

Trade and Jobs – The Real Story

This leads us to a third major battle ground – jobs. All right, you want to talk about jobs? Let’s talk about trade and jobs. Again, acknowledge the pain of workers laid off because of import competition, but we need to put those layoffs in the context of the tremendous job churn in a dynamic market economy. Our eye is always on the net jobs gained and jobs lost, but underneath that number are millions of jobs that are created and destroyed every year. This is the “creative destruction” Joseph Schumpeter talked about.

The U.S. Labor Department has actually tried to calculate total jobs lost and total jobs created, and what they found is that in a typical year, there are something like 30 million jobs in the U.S. economy that are eliminated, half of them permanently. Fifteen million jobs every year just disappear, never to come back again. The other 15 million are seasonal type jobs that disappear and then pop up again.

How many jobs do you think are lost from trade every year? It’s about 400,000. Those are jobs lost because of imports from China and other places that displacing U.S. production, from outsourcing, that sort of thing. To put that number in context, the U.S. economy employs 140 million workers. Of those, about 325,000 people every week are lining up for unemployment insurance. There is a story behind every one of them. So of the 15 million jobs that disappear permanently each year, trade and outsourcing accounts for 2 percent – 2 percent – of the total jobs displaced in the U.S. economy.

What eliminates the other 98 percent? Changing consumer tastes, new technology, domestic competition. Let’s put some flesh and blood on that fact. Kodak, the good old camera company, has laid off 25, 000 workers in the past two years. Because of outsourcing? Because of trade? No. Because of those nifty digital cameras that I bet just about everybody in this room owns. You contributed to putting a Kodak worker out of work with that digital camera. Would we seriously think of banning digital cameras to save those jobs? It would be ludicrous. And yet, that’s what we’re talking about when we consider restricting outsourcing or raising tariffs. When we talk about people who have lost their jobs from trade, we should talk about everybody who has lost their jobs for whatever reason. There is nothing unique about trade when it comes to jobs.

Free Trade and the World’s Poor

Another area of positive terrain for us that we shouldn’t give up is the poor and the world’s children. The highest trade barriers remaining in the United States are aimed at products that are disproportionately consumed by poor people at home and produced by poor people abroad. Our highest trade barriers are on farm products, on textiles and apparel and shoes. And not just all shoes. We have our highest trade barriers on low end shoes, the kind you would buy in a Pay Less Shoe Store. But not on the kind you would buy in a Gucci store.

A moderate Democratic think tank in Washington called the Progressive Policy Institute issued a study in 2004 that documented that U.S. tariffs are much higher on low‐​end goods than high‐​end goods. For example, the tariff on imported silk underwear into the United States is virtually zero, but the tariff on imported synthetic or low grade cotton is higher. So if you wear silk underwear, you get a low tariff. If you wear the regular kind of underwear like the rest of us, you pay a high tariff. This study calculated that a single mother with two children earning $20,000 a year pays an effective tariff on the goods she consumes that’s three times higher than what a single executive earning $100,000 a year would pay.

Our existing trade barriers are biased against the poor at home. A trade representative in Washington likes to say that our goal should “to make sure that every discount store in America is a duty free shop for working families.”

How about the world’s poor? Here’s a headline you probably didn’t see in your local newspaper:” Global Poverty Down by Half Since 1981.” The Share of the world’s population living on dollar a day or less has dropped from 40 percent then to 20 percent today, and that share is expected to continue to fall. And by the way, virtually all that progress has happened in poor countries that have progressively globalized. Places like Sub Saharan Africa, there is very little progress. In fact, the number of poor is rising in those places.

The World Bank could not find a single example of a poor country that had kept its markets closed and chased away foreign investment, and at the same time made progress against poverty. In other words, all the poor countries that followed our example, most of them have made progress against poverty. Those that follow the teachings of the anti globalization people have made no progress.

The evidence on trade and poverty became so overwhelming that Oxfam International issue a study in 2002 that, while critical of a lot of things in the global economy, came down firmly on the side of trade being a friend of the poor. And they pointed out that by getting rid of these rich‐​country trade barriers, we could deliver twice as much income to poor countries as all the aid we give them.

