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Mankiw on free trade...the Dems are wrong

Harvard econ professor Greg Mankiw had a great op-ed this weekend in the New York Times.

Mankiw states that most economists don't like barriers to free trade:
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"Economists are, overwhelmingly, free traders. A 2006 poll of Ph.D. members of the American Economic Association found that 87.5 percent agreed that “the U.S. should eliminate remaining tariffs and other barriers to trade.”"
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Mankiw also said that John McCain, an ardent free-trader, might have some problems because of the popular misconception (or lie, if we're discussing Democratic presidential candidates), that free trade is the origin of our economy's short-run troubles.
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"In 2002, Mr. McCain voted to give the president “trade promotion authority,” under which trade agreements were no longer subject to amendment by Congress. Barack Obama was not yet in the Senate at that time, but Hillary Rodham Clinton voted against the measure.

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In April 2005, Mr. McCain voted to table a bill proposed by Senators Charles E. Schumer, Democrat of New York, and Lindsey Graham, Republican of South Carolina, that would have authorized a 27.5 percent tariff on Chinese imports if China failed to revalue its currency. Mrs. Clinton and Mr. Obama voted in support of the tariff proposal.

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Also in April 2005, when 58 senators asked President Bush not to offer large cuts in farm subsidies as part of the Doha trade negotiations, Mr. McCain declined to put his name on the letter. Mrs. Clinton and Mr. Obama were among the signatories defending the subsidies.

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In June 2005, Mr. McCain voted to ratify the Dominican Republic-Central America Free Trade Agreement, which lowered trade barriers with Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and the Dominican Republic. Mrs. Clinton and Mr. Obama voted against the treaty (although, in his most recent book, Mr. Obama wrote, “over all, Cafta was probably a net plus for the U.S. economy”).

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In recent months Mr. McCain has expressed support for the pending free-trade agreement with South Korea, the world’s 12th-largest economy and the seventh-largest trading partner of the United States. Mrs. Clinton and Mr. Obama oppose it."
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Mankiw closes with a somewhat discouraging view of a Democratic ticket in 2008.
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"It is hard to be confident, however, that on issues of trade policy either Democratic candidate would act like the last Democratic president. Maybe the candidates’ records as legislators are not good indicators of what their policies might be as president. Maybe campaign rhetoric about Nafta is nothing more than that. But counting on it requires, one might say, the audacity of hope."
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Mankiw is such a good writer, and spot-on with this op-ed. The Democrats need to realize that free trade isn't the enemy. But, of course, the labor unions wouldn't appreciate that, and they're a major voting bloc for the Dems.

-Matt Hittle

Posted at 01:36AM Mar 18, 2008 by College Republicans in Trade  |  Comments[0]

NAFTA not responsible

Mankiw links to a great Real Clear Politics article.

The author, Thomas Sowell, makes a great point, that the "fair" in fair trade could mean anything to anyone.
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"Since "fair" is one of those words that can mean virtually anything to anybody, what this amounts to is that politicians can pile on whatever restrictions they want, in the name of fairness, and still claim to be for "free trade." Clever."
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Sowell enumerates what he says is the real reason that the so-called Rust Belt is doing badly:
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"When the American automobile industry was the world's leader in its field, many people seemed to think that labor unions could transfer a bigger chunk of that prosperity to its members without causing economic repercussions.

Toyota, Honda, and others who took away more and more of the Big Three automakers' market share, leading to huge job losses in Detroit, proved once again the old trite saying that there is no free lunch.

Like the United Automobile Workers union in its heyday, unions in the steel industry and other industries piled on costs, not only in wage rates having little relationship to supply and demand, but in all sorts of red tape work rules that added costs.

State and local governments in what later became the rust belt also thought that they too could treat the industries under their jurisdiction as prey rather than assets, and siphon off more of the wealth created by those industries into state and local treasuries with ever higher taxes -- again, without considering repercussions.

In the short run, you can get away with all sorts of things. But, in the long run, the chickens come home to roost. The rust belt is where those rising costs have come home to roost."
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The only time NAFTA enters the pictures, Sowell says, is really as just a scapegoat for politicians. Of course free trade does result in some job losses. However, these losses are massively outnumbered by the benefit had by every American consumer. Blaming free trade also helps politicians blame foreigners for America's problems. Sowell is right on target- the anti-free trade bull is just baseless, empty rhetoric.

