Tag Archives: Trade

Get Over The Gap

By INVESTOR’S BUSINESS DAILY | Posted Friday, May 09, 2008 4:20 PM PT

Trade Deficit: We have long been told that when the dollar “corrects,” making our goods cheaper abroad, the trade deficit will begin to fall sharply. Well, it’s finally happening. Now that it is, do you feel any better?

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You shouldn’t. Because even though the trade gap narrowed by $3.5 billion, or 5.7%, to $58.2 billion in March from February, it was a sign of weakness rather than strength.

Compared with a year earlier, March exports rose 15.5% — a good thing, we suppose. But imports increased just 7.9%, a gain that would have been a lot lower if not for oil.

True enough, the deficit appears to be declining — after hitting repeated records in recent years. Exports are booming while import growth has slowed noticeably, due mainly to the slumping dollar.

On the surface, this looks like a good thing. After all, don’t we want to buy less from abroad and more from our own country? The answer is no if it means that the U.S. economy has slowed and is no longer pulling its weight in the world.

Journalists and pundits call the smaller deficit an “improvement,” or “good news.” It isn’t. We run a trade deficit not because we’re uncompetitive or others protect their markets, two great economic myths; we run deficits because we’re such an attractive place for investors from around the world to park their money. The deficit, in other words, is a sign of strength.

As any economist can tell you, the flip side of our trade deficit is our capital surplus, which measures foreign investment flows into and out of the U.S. When we run a trade deficit, by definition we must run a capital surplus — and vice versa.

Last year, for instance, we rang up a record $708.5 billion deficit for both goods and services. But we imported the equivalent of $738.6 billion in investment capital to offset that. This was used to buy Treasury notes, bonds and stocks, and to fund real estate, plants, equipment and worker training.

That foreign capital created jobs and added to our ability to consume. It may even have helped keep us out of recession.

So what does it say that our deficit is now shrinking?

On the whole, it means foreign investors find the U.S. economy a less inviting place to be, maybe because of the housing meltdown and concern over the upcoming election. But if the trend continues, it means we’re all going to have to consume less and save more to make up for the decline in foreign capital.

That might not be a bad thing, but don’t let anyone tell you it will be painless. In the short run, a falling trade deficit will boost GDP. Indeed, based on Friday’s data, it’s likely first-quarter GDP growth will be revised up from the first estimate of 0.6% to roughly 1.2%.

But in the long term, having less foreign investment means our economy will grow more slowly. That’s the downside.

Don’t believe it? Just look at Germany and Japan. They’ve run huge trade surpluses for years, yet their economies have grown slowly at best since at least 1990. They export lots of their capital, as all trade surplus nations do, so they have less to grow on. We import it — and grow faster.

As such, should we root for a smaller deficit? Well, a smaller trade deficit doesn’t have to be a negative. If it got smaller because Congress wised up and created private investment accounts for Social Security — which would raise the U.S. private savings rate — that might be a good thing.

But making the deficit smaller isn’t necessarily a laudable goal, since doing so often covers for other bad policies such as raising taxes, devaluing the dollar and reverting to protectionism.

All these things, by the way, have been proposed as “remedies” for the trade deficit, mostly by wrongheaded Democratic candidates and talk-show hosts. What they’d do, in fact, is shrink the deficit by shrinking the U.S. economy. We’d rather keep the deficits.

Note: I partly agree with this and partly not. I think lower deficits are rather more preferable to larger ones, although free trade, in my view, is more beneficial than detrimental.

Igniting Growth

By INVESTOR’S BUSINESS DAILY | Posted Wednesday, May 07, 2008 4:20 PM PT

Trade: As the U.S. economic hearth flickers, it makes sense to fan it back with the last hardy embers of growth. One is exports, which burn brightest with free- trade treaties. So why is Congress snuffing them out?

Read More: Economy | Business & Regulation

Last week’s preliminary gross domestic product data for the first quarter showed a pallid 0.6% rise. Housing was a drag, pulling real GDP down 1.2%. Business sales were unimpressive, and consumer spending was weak.

But there was one bright spot: exports, which rose 5.5% according to the Bureau of Economic Analysis, accounting for a third of U.S. economic growth during the quarter.

Maybe that’s why President Bush isn’t letting up on urging Congress to pass three pending free-trade agreements, which will strengthen U.S. exports. It may have hit a wall with House Speaker Nancy Pelosi manipulating House voting rules, but with a potential recession looming, Bush has no choice but to seek it anyway.

“Opening markets is especially important during this time of economic uncertainty,” Bush said Wednesday. “Last year, exports accounted for more than 40% of America’s total economic growth. With our economy slowing . . . we should be doing everything possible to open up new markets for U.S. goods and services.”

Thus far, his plea has fallen on deaf ears in Congress, which has refused to ratify U.S. deals with Colombia, Panama and South Korea. Worse, it has halted any new pacts from being negotiated.

After all, with Pelosi literally changing the House rules for a treaty vote to “anytime I want,” it’s unlikely any nation would negotiate a free-trade deal only to see it become a public bargaining chip for Pelosi’s pork-barrel spending schemes.

Pelosi has allies in Democratic presidential candidates Barack Obama and Hillary Clinton. They have collectively become the Three Stooges of Big Labor, which opposes free trade.

Pelosi insists that she’s putting the American people first. That prompted U.S. Trade Representative Susan Schwab to blast those who “demagogue and prey on anxieties and fear. We do a disservice to the American people by pretending that trade is somehow the culprit of our economic problems and anxieties.” We know whom she meant.

Again, let’s look at what free trade with Colombia would do.

