How Capitalism Will Save Us (47 page)

Chastened by that experience, some 23 nations came together after World War II and signed the General Agreement on Tariffs and Trade (GATT) in 1947. In 1995, GATT was replaced by the World Trade Organization, which included 153 nations and nearly 98 percent of global trade.
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Since the trend toward global trade began, most import quotas have been eliminated. According to Rod Hunter of the Hudson Institute, average tariffs fell from nearly 40 percent to 9.7 percent. America’s import duties average a mere 3.5 percent. Europe’s average is 5 percent.
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This loosening of trade barriers brought a thirtyfold increase in global trade that has been a boon to U.S. prosperity. In a widely cited 2006 study, economists Scott C. Bradford, Paul L. E. Grieco, and Gary Clyde Hufbauer estimated that overseas trade had added between $800 billion to $1.4 trillion in annual income to the U.S. economy since World War II.
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That translates into a total gain in products, goods, and services of about seven thousand to thirteen thousand dollars per household. This enormous benefit far exceeds the cost of worker dislocations that trade produces—estimated at about $54 billion or less.

Much of this growth has occurred in the last thirty years. One of the reasons that the 1970s had a lower standard of living was that the United States did not trade with the world to the extent it does today. In 1970, imports and exports together made up only 12 percent of our gross domestic product. By the mid-2000s they made up 24 percent.
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The continuous move since World War II toward freer trade is a
major reason that the United States has, over the past three decades, experienced a historic rise in its standard of living. Thanks to free trade, Americans of all income levels are now able to afford products from televisions to refrigerators to clothing that were once many times more expensive or considered luxuries.

But the benefits of trade with other nations go far beyond being able to afford “cheap” TVs, clothes, and toys. By making the iPod affordable, low-cost flash chips from South Korea, for example, have helped to make possible an entirely new mini-industry, along with tens of thousands of jobs. Economist Ana Isabel Eiras of the Heritage Foundation writes:

Anyone who doubts the connection between free trade and innovation should look at the products of countries that don’t allow competition from imported products. A well-known example is the Trabant, the auto produced in East Germany, where it faced no competition. Little wonder it became known for shoddy quality.

Anti-free traders, particularly organized labor, have bemoaned job loss resulting from corporations “outsourcing” or “offshoring”—using the lower-cost labor of other nations to manufacture goods once made in the United States. We’ve already noted that unemployment over the past three decades has been lower than when trade barriers were higher. And the trade bashers conveniently ignore the fact that foreign trade creates factory jobs in the United States. One out of every five American factory jobs is foreign trade related. Free trade also provides new markets for U.S. farmers, who export one-third of their crops.

Free trade has raised living standards around the globe. As Robyn Meredith and Suzanne Hoppough wrote in
Forbes
in 2007, “globalization”—international free trade—has done more to help the people in Asia and Africa than the $2 trillion of foreign aid that the United States
and Europe have poured into those regions in the last half century.
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According to the International Monetary Fund, some two hundred million people have been lifted out of poverty since globalization took off in the 1990s.

A study by the management consulting firm A. T. Kearney found that between 1980 and 1990 alone, global poverty rates fell by half—from 34 percent to 17 percent.
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Within that decade, trade helped to lift 573 million people above the absolute poverty line. The middle class, meanwhile, saw its median income worldwide rise by roughly 15 percent.

Not only does free trade bring greater prosperity, but it also helps to usher in democracy—or the beginnings of it—to once-repressive dictatorships. No one would call China a democracy. But thanks to free trade and a more liberalized economy, that nation is nowhere near as oppressive as it was in the era of the Cultural Revolution under Mao Tse-tung. Daniel Griswold of the Cato Institute believes that the rise in global trade is related to the reduction of major armed conflicts. He cites a 2006 survey by the Stockholm International Peace Research Institute finding that since the early 1990s, “ongoing conflicts have dropped from 33 to 17, with all of them now civil conflicts within countries.”
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The reason?

