Trade and Jobs

Ray Keating

The primary job of labor unions is to protect members' jobs. That certainly jibes with their protectionist posturing on trade.

There's a lot of ugly politics and silly economics around on trade and the global economy these days. Much of it springs from unions and their political allies.

For example, there's been talk around for years that the North American Free Trade Agreement, or NAFTA, cost the U.S. many jobs. Visit the AFL-CIO's website, for example, and they offer a state-by-state tally of job losses supposedly tied to NAFTA that tops 1 million for the period 1993 to 2004.

One hears the argument a good deal that NAFTA caused business operations to be moved from the U.S. to Mexico. Hmmm, really?

Well, no. All of this actually is quite silly.

Certain kinds of production and related jobs were already moving out of the country, and would have continued moving with or without NAFTA. The main accomplishment of NAFTA was to reduce trade barriers between the U.S. and Mexico (we already had a trade deal with Canada, the other signer to NAFTA), and since Mexico's trade barriers were much higher than our own, the U.S. reaped the greatest rewards.

Ah, but what about rising imports and large trade deficits? Like the mercantilists of centuries gone by, today's protectionists in labor unions and strolling the halls of Congress believe that imports and trade deficits are bad.

They fail to grasp two fundamental facts of economic life. First, imports merely reflect businesses and individuals purchasing the products they choose. Imports expand competition and choice, and reduce prices. That's all good news. Oh yes, by the way, there is that little basic economic fact pointed out by the classical economist Jean-Baptiste Say in the early 19th century, i.e., that products ultimately are purchased with other products. In order to boost imports, there must be a growing domestic economy.

That brings up our second fact of economic life relating to trade -- trade deficits usually reflect economic growth. A growing economy attracts foreign investment and boosts the demand for imports by both individuals and businesses, with the result being a trade deficit. When you look back over the past several decades, it is interesting to note that during periods of robust U.S. economic growth, U.S. trade surpluses shrink or deficits expand, while during economic slowdowns or recessions, trade deficits either get smaller or shift to surpluses.

Of course, the same strong economic growth that means more imports and larger trade deficits, also means increased job creation.

For good measure, lower trade barriers expand opportunities for U.S. entrepreneurs and businesses around the globe, thereby boosting exports.

Overall, the U.S. is more dependent on trade to grow our economy perhaps than ever before. For example, total trade (exports plus imports) in 2006 equaled 28.6 percent of the U.S. economy, compared to 7.8 percent in 1960.

Nonetheless, populist fears too often overwhelm economic common sense on trade. Not only has this Congress failed to extend trade promotion authority so that the President can work to expand opportunities for U.S. businesses and consumers, but it also is delaying action on trade deals with Peru, Panama, Colombia and South Korea. Such a protectionist slant can only be bad news for the U.S. and global economies.

But there's still more. As The Wall Street Journal reported on October 15, some in Congress are using trade as an excuse to spend more tax dollars on so-called trade assistance. That is, if it is somehow deemed that a job was lost due to trade, then the government provides aid to the presumed victims. President Bush has proposed spending $880 million in this area, but some in Congress want to dole out even more.

Perhaps such wasteful government spending is the price these days to push free trade forward. But both the White House and Congress would be wiser to forget about such dubious handouts, and instead just advance free trade. That truly helps the economy grow. And a growing economy, of course, is the best jobs program around.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
Copyright 2007. All Rights Reserved.

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