Global Trade: Let's Get Real! | The Perryman Group

Global Trade: Let's Get Real!

By: Dr. M. Ray Perryman
Published in syndication February 01, 2017

One of President Trump's first official actions was issuing an Executive Order to withdraw from the negotiations for the Trans-Pacific Partnership (TPP), an agreement that would have linked 12 nations in the largest free trade zone to date. As a practical matter, Congress wasn't going to support it in any case, so the Order was only symbolic. It is a genuine mystery to me how we evolved to the point that participating in the world economy is somehow a bad thing to do. That the belief is now present in both major political parties is even more baffling. Let me be very clear from the outset: Trade is good! In fact, trade is essential! We have centuries of history (not to mention some basic math that was figured out about 200 years ago) to illustrate this incontrovertible dictum.

If that were not enough, the flap over renegotiating the North American Free Trade Agreement (NAFTA) and who might pay for the infamous "wall" has now escalated to the point of threatening an all-out trade war with Mexico. One proposal from the new Administration has even suggested imposing a 20% tax on imports from our friendly southern neighbor.

The fiery rhetoric is centered around an "America First" policy which seems to boil down to reducing the US trade deficit, with a special focus on Mexico and China. Ironically, the withdrawal from the TPP will most likely aid China in strengthening its own position in the Pacific and cede the opportunity to substantially impact the ongoing development of South America as a global force. The trade policy largely involves using taxes on imports, or tariffs, and penalizing companies who operate overseas or even source inputs elsewhere to encourage more products to be made in the US in the long run. For reasons explained below, this approach doesn't work.

This oft-cited claim is that trade policy has caused the US to lose manufacturing jobs as some production moved to lower-wage locations overseas. While it is certainly true that some things that are made abroad were once made domestically, the primary reason for US manufacturing job losses is the inexorable advance of technology. It is easy to forget that our manufacturing output continues to expand year after year; it just requires fewer workers. Unless we want to tolerate wages in line with the poorest countries on earth, we are not going to make the things that require the least skilled labor. The impact of NAFTA, for example, has not been by and large to take jobs out of the US; it has been to keep jobs that were leaving in any case in this hemisphere rather than more distant locales. The tragic mistake in US economic policy - and it is a doozy - is not trading with other nations; it is rather, not providing the resources and incentives to re-train displaced workers to meet the rising demand for skilled positions. At the same time these workers are suffering, the country is at virtually full employment and many technology-oriented firms are begging for qualified people to hire (but I digress). Lest we forget, about 11.5 million jobs in the US were supported by exports in 2015. Specifically, exports of goods and services to Mexico supported nearly 1.2 million jobs and exports to China supported another 900,000 jobs.

Closer to home, Texas is the top exporting state in the US and received over $288.0 billion in revenues from exporting in 2014. Mexico is Texas' largest trading partner, receiving $102.5 billion in Texas exports. The state's other largest export destinations include Canada ($31.2 billion), Brazil ($11.8 billion), China ($10.9 billion), and South Korea ($8.9 billion). There were over 1.1 million export related jobs in Texas in 2013, accounting for approximately 16% of all export related jobs for the nation that year. Texas also imported nearly $302.1 billion in goods and services in 2014, including over $90.1 billion from Mexico.

Large import tariffs make imported goods more expensive for consumers, essentially passing much of the cost forward. In addition, small businesses that are buying imports as inputs may not be able to absorb the higher prices, and US goods will become less competitive globally. Furthermore, other nations would likely retaliate by raising tariffs on imported goods from the US, causing our exports to suffer as well. The US tried this approach in the 1930s, and managed to worsen the Great Depression, helped create a later global depression, and, thus, contributed to one of the causes of World War II (other than that, it was great!).

In simple terms, the idea of free trade is that economies, minus the disruptive influence of tariffs, are able to specialize in what they can more cheaply and efficiently produce. When countries specialize in what economists call their comparative advantage, every country can produce more and trade for what they don't have, resulting in more goods and services available overall. Academic studies show that this result has occurred for centuries. Moreover, US firms must ultimately operate facilities where they are profitable; markets and shareholders, which include the pension funds of many workers, will tolerate nothing less.

While free trade can be a part of structural changes in our economy, there would also be even larger and more disruptive ones should the US pursue the aggressive protectionist trade agenda that is currently being proffered. Texas and the US are part of the global economy, and working with other nations to lower trade barriers can enhance prosperity for all. Swimming against the rapid current of progress is never a good idea. "America First" should not mean "America Only," but rather "America Best." In any case, I will enjoy eating my guacamole made from Mexican avocados while watching the Super Bowl.