The Comeback Read online

  Prime Minister Stephen Harper’s governing Conservatives have made strengthening ties with Latin America a priority in an effort to broaden markets for Canadian commodities and reduce the country’s dependence on the U.S. economy.35

  The Wall Street Journal, Sept. 17, 2010:

  BRUSSELS—European governments Thursday approved a free trade agreement with South Korea, the world’s 12th-largest economy. With bilateral trade at $74.3 billion last year, it is one of the biggest free trade deals ever between two economies . . . Starting [July 1, 2011], tariffs will be phased out on 96% of European and 99% of South Korean goods within three years. All levies on industrial goods will be eliminated within five years.

  The deal is a coup for EU trade negotiators. The EU started talks with South Korea in 2007, the same year as the U.S. Fearing a protectionist backlash, however, the administration of U.S. President Barack Obama hasn’t yet presented the U.S.–South Korea free trade agreement to Congress . . . According to EU estimates, the deal will generate an additional $25 billion of additional exports for EU producers. It will likely be in the high-technology industrial sectors where Europe is strong. Top EU exports to South Korea in 2009 were nuclear machinery and parts, $8.6 billion, electronics, $3.4 billion, and cars and trucks, $2 billion.

  “The European Union is the world’s No. 1 economic bloc and South Korea’s second-largest trading partner,” South Korea’s Ministry of Foreign Affairs and Trade said in a statement. “The pact will bring about economic benefit more than a free trade pact signed with the U.S.”36

  FREE TRADE

  In March 2010, President Obama announced plans to double U.S. exports in five years. “Those who once would oppose any trade agreement now understand that there are new markets and new sectors out there that we need to break into if we want our workers to get ahead,” he said.37 The president made a direct call on Congress to pass the pending free-trade agreements with Panama, Colombia, and South Korea, which have been stalled in Congress since Democrats took control in 2006.

  In July 2010, President Obama announced the creation of an export-promotion council, chaired by Boeing Chief Executive James McNerney and Xerox CEO Ursula Burns. “Ninety-five percent of the world’s customers and fastest-growing markets are beyond our borders. So if we want to find new growth streams, if we want to find new markets and new opportunity, we’ve got to compete for those new customers,” the president said.38

  In September 2010, the president’s export-promotion council released a report recommending that the federal government expand its trade promotion efforts and finish work on the pending free-trade agreements. “The more American companies export, the more they produce. And the more they produce, the more people they hire, and that means more jobs—good jobs that often pay as much as 15 percent more than average.”39

  Although the agreements were entered into by President Bush years earlier, President Obama has been consistent in indicating he wanted them passed. Unfortunately, in doing nothing to move them, so has Congress. Almost a year after the president announced his export initiative, the free-trade agreements are still pending. Meanwhile, as the above news stories make abundantly clear, the rest of the world is not waiting on the United States to get its act together in opening new markets for American goods.

  Free trade is the conduit through which the world’s citizens are able to improve their standard of living. Free trade lowers the costs of goods for everyone and opens markets where none before existed. In today’s increasingly connected world, there is no justifiable reason a consumer can’t get a product from anywhere in the world with the click of a mouse.

  As it relates to innovation, free trade vastly expands the market opportunities for U.S. tech companies, adding to economic growth and jobs. At home, Americans get lower-cost consumer technologies that enable them to innovate and create new businesses, Web sites, and content. When the cost of doing business is lower, the cost of starting a business is lower.

  According to the Commerce Department’s Bureau of Economic Analysis, royalty and licensing fees paid to America’s innovators from overseas is on pace to reach $100 billion in 2010. Between 2003 and 2008, royalty and licensing fees paid to Americans doubled from $48 billion to $93 billion annually.40

  Also, exports in other intellectual property–intensive industries nearly doubled over the same period. Income from exports of IT-related services, such as research and development and computer and database services, rose from $17.7 billion to just under $30 billion. Exports of medicines and pharmaceuticals rose from just over $20 billion to just over $40 billion.

  But as long as these trade agreements remain stalled, U.S. firms trying to sell to potential markets like Colombia face higher tariffs than our competition. In September, Colombia announced that its 2010 exports will reach $40 billion and that it expects sales to double in the next four years.41 In addition to Canada, Colombia is also pursuing a trade deal with another U.S. competitor, Japan.

  Moreover, Colombia’s domestic consumer electronics market was estimated to be worth $3.3 billion in 2008, and it is expected to reach $5.1 billion by 2013.42 These aren’t insignificant numbers. They reflect a growing economy in an economically strategic part of the world. Yet the U.S. is willfully cutting itself off from entering this new market.

  The rest of the world wants American dollars. They want us to buy their goods. But they will also not pass on the opportunity to form a free-trade bloc with other nations to get a competitive advantage over the United States. The EU is doing this right now, as are several East Asian nations. Americans now face two powerful spheres of free trade, one in the EU and the other in Asia. Our shift toward protectionism and toward walls around our country will lead to devastating consequences for our economy.

