International Trade

Southwest Regional Economic Forecast - Temecula, California

This forum is billed as an “economic forecast”, which implies looking ahead. But I hew to the view of the late, great Yogi Berra, who said, “It’s always hard to predict anything, especially the future.” It’s safer to talk about the past and the present. In particular, I want to talk about international trade.

To listen to the surviving candidates in this year’s presidential race, no one is for free trade. Donald Trump says, “It’s not free trade; it’s stupid trade.” Republicans in the Congress are split between a dwindling number of Reaganite free-traders (exemplified by Speaker Paul Ryan) and so-called “tea party” or “Freedom Caucus” members who, like Donald Trump, view every trade deal as a job killer in America.

On the Democratic side, two of the party’s most important constituencies, organized labor and the environmental movement, have long had objections to trade deals. Their pressure caused Hillary Clinton to flip from being a supporter of free trade to what could be called a skeptic.

The Economist recently wrote: “It is easier to rail against the hand of a politician who signs a trade deal than the invisible hand of globalization.”

Conflict over trade is nothing new in American history. In many ways, it is our history. Thomas Jefferson clamped an embargo on trade with the combatants in the Napoleonic wars in Europe, chiefly Britain and France. This caused the first talk of secession in the United States – not in the slave South but in maritime New England.

A few decades later, as New England industrialized, it favored tariffs to protect manufacturers against foreign competition. By contrast, the South wanted freer trade in order to sell its cotton to English textile mills.

After the Civil War, as more and more states in the North industrialized, high tariffs were the rule, as they were in the period after the First World War. America turned inward during the 1920s and ‘30s due to urbanization (spurred by the automobile), distrust of our recent allies, and of course the Great Depression.
In our time, there is a transition to a post-industrial economy in which some parts of the country (such as Silicon Valley) do much better than others (like the “Rustbelt” states).

It is useful at this point to remember what actually happens in a “trade deal”. First come many years of meetings at the technical level. Toward the end, there are intense ministerial-level negotiations. The current proposed Transatlantic Trade and Investment Partnership went through 13 rounds of such talks.

The deal then goes to each signatory country for ratification. In the US, this is done by act of both houses of Congress. In recent years, Congress has first passed what’s called a Trade Promotion Authority bill, which requires a simple up-or-down vote. This prevents literally hundreds of amendments from being proposed and voted on, afterward requiring the amended deal to be sent back for renegotiation.

It is impossible to imagine any trade deal in which the United States (or any nation) gets absolutely everything it wants and can crow that it “won”. Negotiations are, of course, give-and-take. The author of The Art of the Deal surely knows that. But Donald Trump may have a point when he says that Americans aren’t very good bargainers, such as the Arabs or Iranians are.

As Henry Kissinger once wrote: “It is the proclivity of most American negotiators to put forward even their most strongly-held positions in a manner which avoids any suggestion of intransigence. Expecting compromise, they look for ways to give their interlocutors a graceful way out.”

This “proclivity” (a good Harvard-professor word!) may be due to the fact American diplomacy has historically been dominated by lawyers, who see themselves as conciliators. Facing the American delegation at the financial conference held at Breton Woods, New Hampshire, toward the end of World War II, John Maynard Keynes huffed that “To judge from results in this lawyer-ridden land, the Mayflower, when she sailed from Plymouth, must have been entirely filled with lawyers.”
What about job losses caused by trade, if not exactly by the trade deals themselves? Of course this happens; it is painful, and it powers the politics of 2016. But it is the inevitable working of economics.

My wife’s grandfather was a cattle rancher in Wyoming. He was born in 1900 and died 92 years later. He said, “In my lifetime, we have gone from when men were cheap and things expensive to when men are expensive and things are cheap.”

Remember when America lost shipbuilding, steelmaking, auto manufacturing, and home electronics to Japan? Then Japan lost those industries to Korea. Then Korea lost them to China. Now China is losing them to Vietnam. What’s next? Maybe Vietnam will lose jobs to Africa.

Was this all due to stupid trade negotiators in Washington, Tokyo, Seoul, and Beijing? No, it was the global marketplace constantly seeking out places where workers are cheaper.

In the high-tech and biotech industries in which the United States still leads the world, there’s a kind of reverse economics underway. The materials, processes, and equipment needed in these manufacturing sectors are so expensive that labor (even well-paid labor) is only a tiny fraction of the cost of the product. This has meant job growth, enhanced by global trade. Unfortunately, these industries require far fewer workers than in the shipbuilding or auto making of bygone days.

Against such realities there is little an American president can do to make a change – except a change for the worse. That president would do well to remember the counsel of his predecessor, Thomas Jefferson, he of the trade embargo of 1807:

“There is but one system of ethics for men and for nations – to be grateful, to be faithful to all engagements under all circumstances, and to be open and generous, promoting in the long run the interests of both.”

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