Free Trade Follies

No one wins in Congress's war on free trade.

Here's why we prefer a do-nothing congress—when they manage to do something, it's frequently so unfathomably irrational, nothing can be done but go outside and let loose a primordial scream of frustration and betrayal.

We're back. The latest Congressional folly was their refusal to extend the president's "fast-track" authority—a presidential privilege since 1975 to negotiate new trade pacts and submit them to Congress for a simple up-or-down vote without amendments (read: pork). Without this authority, new trade deals will likely become highly politicized and agonizingly slow to pass, if at all. Read about it here:

End Nears for Era of Presidential Trade Authority
By Peter S. Goodman, The Washington Post

What have politicians got against free trade and globalization? Congressional leaders claim America is bleeding jobs and losing manufacturing stature. Worse, they claim free trade creates a big, harmful trade deficit. We see two possibilities: Either politicians cannot grasp basic economic fundamentals, or they prefer pandering to baseless fears to curry short-term political favor.

If job loss were a legitimate concern, would America's unemployment be near record lows? Forget America—unemployment is low the world over! Never deterred, critics will claim those are the "wrong jobs"—the right jobs, presumably, being union-heavy manufacturing jobs. It's true, manufacturing has declined as a percentage of our overall economy—but this isn't a strictly American phenomenon. Globally, manufacturing jobs have been declining in total percentage for six decades—not because insidious CEOs are shipping jobs overseas (How are these jobs shipped? Are they wrapped in brown paper? Do they go via DHL?) but because productivity gains have made us more efficient. We get more done with less.

Further, what evidence is there free trade hurts us? Look at NAFTA, signed in 1994. Ross Perot warned of a "giant sucking sound"—jobs, money, and Americans fleeing to Mexico. But no such thing happened—not remotely. It's hard to argue NAFTA harmed us when American household net worth is at record highs—even adjusting for inflation.

So, job loss isn't an issue, but what about this insidious trade deficit? Here's an excellent illustration of why a trade deficit isn't an economic negative, but rather a symptom of economic strength and productivity in developed nations:

An iPod Has Global Value. Ask the (Many) Countries that Make It.
By Hal R. Varian, The New York Times

In the process of manufacturing must-have goodies, Apple creates a trade deficit, keeps prices palatable, increases productivity, provides jobs and increased wealth globally, and increases shareholder value. Yes! (You can't see us, but we're pumping our fists in the air.)

Maybe those folks for whom politicians would artificially preserve manufacturing jobs have found themselves better paying jobs in other sectors. And because they earn more, they can afford a new Toyota with the fancy airbags and iPod hookup, instead of their old Dodge Dart with the 8-track player. Their prosperity, at the hands of free trade and globalization, contributes both to "offshoring" and the trade deficit. We're baffled—do politicians want their constituents to be poorer with grimmer prospects?

Need more evidence of free trade as a great and glorious thing? Bangalore engineers have gone from earning 20% of their American counterparts to 70%:

Bangalore Wages Spur "Reverse Offshoring"
By Richard Waters, The Financial Times

This goofy article paints higher wages as a bad thing—how silly! If Bangalore's salaries rival Silicon Valley's, perhaps both the US and India will turn to another emerging market for cheaper labor—keeping prices on high-tech goodies competitive while increasing wealth and opportunity in that nation. The whole world gets richer. Awesome!

A politically motivated attack on free trade is simply wrong-headed and potentially economically harmful. We're optimists by nature at MarketMinder, so we're hopeful cooler heads will prevail. President Clinton lost his fast-track authority for a brief period; maybe Congress's free-trade kibosh on Mr. Popularity will be similarly short lived. Free-trade is a right and critical aspect of a free-market economy. Let freedom ring!

MarketMinder's taking the day off tomorrow to celebrate the birth of our great nation and ponder Capitalism's beauty. If you can't do without your daily MarketMinder, we direct you to some of our past commentary.

"In Defense of Global Capitalism" – 10/03/2006
"More Freedom; More Money" – 11/14/2006
"Death and Taxes . . . and Economic Growth" – 03/09/2007
"A Political Punch" – 05/31/2007
"Mmm . . . Bacon" – 06/06/2007

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.