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OCT
27
Election Commentary: Trading Places

As I was going through boxes in my attic last weekend, I came across the box that contained one of my most prized childhood possessions—my baseball card collection. I still remember trading away a 1987 Topps Barry Bonds rookie card for a 1991 Upper Deck Bernie Williams rookie card and a 1989 Topps Don Mattingly card. I was thrilled. The only Don Mattingly card I had been missing was now in my collection. Truth be told, my friend got the best of that trade. But that was not the point. The point was, he had a resource I wanted, and I had a resource he wanted. So we traded. And that, ladies and gentlemen, is called free trade, and it has become a central issue in the upcoming Presidential election.

In order to have a conversation about free trade it is important to dispel one significant misunderstanding about nature of the disagreement on this issue.  No one worth their weight who has actually studied this issue and has an articulate opinion on the matter believes that the United States should not participate in free trade agreements. That is protectionist and isolationist rhetoric that is not only beyond reason, but beyond any possibility. Economists across the political spectrum know that optimal free trade is the best possible circumstance. So for the purposes of this article, we will accept that free trade is a good thing and that we all benefit from it.

The crux of the argument is two-fold. It deals with two major questions: fairness and impact. The question of fairness comes down to a fundamental disagreement on whether the US policies on trade, which have been basically unchanged in the past half-century, are still reasonable given a changing global economic landscape. The United States has always believed that an open market is a good market and the mercantile nature of foreign governments like China does not change the fact that the US economy profits from free trade. This theory comes from a time when the US economy was undoubtedly the global standard and when the United States was the unquestioned leader in manufacturing, technology and other critical components of trade. In that scenario, it does not matter if the deals the US makes are unfair, because the other countries don't have the strength that the US has and their products become inputs for US products which are global industry leaders.

The question is, does the same standard still apply? The opposition of the current strategy says that other global economies, like China, Japan, India and others have developed their own strengths while the US has become more domestically regulated and less of a global power. Naysayers will argue that while our old strategy was fine in an era of US dominance, in today's world, unfair mercantile practices by foreign governments, such as the requirement of local production of goods (which they argue costs US workers jobs) and the inclusion of intellectual property as part of the deal (which they argue puts the US at a competitive disadvantage) creates a drain on American ingenuity and innovation.

All of that said, it is the issue of impact on American manufacturers and workers that has risen to the center of the debate stage in this Presidential election. Republican nominee Donald Trump's argument is that deals like NAFTA (the North American Free Trade Agreement) and TPP (the Trans-Pacific Partnership) are easily manipulated, which closes American factories and costs Americans jobs.  

Is he right? Sort of yes. Sort of no. He is right that our current trade deals are unfair. They do not have provisions that prevent US companies from moving their production overseas to take advantage of cheaper labor, only to bring their products back to the United States under our existing free trade agreements. Companies like Carrier, who just announced the closing of a factory in Indiana and the building of one in Mexico, produce their products at a fraction of the cost and then distribute their products in the United States without any tax or tariff for doing so. The companies improve their bottom lines while putting thousands of Americans out of work. Equally true is the fact that other countries, like China, are producing products that are in direct competition to those made domestically and are able to sell them here at a lower cost because they are produced more cheaply in their home country. That puts domestic products out of favor when compared to their imported competitors.

Where Mr. Trump begins to err is in presenting this as the whole story. Yes, jobs have been lost...especially in the aptly named "Rust Belt" states like Pennsylvania, Ohio and West Virginia.  The problem with Mr. Trump's theory is that the evidence doesn't support that the impact is wide spread. It is widely accepted that the overwhelming majority of U.S. manufacturing decline is due to productivity gains, not shipping jobs overseas. In fact, a recent study at Ball State estimated that only 10% of manufacturing jobs lost was due to a company moving production to another country. And even with losses, the United States remains the world's second largest manufacturer (17.2 percent of global output) and its third largest exporter. This is not to say that there are not areas of the country that have been impacted, and dramatically, by the jobs that have been lost. It is only to say that the notions of widespread job losses to overseas production and that the US doesn't produce anything anymore are just not supported by the facts.

Furthermore, US manufacturing is at an all-time high. The United States remains the top destination for foreign companies making direct investments, more than double its next closest competitor, Hong Kong, and triple third-place China. That is a fancy way of saying that for every factory closing in the Rust Belt, there are two or three BMW, Toyota or other foreign plants opening in the South.

On the other hand, (if you were waiting for the but, here it is) those numbers do not paint a full picture. The very things I mentioned above—growth in technology, automobiles, and electronics—cover up what are real losses in mill towns and other traditional American manufacturing sectors. Recent numbers even suggest that there has been as much as a 30% decrease in manufacturing jobs outside of the technology sector which is totally masked by the overall 800% gain due to things like electronics and automobiles. And while yes, it is true that technology increases wages and GDP growth, even while costing jobs, foreign manipulation and direct competition from imports have the same impact in the wrong direction.

You will notice one thing missing from this discussion of free trade, and that is Mexico. The trade argument is a reasonable campaign issue for both sides, leading voices in both the pro-trade and anti-trade movements agree that NAFTA (the North American Free Trade Agreement) is not the major culprit of the US manufacturing struggles. Both Canada and Mexico (the two major players in NAFTA) tend to abide by World Trade Organization rules and play fairly on the global landscape with regard to trade.

Also missing is a definitive trade position from Democratic candidate Hillary Clinton. While Mr. Trump has been fairly outspoken about his trade position, Mrs. Clinton has not brought this up as a major campaign issue. She has stated that she is against the Trans-Pacific Partnership, a trade agreement supported by President Obama and her running mate Senator Tim Kaine, and a deal she outwardly supported when she was the Secretary of State. The Democratic National Committee position is one of support for global free trade in its current form, so I think it would be disingenuous to say that Mrs. Clinton would support a substantially different position as President of the United States.

The bottom line is this. The United States has been a major player in the free trade universe for more than 100 years. We are the unquestioned leader of the free trade movement and that is likely to change. The idea that "America doesn't build anything anymore," is simply false. What is true is that we have the largest trade deficit in history and a renewed sense that maybe what has always worked is no longer in our best interest. We must all realize that no matter who our next leader is, they are going to have to find the balance between transitioning the traditional American manufacturing landscape into the 21st century's reality and negotiating trade deals that reward American innovation domestically in a global economy where the US is not the only major player on the block.  

Sources
https://www.nationalreview.com/magazine/2016-09-12-0100/free-trade-us-policy
http://www.cato.org/publications/commentary/truth-about-trade
http://www.ontheissues.org/2016/Hillary_Clinton_Free_Trade.htm
http://www.ontheissues.org/2016/Donald_Trump_Free_Trade.htm



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