  Inaction on trade deals is already costing American jobs. According to C. Fred Bergsten, director of the Peterson Institute for International Economics, every $1 billion in addition exports produces about 7,000 new jobs. Writing in the Washington Post, Bergsten notes that passing the Colombian and South Korean agreements could save around 300,000 American jobs.43

  The Wall Street Journal story quoted earlier mentions that the EU–South Korean free-trade agreement will generate $25 billion in additional exports for EU producers. Talk about outsourcing. Keeping with Bergsten’s formula, the EU should expect to generate roughly 175,000 jobs with its South Korean trade deal alone.

  Meanwhile, a U.S Chamber of Commerce report found that the United States’ existing free-trade agreements with fourteen countries in 2008 generated $304.5 billion in output (or 2.1 percent of U.S. GDP), expanded total U.S. exports of goods and services to the world by $462.7 billion, and supported 5.4 million U.S. jobs.44

  The Chamber of Commerce also looked at what effect the failure to implement the pending free-trade agreements has had on the U.S. economy. It found:

  Specifically, failure to implement the U.S. FTAs while our trading partners go forward with their FTAs would lead to a decline of $40.2 billion in U.S. exports of goods and services and U.S. national output failing to grow by $44.8 billion. We estimate that the total net negative impact on U.S. employment from these trade and output losses could total 383,400.45

  Now take the 1994 North American Free Trade Agreement (NAFTA). In a humorous but telling flip-flop, during the 2008 Democratic primary debate, candidate Barack Obama spoke out consistently against NAFTA, even attacking his opponent, then-Senator Hillary Clinton, for her supposed support of the trade agreement. But then word leaked that one of Obama’s campaign advisors had spoken to Canadian officials to reassure them that Obama’s anti-NAFTA talk “should be viewed as more about political positioning than a clear articulation of policy plans.”46

  Candidate Obama had to do some fancy campaign footwork to reassure his protectionist base that he opposed NAFTA. But nearly three years later, the Obama Administration hasn’t touched NAFTA. So perhaps the campaign advisor’s uncouth comment to the Canadians had been correct after all. Regardless,
it’s no secret why the Obama Administration has no interest in “renegotiating” NAFTA, or any such other nonsense:

  U.S. goods and services trade with Canada and Mexico totaled $1.1 trillion in 2008.

  Exports totaled $482 billion; imports totaled $596 billion.

  U.S. exports to Canada and Mexico in 2009 were $333.7 billion, up 135 percent from 1993 (the year prior to NAFTA).

  It seems that President Obama has learned a thing or two since he was candidate Obama. Taking cheap shots at one of the greatest trade agreements in the nation’s history is easy on the campaign trail and helps please the base, but when confronted with the undeniable benefits of the agreement, it’s a little harder to keep campaign promises.

  The president should be commended for his forceful defense of free trade in general. But the differences between candidate Obama and President Obama underscore the political challenge of championing free trade in the United States, especially for Democrats, but also for Republicans as well.

  The opposition to free trade is easy enough to understand. Opponents say free trade undermines American manufacturing with an influx of cheap, foreign goods; free trade exploits workers in other countries that don’t have labor laws or a minimum wage; and free trade ships jobs overseas, leaving hard-working Americans unemployed.

  Certainly at a time of high U.S. unemployment, these arguments are compelling and attractive to many Americans, particularly union workers. With so many American industries, such as the steel and automotive industries, in various stages of collapse, Americans wonder if we can survive with a declining factory base. Indeed, the popular appeal of these arguments has led to government subsidies for manufacturers, to steel tariffs, and to multi-billion-dollar bailouts of Detroit auto companies.

  But the central fallacy of these arguments is that they see international trade as a zero-sum game. In other words, one nation must win, and one nation must lose. If a company shifts an American job overseas, that’s one less job in America.

  The reality is something different. Certain countries are better suited at producing certain products than other countries. Each country’s economic prosperity will be much greater if it devotes its scarce resources to producing the products it is better suited and more efficient at producing, and then trading for those products it is less suited to produce.

  So the reason that many factory jobs are leaving the United States is that generally other nations are more efficient at producing the same product. We might try to keep these jobs in the United States through artificial means, but since manufacturing in the United States is more costly, the overall economy suffers. It makes more sense for the United States to produce those products it is best suited to produce.

  But making all products in the United States does not make sense. The beauty of free trade is that each country will do what it does best and that each company will make its own decision on where to manufacture, based on comparing costs and benefits. Every American executive would rather produce in the United States just as a matter of convenience. But when it’s more efficient to produce the same product overseas and stay competitive within the industry, that executive will make a decision based on what’s in the best interest of his or her company.

  This comparison also holds true for the American workforce, which is by far more educated than the workforces in high manufacturing countries, like China. Better educated people are more expensive to employ; better educated people also do not seek out factory jobs. Indeed, it is increasingly difficult to manufacture in the United States, not only for reasons of cost but also for finding workers who will be satisfied with factory jobs. People with college degrees do not want repetitive factory work.