Despite all the progress, free trade in the Real World is fragile. Protectionist pressures in all countries increase in hard times. During the 2004 presidential campaign, candidate John Kerry called companies that invested overseas “Benedict Arnolds.”
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Twenty years earlier, Walter Mondale raised the specter of America’s becoming a “hollowed-out” nation of “hamburger flippers” because of the rise of Germany and Japan. Even in the last campaign, Hillary Clinton and Barack Obama competed with each other in denouncing the North American Free Trade Agreement.

Opponents of “globalization” fan the flames of fear by raising the specter of all sorts of doomsday scenarios. None have ever come to pass.
Former Michigan governor John Engler, president of the National Association of Manufacturers, points this out.

The real doomsday scenario would occur if trade were halted. The world economy would shut down.

T
he temptation for nations to turn inward inevitably grows in a down economy. Businesses and labor groups ramp up political pressure on legislators to eliminate foreign competition and—they think—save jobs. Hudson Institute trade policy analyst Rod Hunter reported that countries struggling with a worldwide recession in 2009 increasingly threw up trade barriers.

The United States has shown similar protectionist impulses. In early 2009, the new Obama administration, in a political payoff to the Teamsters union, halted a program that had allowed about one hundred Mexican trucks access to U.S. roads. Meanwhile, stimulus legislation passed by the U.S. Congress featured a “Buy American” provision requiring that iron, steel, and manufactured goods acquired for infrastructure projects be produced in the United States.

Whether it is banning Belgian chocolates or foreign steel or Mexican trucks, protectionism is never a solution to hard times. The Real World fact of the matter is—and this is something that emotional free-trade bashers often don’t get—even moderate-sounding trade protections can be extremely damaging. And they really don’t create many jobs; in fact, they destroy more than they save.

“Buy American” is a case in point. To some, the patriotically named measure may not sound particularly threatening. What’s wrong with requiring that government projects use materials fabricated at home? Buy American, after all, is not an across-the-board tariff like the infamous Smoot-Hawley.

Economists Gary Clyde Hufbauer and Jeffrey J. Schott of the Peterson Institute for International Economics calculate that the number of jobs that would be created by both the House and Senate versions of Buy American would be minimal. The original Buy American provisions as passed by the House of Representatives would have resulted in the purchase of about 0.5 million metric tons of steel—creating about one thousand domestic jobs. In a labor force of 140 million people, this number is—as the authors put it—barely a “rounding error.” They calculated that the total number of jobs created by the Senate version of the bill would be approximately nine thousand.
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Meanwhile, tens of thousands more jobs—directly and indirectly—would potentially be destroyed. Remember the classic case of Smoot-Hawley. That law was originally designed to help protect American farmers—and later, manufacturers and producers—from Canadian and other foreign competition. Yet within eighteen months of its enactment, unemployment had quadrupled.

Buy American provisions also promote unemployment by soaking up private-sector capital that would have created jobs elsewhere in the
economy. Dartmouth economics professor Douglas Irwin describes the capital destruction that took place in the 1990s as a result of California regulations requiring the San Francisco-Oakland Bay Bridge to use more costly domestic steel.

Then there’s the job destruction that occurs when America’s trading partners retaliate. According to Hufbauer and Schott of the Peterson Institute, Buy American as originally written could have provoked retaliation by any of twelve foreign nations that are U.S. trading partners—a group that includes Canada, the UK, Japan, and Germany, as well as China, South Korea, and Hong Kong. Based on our level of exports to those countries, the economists estimated that if “10 percent of those exports are lost, as many as 65,000 jobs could vanish.”
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They conclude:

Fortunately, Buy American was eventually watered down after free traders protested that the provision violated existing trade agreements. Language was added that effectively neutralized the measure. However, the other protectionist move, the banning of one hundred Mexican trucks, resulted in Mexico slapping some $2.4 billion in tariffs on some ninety American products, from toilet paper and Christmas trees to fruit juices and deodorant. James Roberts of the Heritage Foundation writes that in Oregon alone, the tariffs will cost companies tens of millions of dollars, including $80 million in annual exports of french fries to Mexico. Canada, which doesn’t have to pay the tax, would pick up the business.
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