-Matt Hittle

Posted at 11:00PM Mar 04, 2008 by College Republicans in Trade  |  Comments[0]

Foreign nations wary of Democrat trade policy

Fareed Zakaria reports that many nations are unsettled by the Democrats' positions on trade.
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"For the rest of the world—particularly poorer countries—nice speeches about multilateralism are well and good. But what they really want is for the United States to continue its historic role in opening up the world economy. For a struggling farmer in Kenya, access to world markets is far more important than foreign aid or U.N. programs. If the candidates think they will charm the world while adopting protectionist policies, they are in for a surprise.

Already the mood is shifting abroad. Listening to the Democrats on trade "is enough to send jitters down the spine of most in India," says the Times Now TV channel in New Delhi. The Canadian press has shared in the global swoon for Obama, but is now beginning to ask questions. "What he is actually saying—and how it might affect Canada—may come as a surprise to otherwise devout Barack boosters," writes Greg Weston in the Edmonton Sun. The African press has been reporting on George W. Bush's visit there with affection and, in some cases, by contrasting his views on trade with the Democratic candidates'. The Bangkok Post has compared the Democrats unfavorably with John McCain and his vision of an East Asia bound together, and to the United States, by expanding trade ties."
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Some even report the possibility of being nostalgic for a certain hated president:
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"A senior Latin American diplomat, who asked to remain unnamed because of the sensitivity of the topic, says, "Look, we're all watching Obama with bated breath and hoping [his election] will be a transforming moment for the world. But now that we're listening to him on trade—the issue that affects us so deeply—we realize that maybe he doesn't wish us well. In fact, we might find ourselves nostalgic for Bush, who is brave and courageous on trade and immigration."
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For those in the Democratic party who are in favor of scrapping or renegotiating NAFTA, Zakaria offers:
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"The facts about trade have been too well rehearsed to go into them in any great detail, but let me point out that NAFTA has been pivotal in transforming Mexico into a stable democracy with a growing economy. And, in Lawrence Summers's words, "[it] didn't cost the United States a penny. It contributed to the strength of our economy because of more exports and because imports helped to reduce inflation." Trade between the NAFTA countries has boomed since 1993, growing by about $700 billion. There are no serious economists or experts who believe that low wages in Mexico or China or India is the fundamental reason that American factories close down. And labor and environmental standards would do very little to change the reality of huge wage differentials between poor and rich countries' workers.

An argument one often hears from the candidates' supporters is that they don't really mean what they say, that their actual proposals on trade agreements involve only minor tinkering. It is an odd defense of candidates promising change, honesty and a new approach to politics to say that they are being cynical and hypocritical. Besides, both candidates are proposing to renegotiate NAFTA, which is a terrible idea. (And one that has prompted the Canadian prime minister to retort that if that happens, his country, too, would like to get more concessions from the United States.) Hillary Clinton has proposed that free-trade deals be re-evaluated every five years, which is absurd. The benefits of trade deals rest on the fact that they are permanent."
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He finishes with a scathing indictment of the recent Democratic rhetoric:
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I'm not even sure that protectionist rhetoric works that well in a general election. Americans like optimists. They want leaders who look out at the world and see broad, sunlit uplands. Railing against Mexicans, Chinese and Indians for stealing American jobs smacks of anger, paranoia and fear of the future. Americans want hope, as Obama says, "hope in the face of difficulty, hope in the face of uncertainty, the audacity of hope." Where is that courage now?
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This was a fantastic column. More and more is being written about the Democrats' trade policy and the fact that it's a step in the wrong direction. Unfortunately, it doesn't look likely to change until the Democratic party ends it's pandering to labor unions.

-Matt Hittle

Posted at 01:23PM Mar 04, 2008 by College Republicans in Trade  |  Comments[0]

A clarification of the Dems' clarification of the trade deficit

I'm no international trade expert, so I will let the experts make my case for me:
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A new protectionism: dashed hopes and perhaps worse for US trade policy

by Daniel Ikenson
Daniel Ikenson is associate director of the Center for Trade Policy Studies at the Cato Institute in Washington, D.C.

October 2007

Over the next 14 months, culminating in US elections in November 2008, the world will learn whether America’s budding protectionism reaches full bloom or is just a passing fancy. The global economy can shake off a failed Doha Round of multilateral trade negotiations without missing two beats. But if the United States turns inward as well, the consequences could be profound and far-reaching.

Some would argue that US protectionism is already beyond the budding stage. There has been an explosion in the use of trade remedies in 2007, including the first US antidumping case initiated against Australia in 15 years (involving the electrolytic manganese dioxide industry).

Earlier this year, the United States launched three high-profile complaints against China in the World Trade Organization, and reversed its 23-year-old policy of not applying the countervailing duty (or anti-subsidy) law to so-called non-market economies, when it initiated a case against Chinese paper manufacturers in April. And there has been a lot of sabre-rattling in Congress over a host of allegedly unfair Chinese trade practices.