• It slashes tariffs from 32% to zero on 72% of U.S. goods right off the bat. Better still, it levels the playing field for U.S. firms because Colombian goods already enter the U.S. duty-free. In the 17 months that the treaty has awaited passage, U.S. businesses have shelled out $1 billion in tariffs to sell goods in Colombia.

• It provides U.S. investors with legal protections and provides for international arbitration if anything goes wrong.

• It ends child labor and lessens environmental damage, two extras the Democrats requested and got.

Meanwhile, if it’s not passed, the U.S. economy gets . . . nothing.

“Delaying the vote on the Colombia (pact) does not create one American job, it does not put one more dollar in anyone’s pocket, does not save one life, does not help one union to organize, or protect one endangered species,” Schwab said.

It just goes to show that doing nothing on free trade isn’t an accomplishment. In fact, it’s a wet rag on the U.S. economy that will eventually draw angry retribution from U.S. voters.

Bush knows this. Too bad Pelosi doesn’t.

Trade, Scapegoat For Job Losses, Is Now A Driving Force For Gains

By ROBERT SAMUELSON | Posted Tuesday, April 15, 2008 4:30 PM PT

Almost everyone wishes for a renaissance of American manufacturing, and no one has said so louder than the Democratic presidential candidates and Democratic members of Congress. The trouble is that their deeds don’t match their words.

They have blamed trade for almost anything that might ail the U.S. economy — in particular, manufacturing — when the opposite is now true: Only through expanded trade can the economy thrive and manufacturing stage a comeback.

The latest evidence of the gap between political rhetoric and economic reality is the Democratic-controlled House’s decision to set aside, possibly indefinitely, the free-trade agreement negotiated with Colombia by the Bush administration.

On economic grounds, there’s no reason to reject the agreement. Colombia’s exports already enter the U.S. market duty-free under the 1991 Andean Trade Preference Act. Meanwhile, many U.S. exports to Colombia face stiff tariffs — up to 35% on autos, 15% on tractors and 10% on computers — most of which would ultimately go to zero under the agreement.

The tariffs dampen demand for U.S. exports by raising their price and putting them at a competitive disadvantage. Whirlpool exports about $50 million annually of refrigerators, washer-dryers and dishwashers to Colombia from plants in Ohio, Arkansas and Iowa. On a $1,000 refrigerator, a 20% tariff raises the retail price $200 in a fiercely competitive market with appliances also supplied by local firms and imports from Korea and elsewhere.

Misplaced Blame

(Why does Colombia want the agreement? Answer: Congress has to renew Colombia’s present duty-free status periodically. The agreement would make it permanent.)

Yet, it’s politically convenient to oppose the trade agreement because the popular imagery is that trade destroys U.S. jobs. The loss of almost 4 million U.S. manufacturing jobs since 1998 seems easy to explain by cheap imports or the flight of plants to Mexico, China and other poorer countries.

The truth is murkier: Although this has occurred, job losses also stem from greater efficiency (fewer workers producing more goods) and slumping domestic demand (for communications equipment and computers after the dot-com bust and for housing materials and vehicles now).

Nor has falling factory employment crippled overall U.S. job creation. Look at the numbers. From 1998 to 2007, total nonfarm payroll employment rose 12 million, and unemployment averaged only 4.9% — despite those 4 million lost factory jobs. In the same period, U.S. manufacturing output rose 22%.

No matter. Globalization and trade have become lightning rods for myriad grievances (job insecurity, wage inequality, eroding fringe benefits). But even if trade caused all the factory job loss, its impact is now shifting.

The dollar’s dramatic depreciation (down an inflation-adjusted 20% since early 2003 against a basket of currencies) has enhanced the competitiveness of U.S. exports. Their growth now looms as a major source of job creation and economic expansion.

The overall trade deficit is dropping and, except for higher oil prices, would be dropping faster. In 2007, manufacturing exports rose 10.9%, double the 4.9% for manufacturing imports. At some companies, the effect is already noticeable.

Consider Bison Gear & Engineering, a medium-sized firm near Chicago that makes electric motors used for kitchen equipment, packaging machinery and medical devices. Since 2006, exports have increased from 20% of total sales to 30%, chairman Ron Bullock says. Bison has hired about 50 new workers, bringing total employment to 250.

It is no longer necessary to rely on elegant theories of comparative advantage, more consumer choice or greater competition to favor open trade. Jobs and economic growth will suffice. Indeed, without export-led growth, the economy may face a sluggish future.

Even after today’s slowdown (recession?) ends, the outlook is worrisome. Consumers are heavily indebted. Housing will recover but probably not, for many years, to previous highs. Government spending is constrained by growth in the rest of the economy, unless Congress sharply raises taxes or deficits. Exports and related investments are the best hopes.

What House Democrats did was particularly perverse. They suspended Trade Promotion Authority, which mandates that Congress vote up or down on trade agreements within 90 days of their submission.

TPA gives other countries a reason to negotiate in good faith. They can make politically difficult concessions without fearing that Congress will ignore the agreement because it dislikes the U.S concessions.

Raze The Hurdles

Americans do have legitimate trade complaints: China manipulates its currency to aid exporters; other countries restrict imports. It’s in the U.S. interest to dismantle these obstacles. Now the suspension of TPA can serve as an excuse — symbolically and substantively — for other countries not to negotiate, just when U.S. firms can most benefit from market openings.

What matters for workers and manufacturers is not what politicians say. It’s the consequences of what they do. On trade, many Democrats — and some Republicans, too — are fighting the last war.

Samuelson is a contributing editor of Newsweek and Washington Post, where he has written about business and economic issues since 1977.

© 2008 Washington Post Writers Group