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Mad about Trade is the much-needed antidote to a rising tide of protectionist sentiment in the United States. The book explains the benefits of free trade and globalization for middle-class, Main Street Americans exposed to a barrage of negative claims from politicians and commentators such as Lou Dobbs. It offers a spirited defense of free trade and globalization that engages the populists on their own turf. In eight timely and provocative chapters, the book shows how middle- and low-income families benefit from import competition, and how a more globalized U.S. economy has created better jobs and higher living standards for American workers through the ups and downs of the business cycle.
Welcome to my closet-my multinational, middle-class closet. If you had cared to look inside on a Saturday afternoon in early 2009, you would have found:
Ten business suits and blazers: two of them made in China, two in Canada, two in the United Kingdom (my tweed jackets from the 1990s), and one each in Mexico, Guatemala, India, and parts unknown (the label fell off).
Fourteen dress shirts: four made in Bangladesh, two in Honduras, and one each in China, Mexico, Nicaragua, Vietnam, Peru, Costa Rica, Korea, and Egypt.
Seventeen neckties: nine made in the U.S.A. (several of those from imported fabric, including "finest Italian silk"), three in China, and one each in Costa Rica, South Korea, the United Kingdom, Italy, and parts unknown.
Sixteen casual button shirts: five from India, three from Canada, two from Malaysia, and one each from the U.S.A., South Korea, the Philippines, Thailand, China, Bulgaria, and parts unknown.
Thirteen knit shirts with collars: three each from India and Egypt, and one each from Thailand, the Philippines, Honduras, Bulgaria, Vietnam, Brunei/Darussalam (time to get out the atlas), and China-the last with LouDobbs' worst nightmare on the label: "Hecho en China."
Twenty-seven colored and printed T-shirts: nine from Honduras, six from Mexico, three from El Salvador, two from Thailand, one each from China, Singapore, Australia, and four from parts unknown.
Six sweaters: two from China, one from Mexico, one from Italy, one knit by my dear wife, and one from parts unknown.
Twelve pairs of jeans and other pants: seven from the Dominican Republic, four from Mexico, and one from Guatemala.
Six pairs of shorts: two each from Sri Lanka and Nicaragua and one each from El Salvador and Egypt.
As for shoes, if you include my spouse's to increase the sample size, almost all come from China and the rest from India, the Dominican Republic, and that export powerhouse, parts unknown.
If you were to snoop in my dresser drawers, you would find various undergarments and furnishings from Costa Rica, the Dominican Republic, Honduras, and Thailand. On the coat rack inside our front door hangs outerwear from Israel, Jordan, Macedonia (with fabric woven in Italy), the Philippines, Portugal, Sri Lanka, Ukraine, and Vietnam.
In the kitchen, you would find a drip coffee machine from Mexico, a quarter-century-old coffee grinder from Germany, and from China, an electric tea kettle, a toaster, an electric griddle, an electric sandwich grill, a food processor, a bread machine, and a hand vacuum. As you move through the rest of the house, items made-or at least assembled-in China are everywhere: two laptop computers and accessories, a label maker, a table lamp, a DVD player, a steam iron, folding chairs, an indoor/outdoor thermometer, a plastic electronic barking guard dog, three basketballs, and a football. A year-old desktop computer and a decade-old TV are from Mexico, and the 4-in-1 printer is from Malaysia.
Peek over my shoulder as I check the balance of our 401(k) online-alas, not what it was in the fall of 2007-and you will see 10 percent of our retirement assets parked in an international index fund. According to the fund portfolio, our modest savings are providing capital to Japan, the United Kingdom, France, Switzerland, Germany, Spain, Australia, the Netherlands, Italy, and Hong Kong. In the upper left corner of the web page is the logo for the Dutch insurance conglomerate that administers the plan. Inside my health insurance file nearby is paperwork from a South African company that used to administer our health savings account. My wife's home page on her laptop is set to the BBC website.
And sitting outside our townhouse in our two parking spots on a late winter day are a Dodge minivan and an Oldsmobile sedan. Both were made by Detroit-based automakers, but if they are typical of even "American-made" cars, they contain plenty of parts from Mexico, Canada, and even a few from outside North America. And before it went out of business, a Venezuelan-owned CITGO down the road is where we would occasionally gas them up.
An inventory of your own closet, home, and life would probably tell a similar tale. Whether you live in Manhattan, a small town in the Midwest, or anywhere other than a primitive mountain cabin, you are plugged into the global economy and it is plugged into you.
America's Growing Globalization ...