More trade, more democracy

Let me end up with a few thoughts about war and peace and democracy, another area where we’re on solid terrain and where this does resonate with people more than the consumer issues. And this is especially effective in the post 9/11 world. September 11th made my job of promoting immigration more difficult. It made the job of promoting trade liberalization a little bit easier.

Bob Zoellick, the former U.S. Trade Representative, was fast out of the block. He had an op‐​ed in the Post about a month after September 11th, saying this is one more reason to progressively pursue global trade, because trade promotes higher living standards, human rights, democracy, and more cooperation among nations. And he was on solid ground. That was not an opportunistic argument; it was a factual argument.

I think this especially works with older audiences, people who can remember, or at least their parents can remember, the Great Depression. We had the Smoot Hawley Tariff Act in 1930. It was a disaster by all measures. Let’s remind people of that. It’s a good history lesson. Granted, Smoot Hawley did not cause the Great Depression, but it certainly didn’t end it. It didn’t create jobs. It deepened and prolonged the Great Depression. It launched a downward global spiral in trade, by encouraging trade barriers abroad that exacerbated international tensions and helped lay the groundwork for World War II.

One of the many good decisions made during and after World War II was, in the United States, to turn away from protectionism towards freer trade. We launched the General Agreement on Tariffs and Trade. We encouraged the Europeans to trade more with each other through the common market. And you have to say, that’s been a spectacular success in terms of promoting the peace in Western Europe. And this was a bipartisan policy supported by JFK, Eisenhower, and Truman.

The world today is more democratic and politically free because of trade and globalization. A 2004 Cato study documented that countries that are open to trade are more likely to be democracies and respect human rights. We can point to examples of South Korea, Taiwan, Chile, Mexico, Ghana – all are countries that embarked on economic liberalization, which laid the groundwork for political liberalization.

Free trade begets a growing middle class, which often forms the backbone of political pluralism. Freedom House, a New York‐​based think tank, has documented that a higher share of the world’s people are living under democracies today, where they enjoy political and civil liberties, than at any time in human history. That’s another headline you probably didn’t see in the New York Times recently, but it’s true.

More peace on Earth

Finally, free trade has spread peace around the world. By encouraging democracy, democracies are less likely to fight wars with each other. In fact, they virtually never do. But also globalization has given governments one more reason not to go to war because, among its evils, it disrupts trade, which raises the cost of war. Trade doesn’t prevent war, but it gives leaders one more reason to stop and think before they go to war.

Here’s another headline I bet you didn’t see in one of the major papers. This was actually an Associated Press headline from April 2004: “War declining worldwide, studies say.” And sure enough, according to a Swedish think tank, the number of people who die in international wars annually is down to about 20,000, the lowest figure in the postwar era. That compares to the 700,000 people who died in 1951. According to the World Bank, civil wars are declining in those less developed regions that are globalizing. All this dies into the war on terrorism, of course. The Middle East is one of the least globalized regions in the world. Their share of global trade and investment has been declining significantly. Outside of oil, they offer virtually nothing to the rest of the world.

Mohammed Atta, the ringleader of the September 11 attacks, was not poor. He had a master’s degree can came from a well‐​to‐​do Egyptian family. He just didn’t have a future. He came from a stagnant country, socially, politically, and economically. We need to encourage, among other things, for countries in the Middle East to trade more with each other.

We do not help the situation with cotton subsidies in the United States. They deliver subsidies to 25,000 U.S. cotton farmers, with an average per capita wealth of $800,000. That drives down the global price of cotton. Where are the cotton producers in poor countries? Well, among them are Sub Saharan African countries like Mali. Mali is one of the few Muslim majority countries in the world that is free, that has a democracy, where people enjoy full civil and political liberties. How do we encourage that sort of political and economic reform in the Muslim world? We drive down the global price of their chief commodity export through our cotton program, extracting $250 million a year from that part of the world, where that is no small change.

Free trade makes us freer as individuals. It makes us better off as consumers. It makes us more productive as workers and producers, lifting hundreds of millions of people out of poverty around the world and spreading democracy, human rights and peace around the world. That is the story we must tell.