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Free Trade: Having Faith in Capitalism

August 06, 2015
Recent discourses between the legislative and executive branches of our federal government often place the President and his minority caucus in Congress against the majority GOP—classic Democrats versus Republicans. Debate over the ‘fast track’ trade bill, formally known as the Trade Promotion Authority (TPA)—a to-be hallmark accomplishment of President Obama’s second term—has surprised many Americans.

By Alexander Gray, C’17 W’17

The President, who is using TPA to speed the legislative passage of future trade agreements as means to further expand the political and economic influence of the United States abroad, including the presently debated Trans-Pacific Partnership (TPP), joined Republicans in Congress, led by Senate Majority Leader Mitch McConnell (R-KY) and Speaker John Boehner (R-OH), to vigorously back legislation that Democrats claim will cost American jobs and give the Near East an even greater advantage in the manufacturing sector.[1]

With strong interest in Asian economies and as a personal supporter of the reduction of global import tariffs, I have keenly followed the progression of both the TPA and TPP from the start of U.S. trade discussions with Asian nations. The foreign trade policy debate of today does not emanate from the who or the how with regard to private sector transactions, but the why. Adam Smith famously advocated against government regulation of commerce in his Wealth of Nations as a method to maximize both capital formation and the collective spirit of enterprise.[2] Similarly, the late Milton Friedman asserted that free trade would not simply benefit shareholders of multinational corporations, but it would also strengthen purchasing power of American consumers.[3] Global free trade is the conclusion to a centuries-long effort to minimize market inefficiencies—the goal of every neoclassical economist.

Behind the lofty economic goals of Free Trade Agreements, however, is data that supports their positive impact on U.S. output. Between 1993 and 2010, as a result of the North American Free Trade Agreement (NAFTA), commerce between the United States, Mexico, and Canada has increased 218-percent to $944.6 billion; U.S. exports to our neighbors to the north and south now total 32.3-percent of all foreign exchange in which we engage.[4] Meanwhile, opponents of free trade continue to claim that it will only shift manufacturing abroad, which they correlate with decreases in domestic jobs, yet the American trade deficit peaked in 2006 at a time when unemployment was only 4.6%. Conversely, the trade deficit fell by $300 billion in 2009 and unemployment jumped to 10-percent.[5] It seems as though the correlation between free trade and the employment situation is no more than shoddy reasoning—there are many other compound factors, including weak consumer demand, poor business liquidity, and tax increases, that contribute to weak jobs reports.

Unemployment Rate and Trade Deficit 

Indeed NAFTA led to job losses — nearly 900,000 — in the manufacturing sector.[6] But it is this kind of structural unemployment that neoclassical economists say will compel workers to develop new skills and will cause our nation to become more reliant on higher paying tech-driven jobs instead of those in traditional manufacturing, which have been moving to the developing world for decades. The net benefit to society is positive.[7] Withstanding any short-term contractions in output, the benefit of these so-called tectonic shifts in employment will lead to greater capital accumulation and lower natural unemployment in the long run due to more exports of goods and services that require input from a highly skilled labor force. Additionally, the population will enjoy higher median wages, which boosts domestic consumption, thus further growing GDP. Free trade means job change, not job loss.[8]

Shifting back to TPA and TPP: the United States has without a doubt endured its most severe economic downturn since the Great Depression of the 1930s under the stewardship of Presidents George W. Bush and Barack Obama. Recklessness on Wall Street has brought an air of distrust toward large corporations among middle class Americans, especially when considering sweeping free trade agreements that would undeniably increase corporate profits without a promise for increases in jobs and stock dividends or a decrease in retail prices. Perhaps a confounding factor to the lack of support for TPA and TPP among legislators is that the 12-nation pacific trade pact was negotiated without any transparency whatsoever. The only solution, as a capitalist nation, though, is to have faith in the roots of our system and embrace our market economy.

Can I be optimistic about an opaque legislative priority of the President’s that has fondly become known as ‘Obamatrade’? Or can I support a bill that would further expand the power of our chief executive? Perhaps the short answer to both of these questions is no. But I do support capitalism and the promise that free trade will bring greater levels of market efficiency. If anything at all, we should be excited about the prospect for a greater level of business connectivity with our once isolated friends across the Pacific. Perhaps they could teach us Americans a thing or two about efficiency.

  [1] Eric Garcia, “Senate Democrats are Fuming Over the ‘Fast-Track’ Trade Deal,” National Journal, April 17, 2015,http://www.nationaljournal.com/congress/senate-finance-committee/senate-democrats-are-fuming-over-the-fast-track-trade-deal-20150417.

   [2]Adam Smith, “On Free Trade,” in Wealth of Nations, ed. Charles W. Eliot (New York: P.F. Collier & Son, 1909-1914).

  [3] Milton Friedman and Rose D. Friedman, “The Case for Free Trade,” Hoover Digest, October 30, 1997, http://www.hoover.org/research/case-free-trade.

  [4] North American Free Trade Agreement: Reports and Statistics (Washington D.C.: U.S. Department of Commerce, 2008), http://www.export.gov/%5C/FTA/nafta/eg_main_017794.asp.

  [5] Derek M. Scissors, “Bad arguments against trade,” The Hill, May 5, 2015, http://thehill.com/blogs/pundits-blog/international/241060-bad-arguments-against-trade; U.S. Trade in Goods and Services—Balance of Payments Basis (Washington, D.C.: U.S. Census Bureau, Economic Indicator Division, June 3, 2015), https://www.census.gov/foreign-trade/statistics/historical/gands.pdf; and Labor Force Statistics from the Current Population Survey (Washington, D.C.: U.S. Department of Labor, Bureau of Labor Statistics, 2015), http://data.bls.gov/timeseries/LNS14000000.

  [6] Robert E. Scott, “The high price of ‘free’ trade” (working paper, Economic Policy Institute, Washington, D.C., November 17, 2003), http://s2.epi.org/files/page/-/old/briefingpapers/147/epi_bp147.pdf.

  [7] David Talbot, “‘Tectonic Shifts’ in Employment,” MIT Technology Review, December 20, 2011, http://www.technologyreview.com/review/426436/tectonic-shifts-in-employment/.

  [8] Hiau Loooi Kee and Hian Teck Hoon, “Trade, capital accumulation and structural unemployment: an empirical study of the Singapore economy” (working paper, The World Bank, Washington, D.C., March 2004), http://siteresources.worldbank.org/DEC/Resources/KeeHoon-jde.pdf.

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