Tag: Free Trade

John Steel Gordon on Democratic Opposition to Free Trade

In the February 2008 issue of Commentary, John Steele Gordon has a nice look at the increasing opposition within the Democratic Party to free trade. As Gordon notes in Look Who’s Afraid of Free Trade, this is a surprising turn of events since historically it has been the Democrats who supported free trade while Republicans tended to favor high tariffs and other protectionist measures.

Gordon lays the blame for the switch on a number of factors, primarily the decline of manufacturing jobs in the United States which led to an attendant decline in the percentage of works in union jobs in the 1970s and the 1980s. Traditionally pro-free trade unions changed their mind about the value of free trade, and the Democrats have started to follow. This despite the fact that there have been far more new jobs created in the United States than have been lost in the structural shift away from manufacturing.

One of the oddest things about opponents of free trade is how frequently such opponents are also genuinely concerned about global poverty. But if anything is clear about free trade, it is that it ameliorates global poverty. As Gordon notes about NAFTA (emphasis added),

No sooner had the agreement come into force in 1994 than Mexico suffered a severe financial crisis and a radical contraction of its economy. Thanks to an international rescue effort crafted by President Clinton, and the growth in exports fostered by NAFTA, the crisis ended in 1996 and the economy began growing again. Indeed, in nominal terms, Mexican GDP has approximately doubled in the last ten years, poverty has fallen significantly, and exports have been surging. Mexico is now one of the world’s leading trading nations and the biggest in Latin America, surpassing even Brazil.

Free trade is simply the best anti-poverty program ever invented, and it is shameful to see political leaders in the richest country in the history of the world demonizing the efforts of poor around the globe to improve their economic outlook.

Surprise — Free Trade Works Out In The End

Despite Adam Smith’s definitive explanation of how free trade could benefit both parties engaging in trade, pretty much every society is skeptical of free trade and that other country stealing our jobs. So, today, we have the specter of some of the richest nations in the world appalled at the thought of having to compete with some of the poorest nations, and all too happy to condemn the developing world to poverty by closing off markets.

Surprisingly there isn’t actually a lot of research looking at how free trade affects industrialized countries, but Virginia Postrel published an article in the New York Times in January that explored just this topic.

She reported on an academic study of the effects of the Canada-U.S. Free Trade Agreement. The study, by Daniel Trefler of the Rotman School of Management at the University of Toronto.

Trefler’s study focused on the effects that liberalizing tariffs between the two countries had. Postrel writes,

Before the agreement went into effect in 1989, more than one in four Canadian industries were, in fact, protected by tariffs of more than 10 percent. Those industries included not only businesses known for their protectionism, notably apparel makers, but manufacturers of a wide range of products, from beer and pretzels to coffins, plastic pipes and paper bags.

Before the agreement, imports from the United States faced an average tariff of 8.1 percent and an effective tariff of 16 percent. The effective rate included import taxes on the final product and tariffs plaid on raw materials. Someone importing a chair could face a direct tariff on furniture, for example, but could also pay indirect tariffs on wood and upholstery fabric.

At the very beginning of the free trade agreement, those industries that were the most heavily protected took big hits as imports from the United States became even cheaper. According to Trefler, such industries, saw employment declines of as much as 12 percent, and the free trade agreement as a whole reduced employment by 5 percent in industries that had previously been protected by tariffs.

But, over the long run, the Canadian economy regained those jobs and has one of the healthier industrial bases in the developed world. According to Trefler,

Within 10 years, the lost employment was made up by employment gains in other parts of manufacturing. . . The average effect of the U.S. tariff cuts on Canadian employment was thus a wash: the employment losses by less-productive firms offset the employment gains by more productive firms.

And rather than force Canadian wages into a downward spiral, as had been predicted by opponents of the free trade agreement, Canadian wages increased by 3 percent over the eight years studied. A small increase to be sure, but not the predicted decline.

So what did Canadians get out of the free trade agreement if employment was a net wash and wages increased just slightly? It got a big productivity boost. Postrel writes,

The big story is that lowering tariffs set off a productivity boom.