But, by and large, the United States has yet to cross the precipice. Bringing antidumping and countervailing duty cases and launching WTO complaints are all permitted within the global trade rules. Those actions are not necessarily cause for alarm—at least relative to what could be in store in the months ahead.

The Democratic Party, which has grown increasingly hostile towards trade over the past decade, controls the legislature, and thus the policy agenda, for the first time in 12 years.

President George W. Bush’s authority to negotiate trade agreements and present them to Congress for an up-or-down vote (the so-called Fast Track or Trade Promotion Authority) expired in June, and will not be renewed.

Completed bilateral trade agreements with South Korea, Colombia, Peru and Panama have been shunted aside to consider, instead, trade legislation that is antagonistic, if not expressly protectionist. Although a few of those bills were crafted mostly for political effect, it is a good bet that some of the nearly two dozen pieces of provocative trade legislation will at least make it to the floors of both chambers of Congress for official votes before the 2008 elections.

As Congress reconvenes in Washington, it is likely to begin moving some of those bills, which include, among other things, provisions that: make enforcement of trade agreements systematic and mandatory; lower the current evidentiary thresholds for imposing antidumping, anti-subsidy, and China-specific safeguard duties; establish a panel of retired federal judges to review adverse WTO decisions and advise Congress on the propriety of those decisions before any steps toward compliance are undertaken; forbid the United States from entering into any new trade agreements; revoke China’s ‘normal trade relations’ status; define and treat currency manipulation as a countervailable subsidy; require the President to pursue concrete measures to achieve greater trade balance with countries that have persistent trade surpluses with the United States; and, expand trade adjustment assistance programmes to cover people who have lost jobs in the services sectors due to outsourcing.

Implicit in this legislation: trade liberalisation is bad, US trade partners cheat, and the folly of America’s embrace of globalisation is evidenced by its massive human toll.

To the mercantilists in Congress, the large and growing trade deficit is confirmation that the United States is losing at trade. And it is losing because US trade partners are cheating.

The primary target of most provocative legislation is China. But that shouldn’t prompt sighs of relief in other countries. Thwarting Chinese imports into the United States is an indirect assault on other countries, particularly those in the Asia-Pacific region. What the US Congress fails to grasp is that many products imported from China comprise value-added materials and labour services provided mostly in other countries. In that regard, the bilateral US trade deficit with China is a meaningless statistic. Yet it fuels the legislative push for action.

Adoption of the kinds of protectionist policies under consideration in the United States would likely have a dramatic, adverse impact on the global economy, with particularly acute consequences felt in countries that supply China with components, machinery, and raw materials. If the world’s largest consuming nation buys fewer Chinese wares, Chinese factories won’t be buying as much iron ore, bauxite, electronic components, or LCD screens. There is indeed a bit of Australia, Japan, Korea, and Malaysia in the typical Chinese cargo container unloaded in Long Beach, California.

Furthermore, legislation that effectively challenges the efficacy and legitimacy of the WTO dispute settlement system can only lead to a weakening of the multilateral trading system, as other countries are tempted to follow suit and treat adherence to the rules as optional. Ironically, the Congress is seeking to beef up US enforcement and prosecutorial capacity to bring more WTO cases, while it simultaneously considers a bill that denigrates the WTO process, as well as other bills containing provisions likely to be WTO-inconsistent.

The WTO system isn’t perfect, but it has worked well to facilitate the growth of trade and investment, while practically extinguishing the his his¬toric tendency towards tit-for-tat trade wars. Until now, at least.

Once-giddy expectations for comprehensive international trade liberalisation at the outset of the Bush Administration have been downgraded to hoping that the US President is prepared to veto the slew of anti-trade legislation expected to reach his desk. Not too long ago, Bush Administration officials spoke optimistically about a free trade zone ‘from Alaska to Tierra del Fuego’, and a world free of in¬dustrial tariffs by 2015. The Administration initiated bilateral trade talks with dozens of countries as part of its programme of ‘competitive liberalisation’, hoping that the momentum that it spurred would lead to a relatively quick and successful conclusion to the Doha Round.

But Doha lies in a cryogenic state and it remains to be seen whether the Bush Administration is able—even willing—to hold the line against the impending protectionist offensive. Some in Congress speak of veto-proof majorities (Congress can override a Presidential veto with support from two-thirds of each chamber), which attests to the growing bipartisan nature of skepticism over trade.

