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Saturday, February 14, 2004 || Contact Us || Terms of Service || Check Email

Pittsburgh Tribune-Review

Guest column

The great trade debate


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By Raymond L. Richman
Sunday, September 14, 2003

President George Bush has taken the first steps to do something about the trade deficit which has inflicted great damage on American blue-collar workers. He imposed unilaterally a tariff on steel last year and Treasury Secretary Snow has just returned from a mission to China and the Asian-Pacific Economic Cooperation (APEC) conference in Thailand. He urged China and Japan to let their currencies find their true market level.

While these exhortations recognize that there is a problem that requires a solution, they will have about as much effect on the trade deficit as an umbrella in a hurricane. Our commitment to free trade has caused manufacturing employment in the U.S. to stagnate for 30 years.

The U.S. civilian labor force increased 70 percent since 1972 from 82.8 million workers to 140.9 million. During the same period, manufacturing employment increased a mere 11 percent, from 18 million to about 20 million. Millions of factory workers lost well-paid manufacturing jobs as those in Pittsburgh know and new entrants to the labor force had to accept employment in non-manufacturing industries at much lower wages.

Blame the economists

Economists must bear much of the blame for this bloodletting. Economists universally tout the benefits of free trade and ignore its costs. In every economic textbook, there is an analysis designed to prove that if all countries specialize in the production of goods and services in which they enjoy a comparative advantage, they will all be better off. The only trouble is that in all their analyses there is an unconsidered, unexpressed, and implicit assumption that trade is in balance.

When trade is in balance, trade is like barter; each party gives up a bundle of goods it values less for a bundle of goods it values more. When trade is in balance, the gains of those in the export industries exceed the losses in the import industries. When a country experiences growing deficits for 30 years as the U.S. has done, the benefits to exporters in the form of profits and wages falls far short of the costs to the industries hurt by imports even when you add in the benefits to consumers in the form of lower prices.

During 2002, U.S. imports of goods and services exceeded exports by $418 billion. Output per worker in manufacturing came to about $65,000 in 2000. Using this figure, 6.4 million jobs were lost in manufacturing as a result of the trade deficits. That doesn't mean that the workers laid off remained unemployed. Trade deficits, while causing a loss of jobs in the industries affected, do not cause general unemployment. Only a deficiency of aggregate demand does. The American economy was able to absorb the displaced workers into lower-paying jobs in non-manufacturing industries.

Bearing the burden

The burdens affected blue collar workers mostly. Who ever thought that companies like Bethlehem Steel and LTV would end up on the slag heap of history? That St. Louis would become shoeless? The trade deficits did not hurt the government bureaucracy, congressmen, teachers, bus drivers and other workers who face no foreign competition. They benefit by paying less for imports than they would if trade were balanced. But it did hurt the workers in manufacturing industries such as wearing apparel, home appliances, steel and electronics.

The U.S. benefited from foreign investment during the 19th century and we still benefit from direct investment by foreigners. Cash coming in to finance new factories, even though they are foreign-owned, create a demand for workers and raise American living standards. It is the cash coming from abroad and invested in Treasury bonds and corporate securities that is the culprit. It results in an overvalued dollar which makes foreign goods cheap and American goods expensive. That is the principal cause of our chronic deficits, the high value of the dollar relative to other currencies.

Increased demand for labor raised wages in China, Japan and Germany. Had exports kept pace with rising imports, the demand for American labor would have risen likewise and real wages would have risen, not stagnated. Real wages would have risen in both the U.S. and our trading partners. Economists have attributed wage stagnation to technological change; they seem unwilling to admit that the trade deficits could possibly account for it.

It is no coincidence that two of the countries named are former enemies whose recovery from World War II was made possible by very low wages. But their wages are no longer low and they still have a surplus. Forty years ago, U.S. automobile workers complained about their having to compete with the low-wage Japanese workers. Today the wages of automobile workers in Japan may even exceed those of American workers. Low wages don't cause deficits; cash flows invested in financial assets do. One of the principal causes of the collapse of the "Asian Miracle" several years ago was the Soros-like speculation in financial assets that produced booming stock markets and turned recession into depression when the money was suddenly withdrawn.

The surplus of dollars that the Japanese and others accumulate from their trade surplus, they invest mostly in financial assets in the U.S. At the end of last year, foreign investment in the U.S. exceeded U.S. investment abroad by $2.4 trillion! During 2002, foreign investment in the U.S. increased by $407 billion, roughly equal to the trade deficit. This created no jobs in the U.S. It kept the relative value of the dollar high.

The value of money

We could reduce the value of the dollar relative to other currencies, which would increase U.S. exports and reduce our imports. To have that effect, it would have to be a very substantial devaluation. And a substantial devaluation of the dollar would destabilize the world economy. So Secretary Snow went to Asia to talk Japan and China into raising the value of the yen and yuan relative to the dollar. The world economy would hardly notice the revaluation. But don't expect them to do so.

Without serious U.S. pressure, Japan and China won't let their currencies float. Japan maintains the yen and China the yuan at artificially low values relative to the dollar because their businesses and their workers benefit. They could care less that their gains are at the expense of the American worker. In addition, both have substantial artificial barriers to imports. For reasons we need not get into here, these protectionist measures do not violate the international trade rules. In 2002, our trade deficit with China was $103 billion and with Japan, $70 billion.

The solution

Is there any way to balance our trade? Let's take a clue from the fact that barter is always beneficial to both parties. Instead of "Free Trade" as the slogan, how about the slogan, "Free and Balanced Trade"? We could announce to countries with whom we have large chronic deficits that their exports to us in the future will be limited to, say, 110 percent of what we bought from them last year. If you want to trade with us, you'll have to buy from us. Let's barter!

I'm sure the countries given this ultimatum will protest to the World Trade Organization (WTO) but there is precedent for bilateral agreements. We have a bilateral agreement with Japan now that limits the number of autos it can export to us.

The rules of international trade discriminate against the U.S. but the discrimination is not the cause of the deficit. The average level of U.S. tariffs is lower than that of any other large industrial nation. We have some barriers in the form of quotas but they affect a small proportion of our trade. The definition of dumping under WTO rules allows countries to rebate value-added taxes. Since we have no value-added tax and income taxes cannot be rebated, goods from many countries sell for less in the U.S. than in the countries in which they are produced. We could replace the corporate income tax with a value-added tax and subsidize exports by rebating the tax. Or we could change the rules to deny countries the right to rebate the value-added tax.

While such actions would do some good, the principal cause of chronic trade deficits was and continues to be capital flows from abroad. The U.S. went from being the world's leading creditor nation in 1970 to become the world's biggest debtor.

The situation calls for dramatic action. Stop the bleeding! Blue-collar workers have been bearing the burden of so-called "free trade" long enough. Let's have balanced trade.

Raymond L. Richman is a professor emeritus of public and international affairs at the University of Pittsburgh. He lives in Shadyside. What's your view? E-mail us at opinion@tribweb.com.

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