Formerly sheltered Canadian companies began to compete with and compare themselves with more-efficient American businesses. Some went under, but others significantly improved operations.

The productivity gains were huge. In the formerly sheltered industries most affected by the tariff cuts, labor productivity jumped 15 percent, at least half from closing inefficient plants. “This translates into an enormous compound annual growth rate of 1.9 percent,” he [Trefler] wrote.

But closing plants is not the whole story, or even half of it. Among export-oriented industries, which expanded after the agreement, data from individual plants show an increase in labor productivity of 14 percent. Manufacturing productivity as a whole jumped 6 percent.

Free trade — its good for you. Even you folks in the industrial world. So loosen up those protectionist tariffs and quotas already, and give the developing world a fair chance.

Source:

What happened when two countries liberalized trade? Pain, then gain. Virginia Postrel, The New York Times, January 27, 2005.

U.S. Judge Blocks Chinese Textile Quotas

In late December 2004, Judge Richard Goldberg of the U.S. Court of International Justice blocked the United States from imposing emergency quotes on the import of textiles from China.

In order to appease U.S. textile companies, the Commerce Department prepared to impose a number of emergency quotas on the import of jeans, underwear and other clothing products from China. U.S. clothing retailers filed a lawsuit arguing that they would suffer irreparable damage if the emergency quotes were to go into effect.

Goldberg issued a temporary injunction barring the quotas from going into effect, agreeing that retailers would suffer irreparable harm from the quotas and that the quotas should be blocked while the court heard the case.

Under trade agreements that the United States is signed, this year it must remove its textile quota system. Textile companies fear that once the artificial barriers against Chinese textiles are removed, that Chinese textiles will flood the U.S. market. And that would be bad how?

The textile companies created this very situation. Rather than gradually phase out the quotas, they clung to them to protect their anti-competitive products, and now face the prospect of the quotas disappearing with one fell swoop.

The U.S., meanwhile, continues to play the role of preaching the wonders of free trade and the importance of adhering to international trade agreements . . . unless U.S. special interests find this inconvenient, in which case all bets are off and suddenly protectionism is all the rage.

Sources:

U.S. Judge Bars Limits on Imports of China Textiles. Reuters, December 31, 2004.

US Textile Makers Lose Bid to Cap Chinese Imports. Xinhua News Agency, January 2, 2005.

Developed Countries Should Lower Trade Barriers, Period

In the wake of the devastating tsunami that parts of Asia in December, the World Trade Organization’s Supachai Panitchpakdi urged developed nations to lower trade barriers with nations hit by the tsunami.

How pathetic. The developed world should eliminate their ridiculous trade barriers with developing nations permanently. Such barriers have done far more long-term damage to the developing world than the tragic — but one-time — horrors created by the December 2004 tsunami.

Along with further worsening poverty in those countries, trade barriers directly contribute to corruption and other problems in developing nations by making it difficult for enterprising individuals to succeed in the market.

Anti-free traders shouldn’t worry, however — special interest groups here in the United States were quick to defend their particular fiefdoms from liberalization.

Deborah Long, the hack in charge of speaking for the Southern Shrimp Alliance, argued that suspending duties on Asian shrimp imports would be unfair. Lloyd Woods, who serves the same role with the American Manufacturing Trade Action Coalition, argued that the best way to help Sri Lanka, Thailand and India wasn’t to eliminate textile tariffs against those country, but rather impose import quotes on Chinese textiles!

Straight from the land of the tariff and the home of the scared s–tless by the prospect of truly free trade.

Source:

Rich nations are urged to ease trade with affected countries. Elizabeth Becker, The New York Times, January 15, 2005.

Kenya, Tanzania, and Uganda Trade Bloc Accord Goes Into Effect

A treaty between East African nations Kenya, Tanzania and Uganda went into effect in January creating a trade bloc that over the next few years will create a free trade zone.

A similar East African free-trade zone was set up in 1967, but collapsed in 1977 as wars devastated the region.