Not long ago, Republicans were solidly in the pro-trade camp, while Democrats abandoned the pro-union, anti-trade line with in¬frequency and at their individual peril. As we enter the spirited US election season, President Bush is likely to be pressured by Republican lawmakers and the party leadership to acquiesce before the rising pro¬tectionist tide in an effort to minimise Republican losses in November 2008. The era of negotiation and accommodation and optimism has yielded to one of confrontation and litigation and skepticism.

It is difficult to pinpoint a specific event that precipitated Amer¬ica’s apparent change of heart. It has been more of a drift, perpetu¬ated by a confluence of several factors, including the rise of China, the myth of US manufacturing decline, relentless salesmanship from politicians and media personalities of their mercantilist narratives, widespread disaffection for President Bush and, also, the failure of the Bush Administration to make a convincing, comprehensive case to the American public about the benefits of trade liberalisation.

That last factor is probably the most significant determinant of the present state of affairs. Had the Administration done a better job of communicating the merits of a liberal trade agenda through its words and actions, the other factors might never have risen to prominence.

But instead, the Bush team opted to politicise the process. They reckoned that with a Republican majority in Congress at the time, the trade agenda could advance without need of much Democratic support. Given the anti-trade sentiments permeating the Democratic caucus, that strategy had virtue, if not merit.

Ultimately, though, that approach alienated important Democrats who now control the congressional trade agenda. And it would be naïve to think that experience doesn’t colour their current perspectives on trade policy.

Bush granted steel tariffs to make it easier for certain Republicans in Congress to support trade promotion authority—a move characterised by former US Trade Representative Robert Zoellick as ‘one step back for two steps forward’. Similar protectionist back-steps were taken to secure support from key Republicans in textile- and farm-states, as well. In that process, the Administration legitimised the claims to exceptional treatment for import-competing industries while preaching the merits of free trade abroad, a hypocrisy that contributed to the poisoned atmosphere surrounding the Doha Round.

The Administration also erred badly in the way it promoted trade agreements. The USTR’s office has had a short-sighted tendency to focus on the benefits of trade from an exporter’s perspective. A common refrain from the USTR when pitching trade liberalisation is that the United States runs an aggregate trade surplus with the dozen or so countries with which the Administration had concluded bilateral or regional trade agreements—the implication being that strong export growth and minimal import growth constitutes success. But if that’s the appropriate metric, it doesn’t take much of a leap to conclude that US trade policy is failing given an overall trade deficit approaching $1 trillion.

That kind of salesmanship—touting exports and downplaying the benefits of imports, which are the source of most of the gains from trade—played into the hands of the mercantilists in Congress, where too many already believe that exports are good, imports are bad, and the trade account is the scoreboard. To them, the large and growing trade deficit is confirmation that the United States is losing at trade. And it is losing, in large measure, because US trade partners are cheating.

In China’s case, the purported transgressions include currency manipulation, widespread subsidisation of industry, unfair labour practices, intellectual property theft, opaque market barriers, among others. Some of the allegations have some degree of merit, but not to an extent that comes close to explaining even a fraction of the bilateral deficit.

Allegations of currency manipulation and its adverse impact on the US manufacturing sector have dominated the political discourse this year. As Congress gripes and threatens action, the Chinese Yuan continues to appreciate against the US dollar. It is up nearly 8 per cent since the firm dollar peg was abandoned in July 2005. Yet the bilateral deficit continues to rise. It is quite clear that Congress hasn’t given much thought to the prospect that a dramatically appreciated Yuan could actually increase the deficit.

The key to achieving greater trade balance without sparking a US recession is not to tax US consumption through protectionist legislation, but to encourage Chinese consumption. That is the essence of what has become known in Washington as the ‘Paulson Approach’. Treasury Secretary Henry Paulson has been engaged in dialogue with his Chinese counterparts, trying to foster the kinds of structural changes needed to dissuade excessive thrift there. However, Congress seeks fireworks, not durable solutions.

But why focus on the trade balance at all? Japan has run a trade surplus for decades, but its economy has been stagnant for the better part of the last 15 years. The Germans have a large trade surplus, but double-digit unemployment. The United States has a large and growing trade deficit, but also consistently strong economic growth and an unemployment rate, near all-time lows, of 4.5 per cent.

Still, the trade account as scoreboard metaphor resonates. Americans are told repeatedly that their jobs are being exported to China and India and that the trade deficit is a proxy for job loss. The loss of nearly 3 million US manufacturing jobs during the recession of 2001–2002 is constantly cited as evidence of failed trade policies, even though the US economy has generated 1.8 million net new jobs every year, on average, since 1980, when imports, in real terms, were only 45 per cent of what they are today.

