Market Analysis

Free Trade Imperiled

Is Congress trying to make the media's baseless proclamations that the US economy is dead come true?

Last week, in a little-noticed paedomorphic fit, Congress declared they don't plan to approve the free trade agreement (FTA) with South Korea. Since they petulantly let President Bush's fast track authority expire last month, it appears this FTA is doomed for the dustbin. Read more about this potentially disastrous development here:

Trading Without America
By the Editorial Staff, The Wall Street Journal (*site requires registration)

Certain presidential hopefuls are declaring, among other things, free trade will "kill jobs" while creating a bigger trade deficit and hindering US exports. (Perhaps they hope their disavowal of basic economic fundamentals will curry short-term favor with unions.) Unfortunately for them, in the history of mankind, there's no evidence free trade has done any of those things to an economy in aggregate. In fact, there's plenty of empiric evidence that free trade does just the opposite and is overall a major net positive—creates job, makes prices more competitive, etc.

Does free trade result in fewer jobs here? It takes some chutzpah to make that argument, considering unemployment is currently a historically low 4.6%. Perhaps unemployment would be lower still if we erected 30-foot walls on our borders, but we doubt it, particularly since the 5.1 million Americans employed by foreign companies would likely be out of a job. (Interestingly, employees of foreign-owned companies in the US make, on average, 30% more than those employed by US companies.) Sure, the shoelace factory line worker is probably out of his current employment, but odds are he'll likely end up with a different job, maybe even higher-paying!

What about a big(ger) trade deficit? Does freer trade mean bigger deficits? Here's another question: Who cares? Trade deficits in developed nations are not the big bad economic boogiemen campaigning politicians (and the media) purport. Since the US started running a big (and growing) trade deficit over 25 years ago, nothing nefarious happened. In fact, GDP growth was above average, the stock market has soared, and per capita net worth is at an all-time high. And the same is true for the UK—they've also had a big trade deficit and a dynamic economy. Meanwhile, noted surplus nations like Germany and Japan have not fared as well. Clearly, our deficit isn't hurting us. (For more on how trade deficits are misconstrued, read MarketMinder commentary, "Free Trade Follies," 07/03/2007.)

What about the charge that free trade hinders our exports? Wouldn't a proliferation of cheaper goodies make our widgets less attractive? Sure, that's progress, and it's good for our economy. If we aren't making shoelaces, we're freed up to design and market iPhones. We'd argue that nothing would curtail exports like more protectionist nonsense. This web site shows export growth to China, currently a favorite target for protectionist rhetoric, versus the world:

Trade with China by Congressional District
By Andrew Roth, The Club for Growth

We're sure our elected officials would hate to see all those exports dry up in a needless tariff war. But maybe not! Congress is currently on target to deny us the same type of export growth to the world's 10th-largest economy.

This kind of political posturing is a dangerous game to play. Check the graph in the WSJ article cited above. The US currently has 10 FTAs, the EU 21. China is negotiating 28. Do we want to turn this world into one where nations with the most open trade economically dominate those who erect politically-motivated barriers?

Investors needn't fear big or growing trade deficits. What we should be mindful of are efforts to reverse free trade and globalization. Give the shoelace factory worker a break. Maybe he wants to design iPhones for a change.

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