The Facts on Free Trade
- Wednesday, November 12, 1997
The debate over granting President Clinton’s fast-track authority to negotiate international trade and investment agreements (postponed until next year) has given rise to a larger debate on expansionism vs. protectionism of U.S. trade policy. Protectionists, who are against fast-track authority, claim that expanding trade has a negative impact on the U.S economy. Supporters of trade expansion realize that free trade policies actually increase jobs and improve the economy. NAFTA (the North American Free Trade Agreement) has been used by both sides in support of their claims that free trade is harmful or beneficial, respectively. Following are general facts about free trade along with a closer look at the results of NAFTA in the U.S. and Nevada during its first three years, 1994 to 1996.
Free Trade Creates Jobs
Contrary to the contentions of protectionists, free trade creates jobs because opening up trade internationally means there will be more demand for American goods and services. To meet the increasing demand, U.S. companies must hire additional workers. Perhaps more convincing are the statistics comparing unemployment levels to export levels. In 1975, U.S exports represented 4 percent of Gross Domestic Product (GDP), while unemployment stood at a dismal 8.5 percent. Two rounds of multilateral trade negotiations liberalized trade in goods and services since 1975, and today U.S. exports represent 8.2 percent of the GDP—doubling the levels in 1975—and unemployment is around 5 percent. (Information from the Economic Report of the President 1997, Council of Economic Advisers, Executive Office of the President.) Of course many factors are involved in this shift, but it is clear that as the level of exporting has grown so has job creation. For every $1 billion increase in U.S exports, up to 20,000 U.S. jobs are created, according to the Trade Promotion Coordinating Committee report in 1993. According to the Council of Economic Advisers, 12 million American owe their jobs to exports.
"Of course exports create jobs, but imports cost Americans jobs," say the protectionists. This assumption is based on the fact that just as $1 billion in exports creates 20,000 jobs, then $1 billion in imports means 20,000 jobs lost. Further, because the United States is running a trade deficit there must be a net loss of American jobs overall. Neither assumption is true. When the U.S. trade deficit grew, representing an increase in imports, the U.S. unemployment rate decreased. Conversely, when the trade deficit fell (a decrease in imports), the unemployment rate rose. For example, the U.S. trade deficit rose starting in 1983 and peaked in 1987, while the unemployment rate decreased from 9.6 percent in 1983 to 5.5 percent in 1988. (Based on Economic Report of the President, 1993, 1994, 1995 editions.) The trade deficit began to shrink between 1989 and 1991 and unemployment rose from 5.3 percent to 6.7 percent. Currently the unemployment rate is around 5 percent—anything below 6 percent economists consider "full employment"—and the trade deficit is growing. Since NAFTA went into effect Nevada’s unemployment rate fell from 7.2 percent in 1993 to 5.4 percent in 1996.
Trade Deficits Are a Sign of Economic Strength
To stay competitive in an international marketplace, Americans must to import products. Petroleum, one of the largest and most important imports, accounted for 40 percent of the overall trade deficit in 1996. The U.S. economy relies heavily on petroleum, so much so that without importing it, the U.S. economy could not function. Similarly, other U.S. companies rely on importing items needed to manufacture their products.
Contributing to the trade deficit is the inability of the U.S, or any country to manufacture everything it needs. Also, some countries are simply better than others at producing certain items. In an example cited by Bryan Johnson of the Heritage Foundation, Japan may have a competitive advantage in producing certain memory chips for computers while U.S. firms have an advantage in producing the microprocessors, the computer’s brains. U.S. firms will employ their labor and resources to produce more and better microprocessors and import reliable components like memory chips. However, if the U.S. erects barriers to memory chips, the U.S. firms will either pay higher costs or divert labor and capital from something they do well to make something else that they don’t but is cost-prohibitive to import. The result is an increase in manufacturing costs and a decrease in marketplace competitiveness.
A U.S. trade deficit reflects Americans’ ability to buy goods and services from around the world because high per-capita incomes permit Americans to search for superior products. The U.S. is the world’s largest exporter of goods and services. But if Americans decided to buy more foreign than U.S.-produced goods, the U.S. will have a trade deficit—which is not a sign of economic weakness. "Measuring the benefits of trade by subtracting the imports from the exports makes little sense," says John Sweeney, also from the Heritage Foundation.
A Closer Look
NAFTA provides the proof that free trade positively impacts the economy. According to the Massachusetts Institute for Social and Economic Research (MISER), total exports to Mexico grew by 30 percent from 1993 to 1996, reaching a record $54 billion. U.S. exports to Canada increased by 26 percent, to $126.5 billion.
NAFTA benefited the U.S. economy, although not all states benefited equally. Nevada saw exports to Canada grow by 94.6 percent, from $147 million in 1993 to $288 million in 1996. But exports to Mexico fell by 33.5 percent from $13 million in 1993 to $9 million in 1996. Overall Nevada ranked fourth nationwide in percent of increased exports to NAFTA countries. (Based on MISER numbers.)
If NAFTA is so great, why did Nevada exports to Mexico decline? Actually, this is not surprising, because foreign exports are driven by foreign demand. The average Canadian, five times wealthier than the average Mexican, is much more likely to buy U.S.-made products, explains Sweeney. Per capita GDP in Canada was $19,588 in 1996 compared with $3,600 in Mexico. Also about 14 percent of Canada’s population of 30 million lived below the poverty level in 1996 while over 40 percent of Mexico’s population of 93 million lived in poverty. Demand in Mexico for U.S.-made goods will be significantly lower than the demand in Canada for the same goods.
If free trade critics were right, more Americans should be out of work now than ever before and the economy should be shrinking. NAFTA is the example that has not lived up to protectionist’s claims that millions of jobs would be lost— the unemployment rate has declined. Additionally, the U.S. manufacturing base has not been weakened—exports have increased.
Other countries will not wait for the United States while they move ahead with new free trade agreements to liberalize trade and investment that benefit their own workers. If the U.S. does not enter new free trade agreements or expand existing ones but sits on the sidelines, ultimately the American consumer and the American worker will be the ones paying for this choice.
Free-trade agreements advance U.S. economic interests. America should continue to lead in expanding trade and opening markets throughout the world to benefit American consumers and workers.
Erica Olsen is a research analyst.