Policymakers have perpetuated a myth that the US manufacturing sector is in decline, which has encouraged further skepticism among Americans about trade. But closer examination reveals not only that US manufacturing is thriving according to every relevant financial yardstick (in 2006, the sector achieved record sales, record profits, record output, and record return on investment), but that it is thriving in large measure because of relatively open US trade policies.

Access to foreign markets has been a crucial component of US manufacturing revenue growth. And access to imported raw materials, components, and capital equipment has helped keep the lid on US manufacturers’ costs. In fact, US producers accounted for 55 per cent of total US imports in 2006, which affirms a long-observed relationship in the manufacturing sector: imports and output move in tandem.

It is unlikely that the truth about trade and manufacturing will suddenly prevail upon the political discourse and reverse America’s growing skepticism. Not with an election on the horizon. Perhaps the best to hope for is that some of the pending legislation is made less onerous as it advances through the process, while President Bush does his part to veto legislation that would take the United States, and the world, down a path it would regret.

Posted at 06:34PM Feb 07, 2008 by College Republicans in Trade  |  Comments[0]

Letter to the Editor

In today's Sioux City Journal, there was yet another excellent letter to the editor.

It was a response to a letter yesterday that claimed the US should boycott Chinese goods because China is Communist. Unfortunately, that letter wasn't posted online so I can't link to it. It was pretty crazy protectionist.

-Matt Hittle

Posted at 10:38AM Jan 11, 2008 by College Republicans in Trade  |  Comments[0]

Funny!

Once someone has to explain how they're not a protectionist....you can tell they are a protectionist!
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-Matt Hittle

Posted at 11:33AM Dec 13, 2007 by College Republicans in Trade  |  Comments[0]

Tide turning against free trade?

Today, on RealClearPolitics, Tony Blankley has an interesting article about free trade.
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"Until the 1980s, it was not even a debated point. Both Democrats and Republicans, liberals and conservatives largely supported free trade. During the past 20 years, doubt has emerged on the question of whether Americans gain or lose from free trade. But the Bill Clinton presidency, in full partnership with the Newt Gingrich Republican Congress, fully supported free trade.

However, even in the 1990s, the Democratic Congress only begrudgingly voted with half its caucus for Clinton and Gingrich's NAFTA. About two-thirds of the Republican caucus voted yes. Then, by about 40 percent to 30 percent, Republican voters thought free trade was good for America (with the remainder saying it made no difference). Now, according to an October 2007 Wall Street Journal poll, by 59 percent to 32 percent, Republicans think foreign (free) trade has been bad for America. Democrats are more negative. Many other polls confirm this trend over the past two decades.

Thus, it was not surprising that this Monday, the Financial Times gave their lead headline (plus a 3-by-6-inch above-the-fold color photo) to Hillary Clinton on her statement that she doubted the benefits of the upcoming world-trade talks in Doha, Qatar. As her campaign is largely premised on the proclaimed wisdom and success of her and her husband's previous presidency, it is noteworthy in the extreme that she is breaking with her co-president (some guy named Bill, I think) on the question of free trade."
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"What the country (and the Republican Party) needs is an intelligent, nonbelligerent debate, not the mere recitation of ancient maxims that may or may not be valid in a world in which potentially 2 billion Chinese and Indian workers suddenly have been thrown into the world labor market. Maybe that won't put severe downward pressure on American wages (and salaries of many white-collar workers), but it ought to be worrying."
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-Matt Hittle

Posted at 02:57PM Dec 05, 2007 by College Republicans in Trade  |  Comments[0]

The Washington Post on trade

Yesterday, The Washington Post had an excellent editorial on trade.
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"Not that any of the Democratic candidates seem to care, but the impact of NAFTA seems to have been both larger and more positive in Mexico than in the United States. Mexico's gross domestic product, now more than $875 billion, has more than quadrupled since 1987. The poverty rate dropped 10 percentage points in the second half of the 1990s. Average wages have not grown and wage inequality remains a stubborn challenge, but pay grew most swiftly in the Mexican industries most exposed to trade, according to the World Bank. And Mexico, once considered the sick man of Latin America, has logged its progress while also accomplishing a mostly peaceful transition to multiparty democracy."
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Of course, we can't yet pass final judgement:
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"A final verdict on NAFTA is not possible yet, because the last deferred provisions won't be phased in until Jan. 1, just two days before Iowans go to the caucuses. Among them is the long-awaited elimination of all remaining barriers on American corn exports to Mexico. Corn -- don't they grow that in Iowa?"
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-Matt Hittle

Posted at 04:07PM Dec 04, 2007 by College Republicans in Trade  |  Comments[0]