Friday, October 26, 2007

Positive Trade Talk

Economist and columnist Robert J. Samuelson counters current demonizing international trade in Wednesday's Washington Post:
It's our versatile villain. Globalization has served as a whipping boy for politicians of both parties and legions of pundits. We blame it for all manner of grievances: lost jobs, greater inequality, shoddy goods. But take this quiz as a reality check. What explains the resilience of the U.S. economy in the face of the deepening housing collapse? (a) Ben Bernanke's deft management of the Federal Reserve; (b) the tireless spending of consumers; (c) low inflation; or (d) foreign trade.

The best answer is (d).

The trade deficit has been rising for so long that people forget that it can also fall. Well, it has -- to good effect. Through August, the deficit in 2007 was $472 billion, down $46 billion (9 percent) from the same period in 2006. In the second quarter, the U.S. economy expanded at an annual rate of 3.8 percent, even though housing subtracted 0.6 percentage points from growth. But the improved trade balance added 1.3 percentage points, notes economist Edward Yardeni. . .

Contrary to popular opinion, the trade balance (deficit or surplus) barely affects total U.S. employment over long periods. Domestic job creation and destruction ultimately overwhelm trade's effects. From 1991 to 2006, the trade deficit rose from $31 billion to $759 billion. In the same period, payroll jobs increased by 28 million and the unemployment rate fell from 6.8 percent to 4.6 percent.

But trade -- like any form of competition -- does affect specific workers. Those vulnerable to imports naturally want to save their jobs, even if open trade is good for the country as a whole (it broadens choices, reduces prices). Although protectionism is a logical response, it's too late. The right time would have been 30 years ago, before the trade deficit exploded. Those jobs are now gone, and most aren't coming back. Perversely, being anti-trade today will weaken the employment prospects of trade-sensitive industries. A case in point: The Bush administration has proposed "free-trade agreements" with Peru, Panama, Colombia and South Korea. Together, they would modestly bolster U.S. exports. In today's anti-trade climate, none has yet passed Congress. . .

For years, the U.S. economy was an engine of global economic growth. Americans were the shoppers of last resort. Other countries boosted production and jobs by exporting to us. No more. In the second quarter, U.S. consumer spending grew at a meager 1.4 percent annual rate. Just last week, the International Monetary Fund said it expects the world economy to grow 4.8 percent in 2008, more than double the projected U.S. growth rate of 1.9 percent.

"At a time of subdued U.S. consumption," O'Neill [economist Jim O'Neill of Goldman Sachs] writes, "the world is helping the U.S. economy."

There is a larger lesson. We wrongly blame globalization for much that ails us. It's easier to denounce faceless forces beyond our borders. . .

All the ritualistic denunciations of globalization are not harmless. Psychology matters. If global investors fear that the United States might make its economy less open to foreign trade and investment, the result might be the very dollar panic that everyone fears. The dollar's status as the world's central international currency depends on its usefulness in buying and selling. The more we restrict, the less useful it becomes. Globalization's casual bashers should remember that. They think they're playing only to a domestic audience, but the world is listening, and it may not like what it hears.

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