  As it is, we often face challenges filling the tens of millions of service jobs needed to keep our economy going. We cannot fill retail, fast food, cleaning, janitorial, gardening, driving, dishwashing, orderly, and other important and necessary jobs that are the backbone of our economy. One reason illegal immigrants are attracted to the United States is that many of these jobs are not filled, because Americans do not want them.

  The kind of factory jobs Americans are filling are in the high-tech sectors, where educated workers are required to operate computers or work with complicated machinery. Instead of highly skilled Americans working in textile, steel, or automotive plants, they’re working in computing, pharmaceutical, and nanotechnology plants.

  BUY AMERICAN

  The result of this shift away from more traditional factory jobs toward high-tech factory jobs is that the U.S. economy is more efficient and our workers are more productive. Our economy is able to generate more goods and consume more goods and services at a cheaper cost. We’re doing what we do best, while other nations do what they do best. In the end, both win. International trade is not a zero-sum game.

  Unfortunately, politics usually gets in the way. For instance, appeals like “Buy American” strike a patriotic chord, and on the surface it seems like the decent thing to do to help U.S. workers. But there’s a wide chasm between the perception of “Buy American” and the reality.

  In the 2009 “Recovery Act,” which totaled $787 billion, there was a “Buy American” provision. All steel, iron, and manufactured products used in stimulus-funded projects had to be produced in the United States. The same was true for all clothing, equipment, and textile products used by the Department of Homeland Security. The obvious intent behind the “Buy American” provision was to create or save American jobs in these industries.

  The problem occurs when other countries retaliate with “buy local” provisions of their own. For instance, the U.S Chamber of Commerce estimates:

  [a]ny net increases in U.S. employment resulting from the new “Buy American” provisions will quickly evaporate as other countries implement “buy national” policies of their own. In the event that retaliation causes U.S. companies to lose just 1 percent of potential foreign stimulus procurement opportunities, the net employment loss to the United States from the Recovery Act’s “Buy American” provisions could total 176,800. In the event retaliation escalates, U.S. job losses will mount dramatically.47

  Which raises the other ugly side of protectionist policies: whatever the United States can do to shut out foreign markets and goods, so those foreign countries can do to the United States. It happens all the time. Early in his term, for instance, President George W. Bush imposed steel tariffs on foreign producers as a boon to the domestic steel companies. At the time, the administration defended the move as a way to support an all-American industry. The cynics in the audience saw it as an economically stupid way to buy votes in swing states like West Virginia and Pennsylvania.

  In any case, three years after the imposition of the tariffs, the economic consequences proved too much. One study found that retaliation from foreign steel-producing countries had cost about 200,000 American manufacturing jobs, while steel prices rose as high as 30 percent, decimating the small steel-using shops across the country.48 The administration finally waved the white flag and removed the tariffs.

  Such economically short-sighted and politically motivated policies are one factor hindering the nation’s economic growth. It happened under a Republican administration, and it’s happening under a Democratic administration. Despite President Obama’s best efforts, the main reason why nothing has been done to pass the pending free-trade agreements is because Democrats in Congress are beholden to the labor unions. Considering how much money the unions give to the Democratic Party, it’s hard to blame them.

  Since 1990, labor unions have contributed over $700 million (92 percent of union money) to Democrats. In 2008, unions contributed $68.2 million directly to the Democratic Party, according to the Center for Responsive Politics.49 In addition, unions spent heavily on their own advertisements to get President Obama and other Democrats elected. The AFL-CIO borrowed over $30 million to support Democrats in the 2008 cycle. SEIU headquarters required every local affiliate to pay a $6 per member per month contributio
n or pay a 50 percent fine. The support of the Democrats does not come without strings. The unions expect something in return for their generous support of the Democratic Party, and stalling passage of free-trade agreements is exactly what the unions had in mind.

  It’s not that Republicans are immune to patriotic appeals to “Buy American,” but at least in the case of the GOP, we can assign it to pure economic ignorance. For Democrats, it’s a shameful lesson in “pay-to-play” politics.

  PIRACY

  In terms of innovation, there remains the matter of intellectual property rights when it comes to free trade. The fact is that there is very little the United States can do to combat content piracy and patent stealing in foreign countries. Going abroad, it’s easy to find a copy of almost any American movie or song at rock-bottom prices right off the street. World Trade Organization members are required to adhere to IP protections, but even these provisions are hard to enforce and violations hard to prove, except on a massive scale.

  And the piracy isn’t just movies and songs illegally downloaded over the Internet or burned onto a DVD. Sometimes foreign IP piracy takes the form of stolen computer codes and counterfeit consumer electronics. Most of these rip-offs are sold abroad, but they are also sometimes smuggled back into the United States and sold on the black market. This type of international IP piracy poses serious problems for innovative companies. Two recent examples highlight the severity of the problem.

  On June 8, 2010, a former research chemist for DuPont who had accepted a position at Peking University College of Engineering in China pleaded guilty to trade secret theft. In 2009, while still working for DuPont, he had attempted to send documents detailing a proprietary chemical process and samples of chemical compounds to himself at the University.