Mad About Trade: Why Main Street America should Embrace Globalization

America’s Growing Globalization …

Growing trade and globalization have come to Main Street, and not just in how we spend or earn our money. Through our TVs, newspapers and web browsers, the global economy has become a major subject of coverage and controversy. TV personalities such as Lou Dobbs and Pat Buchanan and a growing chorus of politicians and interest groups blame trade and globalization for a long list of real and imagined ills afflicting our nation. They blame the trade deficit and our growing inventory of foreign products for the loss of millions of well-paying jobs, declining real wages and household incomes, a shrinking middle class, deindustrialization, and the exploitation of poor workers in distant countries. They tell us that multinational companies are “shipping our jobs overseas” and now millions of white collar service jobs are at risk of being “outsourced.” Polls show that their message resonates with a majority of the public.

Much of this book will be spent examining the merit of those claims as we shine a light on just what trade and globalization mean for the typical, middle-class American family.

We can all agree that America is a more globalized place today than it was in the past. The trend is true whether we look at the narrower measure of international trade—the movement of goods and services across our borders—or the broader measure of globalization, which includes not only trade but also the movement of capital and the growing integration of production across borders. In 2007, 18.7 million standard shipping containers arrived at U.S. ports carrying many of the shirts, shoes, toys, and consumer electronics that fill our closets and family rooms. That is an average of 2,133 containers arriving every hour of the year, 24/7. Almost half arrived from China.[1]

The nearby figure shows total annual U.S. imports and exports as a percentage of our gross domestic product going back to 1900. The share includes not only trade in goods but also services and income earned on investments, such as profits, dividends, interest, and royalties. U.S. exports spiked during both world wars as Americans exported arms and other war supplies to our allies, while both imports and exports plunged during the Great Depression of the 1930s as output fell and trade barriers rose. As recently as the 1960s, both imports and exports were only about 6 percent of our GDP. In 2007, after four decades of historic growth, exports reached 17.4 percent of GDP and imports 22.8 percent.[2] Not since colonial days have Americans earned or spent a higher share of our income in the global economy than we do now.

Figure 1-1.

America’s Growing Globalization

(Imports and exports as a % of GDP)

 

On foreign investment, the story is the same. Cross-border ownership of assets has soard since the United States and most other developed nations lifted controls on foreign investment in the 1970s. In 1976, the sum of U.S.-owned assets abroad and foreign-owned assets in the United States was less than $1 trillion, equivalent to about 40 percent of our GDP. The current sum total of cross-border assets is $38 trillion, nearly three times our GDP.[3] To grease the global exchange of goods, services and assets, about $3 trillion change hands daily on foreign exchange markets.[4]

America’s growing globalization has been driven by three fundamental changes—growth of the global economy, reduced government barriers to international trade and investment, and the spread of new technologies. The first cause may be the least obvious, but one reason why we do more business with the rest of the world today is because there are so many more people in other countries able to do business with us. The recovery of Japan and Europe after World War Two, the explosive growth of the “Little Tiger” economies in East Asia and the formerly sleeping giants of China and India, and the emergence of former communist countries from their self-imposed isolation have multiplied the opportunities for Americans to buy, sell, and invest abroad.

Meanwhile, trade and investment barriers have been coming down in the United States and most other countries in the world. Trade agreements have played a part. Eight rounds of negotiations through the General Agreement on Tariffs and Trade since it was established in 1947 have helped to bring global tariffs on manufactured goods down sharply. Those agreements now limit tariffs and others barriers to trade for more than 150 members of the successor World Trade Organization. The United States has signed and implemented free trade agreements with 16 other countries, cutting tariffs to zero on most goods we trade with those countries and opening markets even more widely to foreign investment. Many developing countries cut their barriers to trade and investment unilaterally in the 1980s and 1990s, most spectacularly China and India, but also Chile, Vietnam, and Mexico before NAFTA.  

