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To trade or not to trade

By Stephen Moughon
web posted November 8, 2010

One afternoon last week I bounded home from working a morning lifeguard shift. After snatching a bite to eat, I opened my computer and logged into the New York Times. One of the first articles to catch my eye was "U.S. Economy Grew at 2% Rate in Third Quarter". "At least the economy is limping along," I thought. But if the growth numbers were melancholy, the trade statistics were downright depressing. According to the paper, "Imports in the third quarter once again grew faster than exports. Imports grew at an annual rate of 17.4 percent, compared with a 5.0 percent for exports."
 
America's trade imbalance long predates the current financial crisis. The U.S. has not had a trade surplus since 1975, over a quarter century ago. Every year foreign corporations receive billions of dollars from American customers. In turn, those businesses, along with their parent governments, reinvest the money into our economy: purchasing government bonds, buying real estate, and increasing ownership in American firms. While this keeps the interest rate at which we borrow low, the practice discourages private saving and fuels investment bubbles. Because no sector of the economy can sustain limitless growth, an influx of capital facilitates increasingly risky speculation, the very definition of an investment bubble. In their working paper "Current Account Patterns and National Real Estate Markets" Joshua Aizenman and Yothin Jinjarak see a "robust and positive association between… account deficits and the appreciation of… real estate prices".
 
The cure for our trade ills is, ironically, more trade. The U.S. should no doubt continue to confront economic partners over manipulative currency valuations and other hidden taxes on American exports, but the hallmark of future policy must be trade liberalization. Next year the U.S. economy is projected to grow by a meager 2.9 percent, but the emerging economies in Asia are estimated to expand nearly three times as fast. The IMF projects that Brazil, India, and China alone will make up over a quarter of world GDP by 2015. This represents a new frontier for American firms. Germany's economy, for instance, is booming due in large part to increased exports bound for China.
 
Of course, one could argue that lifting barriers to international exchange will only expand the trade imbalance because foreigners will have greater access to the American market. The facts are a bit more nuanced however. Although it is true that the U.S. trade deficit with Canada and Mexico rose after NAFTA's passage, the opposite has occurred with 11 of America's 13 other free trade agreements (FTAs). (Two FTAs, those with Israel and Costa Rica, were left out of the analysis since data for Israel was unavailable and Costa Rica's FTA was enacted just last year.) Another consideration is that trade will bring down aggregate wages. Once again, the data contradict this claim. Bruce Katz from Brookings writes, "In an analysis of the 94… largest… metropolitan areas, for every $1 billion in exports of a metro area industry, workers in that industry earn roughly 1 to 2 percent higher wages. Even those exporting industry workers without high school diplomas earn a higher wage. This wage effect can be seen even adjusting for worker characteristics, occupation, or the characteristics of the metropolitan area."
 
Ultimately the fair exchange of goods, services, and ideas carries the day. Will the transition to greater trade be difficult? Undoubtedly. But will it be worth it? Absolutely. Our fathers put a man on the moon. Our grandfathers won the most widespread war in history. By comparison, our task is miniscule. We can do it.
 
Let's roll. ESR

© 2010 Stephen Moughon

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