Global Policy Forum

By Daniel T. Griswold*

A week-long series on Lou Dobbs's CNN show MoneyLine pounded home the theme that global trade is sucking the lifeblood out of the American economy. As Dobbs announced in the opening segment, the series would examine "the broken promise of international trade for hundreds of thousands of American workers. Jobs in this country are disappearing, in some cases literally being exported overseas along with valuable technology and intellectual capital."

Sadly, in a disservice to his viewers, the series did not even pretend to be evenhanded. It featured a who's who of protectionists, and blamed every bit of bad economic news squarely on foreign trade. The series missed the fundamental truth that trade has been a key ingredient in the acceleration of worker productivity and rising living standards in the United States in the last decade. During much of the 1990s, when imports and trade deficits were both rising rapidly, so too were domestic employment, manufacturing output, and real wages. Between 1994 and 2000, civilian employment in the U.S. economy rose by a net 12 million and the unemployment rate fell from 6 percent to 4 percent. During that same period, US manufacturing output rose by 40 percent while the volume of imported manufactured goods doubled. Meanwhile, real compensation rose for American families up and down the income scale.

Manufacturing took a nosedive in 2001-2002, but rising imports were not the culprit. While manufacturing output was falling 4.1 percent in 2001, real imports of manufactured goods were falling 5.4 percent after four straight years of double-digit increases. The same domestic recession that put the kibosh on domestic manufacturing output also curbed demand for imports. America's high-tech recession is equally homegrown. Up until mid-2000, high-tech industries were booming and unemployment rates were extremely low. What changed was not a flood of foreign-born workers or work moving offshore, but the collapse of high-tech stock prices, falling domestic demand, and the resulting overcapacity.

Neither the trade deficit nor the North American Free Trade Agreement (NAFTA) can be credibly blamed for America's slow-growth economy. The US runs a trade deficit with the rest of the world year after year because foreign savers continue to find the US economy an attractive place to invest. That net surplus of investment capital buys new machinery, expands productive capacity, funds new research and development, and keeps interest rates lower than what they would otherwise be. Since the implementation of NAFTA, predictions of a "giant sucking sound" have become laughable. In the first eight years of NAFTA, 1994 through 2001, manufacturing output in the United States rose at an annual average rate of 3.7 percent, 50 percent faster than during the eight years before the agreement took effect. Manufacturing employment has fallen in the past few years, but that cannot in any plausible way be blamed on NAFTA. In fact, the number of Americans employed in manufacturing grew by half a million in the first five years of NAFTA.

American factories are not pulling up and moving wholesale to Mexico and China. US manufacturers invest an average of about $2 billion a year in Mexico, and even less per year in China. That compares to $200 billion invested in manufacturing capacity each year in the domestic US economy. US manufacturers have invested more manufacturing capacity in the tiny Netherlands than in Mexico and China combined. In fact, according to a recent study by Deloitte Consulting, 94 percent of America's outward-bound foreign direct investment (FDI) in manufacturing last year went to other high-wage, high-standard countries. The small outflow of manufacturing FDI to Mexico and China has been overwhelmed by the net inflow of such investment from the rest of the world, most of it from Europe and Japan. So much for the mythical "race to the bottom".

In recent testimony before Congress, Federal Reserve Board Chairman Alan Greenspan credited liberalized trade, as well as deregulation and information technology, with raising the productivity and real incomes of American workers. Greenspan understands what the MoneyLine series utterly failed to grasp: In America today, trade and prosperity are a package deal. The more we prosper, the more we trade, and the more we trade, the more we prosper. By seeking to curb imports of manufactured goods or to derail market-opening trade agreements, opponents of trade will only undermine the ability of the US economy to expand output and create well-paying jobs.

About the Author:Daniel T Griswold is associate director of the Center for Trade Policy Studies at the Cato Institute.

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