Powering America’s globalization have been advances in transportation, telecommunications, and computing technology. International shipping costs have declined sharply since the 1950s for both air and ocean freight. On the high seas, the introduction of container shipping in the 1960s has allowed manufactured goods to be transported more quickly and cheaply. Containerization enables goods to be packed once in a standard container and then shipped by a variety of modes—usually by truck, rail, ocean liner, rail and finally truck again to the final destination. This speeds loading and unloading at the docks, so ships spend less of their lifetimes in port and more plying the oceans from one port to another. Gains in efficiency continue to accumulate as more ports in developing countries modernize to accommodate container shipping. The open registry of ships to countries such as Panama and Liberia has allowed shippers to circumvent high regulatory and manning costs imposed by rich nations. And higher trade volumes have allowed ships to grow bigger, moving goods with greater economies of scale and enabling the creation of a global hub-and-spoke system for moving goods.  

In the air, the development of jet aircraft engines after World War Two dramatically increased the speed that goods can be delivered at a cost that continues to fall. Because jet engines are faster, more fuel efficient, more reliable and require less maintenance than piston props, the actual cost per ton-kilometer to transport goods has fallen by more than 90 percent in the past half century, from $3.87 in 1955 to $0.30 in 2004, according to a comprehensive study by David Hummels of Purdue University.[5] Air transport still represents less than 1 percent of the weight and ton-kilometers shipped, but it is grabbing a larger and larger share of the market to ship smaller but more valuable manufactured goods and other high-value items. As a result, the value of U.S. exports going outside of North America via air has jumped from 12 percent of total exports in 1965, to 28 percent in 1980, to a majority of 53 percent by 2004. Almost a third of the value of U.S. imports from outside North America now arrives by air.[6]

The spread of the Internet and the dramatic fall in the cost of international communication has allowed companies to coordinate operations around the globe. This has lead to a dividing up of the “supply chain” so that the various parts of a final product, from an iPod to a jumbo jetliner, can be made in dozens of countries to take advantage of differences in costs and capabilities. Services such as writing software, entering medical data and providing technical support can now be “shipped” electronically across the globe at almost zero cost.

Falling transportation costs have stimulated trade at least as much as falling tariffs. Technological progress in the air and seas has cut the aggregate expenditures on freight for U.S. imports from 8 percent of their total value in 1974 to 4 percent in 2004. Even after those gains, importers in 2004 were still paying three times as much for shipping costs as for tariffs, leaving even more potential gains for the future.[7] As Professor Hummels concluded in his study, “[T]echnological change in air shipping and the declining cost of rapid transportation has been a critical input into a second era of globalization during the latter half of the twentieth century.”[8]

 … and Growing Opposition

The growth of trade and other measures of globalization have stirred more anxiety than gratitude among Americans. Polling data on trade paints a mixed and sometimes contradictory picture. Most polls show a majority of Americans expressing some degree of skepticism that free trade and globalization benefit most Americans, and yet other polls show a majority holding a favorable if qualified opinion. Some polls show the skepticism growing, yet polls from the early 1990s revealed widespread fear about imports and foreign investment from Japan. From the Civil War to the 1920s, Republicans won election after election running on protectionist platforms, which were popular not only with the public but with much of the business community. Skepticism toward trade and the global economy is an American tradition dating back to our founding as a nation.

One reason why skepticism remains is the difference between “what is seen and what is unseen.” The transition costs of moving to free trade are visible and lend themselves to images and anecdotes: a factory closing in North Carolina, the anxiety on the face of a laid-off steel worker, the “sweatshop” conditions in factories making shirts in Honduras and soccer balls in Bangladesh. Yet the benefits that flow from free trade and globalization, while real and substantial, are diffused and often hidden from view: a dozen jobs created at a small business serving an American exporter or foreign-owned plant, lower interest rates on a loan, and $20 saved on a Saturday-afternoon shopping trip because of import competition.

Another, related reason for the skepticism is the emotional appeal of arguments against trade. In a November 2007 essay, “Why Lou Dobbs Is Winning,” the generally pro-trade Third Way Foundation tried to explain why the skeptics have been winning the rhetorical debate. Advocates for open trade “have lost the debate on values,” the authors concluded. “While neopopulists and ‘fair’ traders speak compellingly of ‘justice’ and ‘fairness,’ we speak of dollars per household in economic gains, job growth and economic efficiency. … ‘Fair’ traders fight with values; free traders fight with data.” [9]

That is not quite right. “Fair” traders also fight with data, much of it wrong or misleading, as we shall see. But it is certainly true that those of us who advocate the embrace of free trade and globalization as the best policy for America too often confine ourselves to data. We fail to close the deal by drawing a connection from the facts to our deepest American values of fairness, compassion, competition, freedom, progress, peace, and the rule of law. The mission of this book is to make that connection.