Under the terms of the agreement creating the East Africa Community Customs Union, Kenya, which has a more industrialized economy than Tanzania and Uganda, will pay duties on goods it exports to the other two until 2010, when such duties will disappear.

The three countries will also set identical tariffs for imports from outside the three countries.

Source:

East Africa trade accord launched. The BBC, January 1, 2005.

Russia, Taiwan Learn All the Wrong Lessons from U.S. Protectionism

For the past several months,
U.S. steel companies and their political allies have been complaining
that Japan, Russia and other countries have been unfairly “dumping” steel
in U.S. markets. The United States threatened to increase tariffs against
such nations unless the “dumping” stopped, and recently U.S. Trade Representative
Charlene Barshefsky bragged that through her tireless efforts Japan and
Russia had both lowered their shipment of steel to this country.

“We think we have undertaken
actions that have brought steel import volumes way down, back to pre-[Asia
economic] crisis levels in many instances,” Barshefsky said. And in the
process sent the message to the rest of the world that the United States
is hypocritical in its support of free markets.

It is a lesson that those living
in Cherepovets, Russia, are learning well. Cherepovets’ economy is almost
entirely dependent on the Severstal steel factory which was Russia’s largest
steel producer in 1998. The story of Severstal’s success is a case study
in what was supposed to happen after the collapse of Communism.

After Russian steel production collapsed
following the 1991 breakup of the Soviet Union, Severstal’s Western-trained
managers abandoned the inefficient practices of the Communist era. They
worked hard to boost the profitability of the plant by seeking foreign
investment and by increasing the amount of steel they exported so as to
bring in much needed hard currency. In a country where many factories
still pay their workers in goods rather than cash, Severstal made 60 percent
of its revenue from exports, with a third of that coming from the United
States.

The Russian economic crisis
severely hurt the Severstal plant, and the Russian government’s agreement
with Washington to cut steel exports by 70 percent put the final nail
in the coffin of its success story. The factory managers are trying to
avoid laying off people by paying wages out of the funds they had set
aside for capital improvements, but that tactic will only be viable for
a few months and in any event will further delay much needed modernization
of the plant.

Mikhail Noskov, Severstal’s
financial director, understands the source of his company’s problems —
U.S. protectionist policies. “Such protectionism in favor of American
businesses is a violation of the ideals of a country like the United States
— ideals that they have tried to teach us,” Noskov said.

Is this why the United States
fought the Cold War? So some latter day American apparatchik trade representative
could put Russian steel workers out of business for daring to freely trade
with the United States? American politicians use to deride the Soviet
Union for refusing to embrace capitalism, while today American politicians
sabotage the efforts of Russian capitalists.

Meanwhile, Taiwan is threatening
to turn the “dumping” tables on the United States. After U.S. officials
spent much of the 1980s accusing Japan, South Korea and Taiwan of dumping
computer chips in the U.S. market, Taiwan is now threatening to fine American
companies for dumping computer chips in Taiwan’s market.

The problem is rather straightforward
— at precisely the time when the cost of producing memory chips for computers
was declining, Taiwanese companies invested billions building factories
to produce memory chips. Like the American computer industry who made
similar mistakes in the 1980s, however, Taiwanese companies prefer to
blame anyone but themselves. “Micron [an American subsidiary of South
Korea’s LG and Samsung] is trying to destroy our DRAM industry,” said
Genda Hu, president of Taiwan’s semiconductor association. “It is trying
to destroy our home market.”

As in the American version
of the chip trade wars, the Taiwanese firms haven’t been able to produce
any evidence that they were actually harmed by the alleged dumping, much
less prove that any dumping took place. But as in the United States, political
expediency counts more than actual evidence. If the dumping charge is
successful, Taiwan’s Finance Ministry could impose tariffs of as much
as 67 percent on U.S. computer chip makers.

The tariff game is one that
South Korea learned well, and it’s a competition which the United States
should begin to make a strategic withdrawal from by renouncing protectionist
economics once and for all.