Trade Tantrums

I lamented in the last weeks that there are few voices in government to stand-up for budgetary and monetary control. This week my complaint is about international trade. Whether it is Trump or Sanders or Clinton – the story is pretty much the same. Americans are being hurt by free trade and we have to put an end to that.

This unified wail against trade is expected in slow growth times like we are living through. It is always easier to point the finger of blame and redirect rage at external forces. It is easier to do that than to admit that an economic behemoth like the United States can only linger in slow growth because of our own domestic policy failures. It might be comforting to some that the US is joining other countries in complaining about unfair competition. But it doesn’t help matters. Economists have long pointed to the disastrous effects of the Smoot-Hawley tariffs as a major contributor to the severity of the Great Depression. Protectionism can be devastating. 

As I showed in a previous post, the US has been hurt much less than other countries in the aftermath of the last global crisis. China is a shadow of its former self. Other developing countries that saddled their success to commodities trade are experiencing very slow if not negative growth. Europe grows slower than escargot. We complain when those countries allow their exchange rates to decline or engage in other emergency trade protection measures to resuscitate their economies. But the truth is that we in the US will gain much more than we lose if we ignore those misguided diversions from sanity.

So we ought to stop pointing fingers abroad and instead lead the world by example. And the example is to show that competition is good – whether it plays out domestically or in wider global markets. Since many Americans do not buy that story, let me work on it here today. The story has two parts. One is economics and common sense. The other part has to do with history.

Let’s discuss history and change. Most of us do not want to go back to the days when we washed our clothes by hand using tubs, scrub boards, and clotheslines or when we asked Mary the telephone operator to put our call through to Aunt Bee. We don’t want the textiles industry back in New England. We like modernity and most of us appreciate change that makes our lives easier and better. Transitions can be painful but in retrospect the pain has produced enormous gain.  

It is true that low skill manufacturing has all but disappeared in the US since the baby boom was born. But somehow as that was unfolding gradually over time, the economy grew and employment growth has been nothing short of spectacular. Much of the employment gains went to high valued added manufacturing and to services. And while services do include many low paid jobs they also include many very good ones in technology, scientific research, communications, health services, entertainment, energy, travel, shipping, tourism, finance, banking and much more. It surprises people that while manufacturing jobs have disappeared in the US, manufacturing output has not. US Manufacturing has grown at the same pace as the overall economy for the past 60 years. To say that manufacturing has disappeared in the US is wrong. Manufacturing has survived because US firms and locations have fought to maintain competitive.

Industrialization in America has been nothing short of spectacular as hordes of men and women have found good jobs and ample incomes. And while most of that process was domestic, part of that industrialization has been the phenomenon of globalization. It is the same process but it overlaps borders. No we don’t make many or any televisions in America anymore. How could we when an American factory worker wants to earn $50,000 per year and we can pay a Vietnamese worker $2,000 to produce the same TVs.

Vietnam is just one of many countries that offer advantages for low skill production. Somewhere around the early 1990s the world changed. Whether it was the breakup of the Soviet Union, the economic changes in China, or the demise of Latin American dictatorships and self-sufficiency programs – the next quarter of a century produced a dramatic increase in output and trade. Countries that never traded started to. Countries that traded only with their best regional friends began looking globally for markets.

That major historical change is not going away. And while it benefited the people in emerging market countries it also benefits us every day. We import goods that we could not possibly make as cheaply. We export to countries that need what we can make.  And investors have found new and successful global trading opportunities. If the US stock market is not making money for you – you can more easily buy emerging market stocks.  And vice versa. Call it diversification. Call it globalization. Or just call it good. 

It is true that in times like now when growth is so slow, our first instinct is to blame and protect. But it is also true that we cannot protect ourselves from dozens of countries whose inhabitants want to make $50,000 per year. The only way to truly protect our rich civilization in the US is to maximally exploit our advantages and opportunities. Do we not have world class scientists, companies, workers, infrastructure, and so on? Of course we do. No one should cry for America. But what we need to do is employ all our assets in ways that create competitive products and grow wonderful jobs. 

The future promises new and innovative processes, products, and markets. As people in emerging nations succeed and earn larger incomes, they will spend some of this new wealth at Apple, Microsoft, and Google. We need to focus on getting better and on how we can be the very best at what the world wants to buy. We do this by opening markets not by closing them.