As we build that connection, this book will challenge much of what we hear and read about trade in the American media. Here are some facts and themes from Mad about Trade that you will not hear on cable TV, talk radio or the most popular blog sites:

Free trade is the working family’s best friend. Import competition delivers lower prices and more variety, empowering consumers to get the most from their paychecks. Greater product variety from imports boosts our incomes by $400 billion a year. Those Americans who benefit the most from being able to buy imports from China through big-box retailers are the poor (Chapter 2).

Trade has delivered better jobs for American workers. Most of the net new jobs created in the past decade pay more than the average manufacturing job. The American middle class today is built on millions of well-paying service-sector jobs. Despite the most recent recession, Americans today enjoy significantly higher real hourly compensation, household incomes and family net worth than 15 years go (Chapter 3).

Most American manufacturers have managed to thrive in a global economy. Trade has helped American factories move up the value chain. We’re producing more planes, pills, appliances, chemicals, semiconductors and sophisticated equipment than in decades past. The volume of U.S. manufacturing output was two-thirds higher in 2008 than when Congress passed the North American Free Trade Agreement in 1993 (Chapter 4).

America’s big trade deficit is not a scorecard for U.S. trade policy. If reflects a steady inflow of foreign investment and continued domestic demand for goods and services, whether made at home or abroad. Since 1982, America’s unemployment rate invariably rises when the trade deficit shrinks, and falls when the trade deficit grows. Despite what Warren Buffett says, raising trade barriers cannot “fix” the trade deficit (Chapter 5).

American companies that invest abroad are not “shipping jobs overseas”; they are reaching new customers for U.S.-branded goods and services. For every $1 billion in goods that U.S. companies export, they sell $6.2 billion through their foreign affiliates—and 90 percent of those sales go to foreign buyers. Foreign capital flowing into the United States cuts almost a full point off long-term interest rates, saving a typical homeowner $1,000 a year and federal taxpayers $40 billion (Chapter 6).

High U.S. trade barriers in the 19^th century were a drag on growth and bred anti-competitive domestic monopolies. The Great Depression occurred on the protectionists’ watch. America’s economic performance has been superior during the era of lower tariffs since World War II, including the past 15 years since NAFTA was enacted. Nearly a quarter of a million small and medium-sized U.S. companies are now exporting to global markets, including China (Chapter 7).

Membership in the World Trade Organization has not compromised U.S. sovereignty. It has served our national interest by opening markets abroad to U.S. exports and restraining the U.S. government’s abuses of our economic liberty. A global “rule of law” in place today has prevented a repeat of the disastrous trade wars of the 1930s (Chapter 7).

The spread of trade and globalization has helped to cut world poverty in half since 1981. Fewer children are dying, fewer are heading for work on the farm and in factories, and more are in school, especially girls, than in decades past. Once the world shakes off the current recession, a growing middle class in developing countries will be hungry to buy U.S.-provided goods and services (Chapter 8).

Thanks in part to expanding trade, our world is more democratized and peaceful. More people enjoy full political and civil rights under democratic governments around the world than in any previous era. Trade has promoted peace among nations, making it less likely that America’s sons and daughters will fight in future wars (Chapter 8).  

America is not yet a “free trade” nation. American citizens remain fettered by anti-competitive regulations and thousands of restrictive tariffs on everyday products that protect politically connected domestic producers. Existing tariffs fall especially hard on low-income families struggling to buy the necessities of life (Chapter 9).  

Many Americans these days are “mad about trade”—mad as in angry. They perceive that trade is reducing our welfare by eliminating good jobs in a global race to the bottom. By the end of this book, I hope that readers open to persuasion will see that we really should be “mad about trade” in quite a different way—mad as in crazy in love with the opportunities that our new and more open world is creating before our eyes, not only for ourselves but more importantly for our children. We should have the same positive feelings toward free trade and globalization as we do toward digital cameras, iPods, email, online shopping, a well-fed child going off to school, and peace on earth.