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Vicious Circle of Trade | EPI Viewpoints

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Opinion pieces and speeches by EPI staff and associates.

[ THIS PIECE ORIGINALLY APPEARED IN WASHINGTON POST ON AUGUST 14, 2003. ] 

Vicious Circle of Trade

By Jeff Faux

The country needs more, not less, debate over the rules of the emerging global market. But The Post apparently will not tolerate anything but fervid devotion to the rigid doctrines of free trade ["Trade Jitters," editorial, Aug 7]. Like some medieval inquisitor, The Post smells heresy when even free-traders such as John Kerry, Joe Lieberman and Bob Graham are “less than eloquent in defense of their own records.” Their mild expressions of concern about inadequate labor and environmental standards and China’s mercantilist practices are declared “worrisome,” putting all Democrats on a slippery slope toward becoming “entirely the party of protectionism.”

Protectionism is a straw man. The issue is not whether nations should trade with each other but what the rules should be under which they trade. The people of Mississippi are free to trade with the people of Michigan, and both states are the better for it. But because of our Constitution, they trade within federal rules that require worker, consumer and environmental protections that prevent a competitive race to the bottom.

In contrast, the rules of the global marketplace that has emerged over the past quarter-century protect international investors while tossing the rest of society back to 19th-century-style laissez-faire.

The Post’s assertion that “the inclusion of labor and environmental standards is now standard practice” is not true. Neither the North American Free Trade Agreement nor the World Trade Organization includes such standards. Recent bilateral trade deals with Chile and Singapore — like the side agreements to NAFTA, which are not part of that treaty — simply admonish the participating countries to enforce their own standards.

During the past quarter-century of globalizing markets, we have been assured that freer trade would vastly accelerate the rise in living standards. Yet world economic growth since the mid-1970s has been below that of the previous 25 years. The gap between rich and poor countries has widened, and the legal disputes that accompany new trade agreements have actually raised, rather than lowered, tensions among nations. Free market “reforms” imposed by trade agreements on poor nations often produce a thin layer of globally connected elites, while further impoverishing and angering the poor.

The Post cites the job expansion of the 1990s as evidence of the benefits of free trade agreements to American workers, a point reiterated by the deputy U.S. trade representative ["Free Trade Rewards Workers," op-ed, Aug 13.] But the facts are otherwise.

Economic growth is measured by a change in the real gross domestic product. One of the major components of GDP is net exports. Everything else being equal, when exports grow faster than imports, GDP rises. When imports rise faster, GDP falls. Between 1990 and 2000, imports rose 50 percent faster than exports. The net impact of trade on growth during the decade was undeniably negative.

Our economic performance in the 1990s was similar to that of a corporation whose booming domestic business hid the losses from its foreign operations. With the recent slowdown in domestic growth, the hemorrhaging of skilled manufacturing jobs has accelerated. Their way smoothed by trade agreements with no social protections, American corporations can shift production to countries where able workers are cheap and governments will keep them that way.

The result has been a relentless string of unsustainable deficits in our balance of payments with the rest of the world. We are now in a vicious circle; as trade expands, so does our trade deficit. Yet it is obvious that we cannot continue forever to buy more from the rest of the world than we are selling. At some point foreign investors will be unwilling or unable to keep lending us money to finance our consumption. When that happens, the dollar will likely plummet and interest rates spike, with devastating economic consequences.

Many will argue that the problem is that Americans don’t save enough to pay for our excessive imports. But saving more means spendng less, and no one knows how to get Americans to do that. For the nation as a whole to save more, the government would have to raise taxes and run a very large surplus, which neither America’s leaders nor its electorate is prepared for. Until we solve this problem, expanding trade inevitably expands our trade deficit.

It is quite reasonable for one to believe both that trade is valuable and that the rush to sign still more trade agreements is a mistake. The Post’s use of the epithet “protectionism” to silence even the mildest of dissent from doctrinaire free trade helps throttle a desperately needed national discussion.

Jeff Faux  is a distinguished fellow at the Economic Policy Institute, Washington, D.C.


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