The Bush Administration has finally decided to eliminate the ill-fated tariffs on steel imports. As I vociferously indicated at the time, they never should have been instituted in the first place. Specifically, they led to retaliation, protests to the World Trade Organization, and a loss of our credibility and general impact in trade initiatives. As best I can tell, they did nothing to promote the long-term competitiveness and investment in our domestic industry. I am pleased to have this unfortunate incident behind us.
We have also recently completed a major round of negotiations to establish a Free Trade Area of the Americas, the most logical extension of the North American Free Trade Agreement (NAFTA) and an important step toward open global markets. Granted, the new accord did not go as far as I would like, but it is a good start in the right direction.
The two events, taken together, suggest that we are on a solid path toward free trade. While scholars have recognized that this mechanism was essential to maximizing prosperity for the better part of two centuries, it is amazingly stubborn to implement in practice.
Why is free trade so important? From the selfish perspective of the US, our capacity to sustain future growth is critically dependant on our ability to create, manufacture, and sell sophisticated, high-tech products and services. Because of simple demographics, our domestic market will not generate enough consumers to buy all of this stuff. Thus, we have to be able to market our wares to people in all parts of the world.
Additionally, much of the demand will occur in emerging countries as they develop the infrastructure and facilities to be integrated into the international business complex. It is both difficult and imperative to gain access to these customers. Virtually every developing nation goes through a period where it wants to export everything and import nothing, seeing the influx of resources as a key to growth. Inevitably, however, the folly of this approach is realized, as growth is stunted by protection of products and an inability to compete. When the US adopts its own restrictive policies, it only reinforces this inertia.
Taking a more global view, as each nation pursues its most effective products and services, the pie gets bigger and everyone gets a bigger slice. This outcome (though we can’t ever seem to get it right) is not a pie-in-the-sky theory; it is a mathematical certainty.
The most recent brouhaha in this arena is the concern over the loss of “white-collar” jobs to lower wage countries. While there are certainly short-term dislocations associated with transition, this situation is no different than any other. The segment of engineering, financial analysis and other similar tasks that is routine in nature has become a commodity. It will flow to the lowest cost location (shareholders will see to it), which is how it should be. We have lost other production categories in the past, and we will do so again in the future.
Our comparative advantage is in the creative, high value-added segments of the economy. Our minimum wage is several times the average wage in many parts of the world. With that position comes higher standards of living and greater opportunities for individual success. It also comes, however, with the assertion that we will not get to do the “easy” work that can readily be accomplished at a lower wage. Our goal should not be to get back the jobs somebody else does in a more cost-effective manner. It should be to create more of those that take advantage of our incredible intellectual resource base.