Growing trade and globalization have come to Main Street, and not just in how we spend or earn our money. Through our TVs, newspapers, and Web browsers, the global economy has become a major subject of coverage and controversy. TV personalities such as Lou Dobbs and Pat Buchanan and a growing chorus of politicians and interest groups blame trade and globalization for a long list of real and imagined ills afflicting our nation. They blame the trade deficit and our growing inventory of foreign products for the loss of millions of well-paying jobs, declining real wages and household incomes, a shrinking middle class, deindustrialization, and the exploitation of poor workers in distant countries. They tell us that multinational companies are "shipping our jobs overseas," and now millions of white-collar service jobs are at risk of being "outsourced." Polls show that their message resonates with a majority of the public.
Much of this book will be spent examining the merit of those claims as we shine a light on just what trade and globalization mean for the typical middle-class American family.
We can all agree that America is a more globalized place today than it was in the past. The trend is true whether we look at the narrower measure of international trade-the movement of goods and services across our borders-or the broader measure of globalization, which includes not only trade but also the movement of capital and the growing integration of production across borders. In 2007, 18.7 million standard shipping containers arrived at U.S. ports carrying many of the shirts, shoes, toys, and consumer electronics that fill our closets and family rooms. That figure is an average of 2,133 containers arriving every hour of the year, 24/7. Almost half arrived from one country.
Figure 1.1 shows total annual U.S. imports and exports as a percentage of our gross domestic product going back to 1900. The share includes not only trade in goods but also services and income earned on investments, such as profits, dividends, and interest. U.S. exports spiked during both World Wars as Americans exported arms and other war supplies to our allies, whereas both imports and exports plunged during the Great Depression of the 1930s as output fell and trade barriers rose. As recently as the 1960s, both imports and exports were only about 6 percent of our GDP. In 2007, after four decades of historic growth, exports reached 17.4 percent of GDP and imports 22.8 percent. Not since colonial days have Americans earned or spent a higher share of our income in the global economy than we do now.
On foreign investment, the story is the same. Cross-border ownership of assets has soared since the United States and most other developed nations lifted controls on foreign investment in the 1970s. In 1976, the sum of U.S.-owned assets abroad and foreign-owned assets in the United States was less than $1 trillion, equivalent to about 40 percent of our GDP. The current sum total of cross-border assets is $38 trillion, nearly three times our GDP. To grease the global exchange of goods, services, and assets, about $3 trillion change hands daily on foreign exchange markets.
America's growing globalization has been driven by three fundamental changes-growth of the global economy, reduced government barriers to international trade and investment, and the spread of new technologies. The first cause may be the least obvious, but one reason why we do more business with the rest of the world today is because there are so many more people in other countries who are able to do business with us. The recovery of Japan and Europe after World War II, the explosive growth of the "Little Tiger" economies in East Asia and the formerly sleeping giants of China and India, and the emergence of former Communist countries from their self-imposed isolation have multiplied the opportunities for Americans to buy, sell, and invest abroad.
Meanwhile, trade and investment barriers have been coming down in the United States and most other countries in the world. Trade agreements have played a part. Eight rounds of negotiations through the General Agreement on Tariffs and Trade since it was established in 1947 have helped to bring global tariffs on manufactured goods down sharply. Those agreements now limit tariffs and other barriers to trade for more than 150 members of the successor World Trade Organization. The United States has signed and implemented free trade agreements with 16 other countries, cutting tariffs to zero on most goods we trade with those countries and opening markets even more widely to foreign investment. Many developing countries cut their barriers to trade and investment unilaterally in the 1980s and 1990s, most spectacularly China and India, but also Chile, Vietnam, and Mexico before the North American Free Trade Agreement.
Powering America's globalization have been advances in transportation, telecommunications, and computing technology. International shipping costs have declined sharply since the 1950s for both air and ocean freight. On the high seas, the introduction of container shipping in the 1960s has allowed manufactured goods to be transported more quickly and cheaply. Containerization enables goods to be packed once in a standard container and then shipped by a variety of modes-usually by truck, rail, ocean liner, rail, and finally truck again to the final destination. This process speeds loading and unloading at the docks, so ships spend less time in port and more time plying the oceans from one port to another. Gains in efficiency continue to accumulate as more ports in developing countries modernize to accommodate container shipping. The open registry of ships to countries such as Panama and Liberia has allowed shippers to circumvent high regulatory and manning costs imposed by rich nations. And higher trade volumes have allowed ships to grow bigger, moving goods with greater economies of scale and enabling the creation of a global hub-and-spoke system for moving goods.
In the air, the development of jet aircraft engines after World War II dramatically raised the speed at which goods can be delivered, at a cost that continues to fall. Because jet engines are faster, more fuel efficient, and more reliable and require less maintenance than piston props, the actual cost per ton-kilometer to transport goods has fallen by more than 90 percent in the past half century, from $3.87 in 1955 to $0.30 in 2004, according to a comprehensive study by David Hummels of Purdue University. Air transport still represents less than 1 percent of the weight and ton-kilometers shipped, but it is grabbing a larger and larger share of the market to ship smaller but more valuable manufactured goods and other high-value items. As a result, the value of U.S. exports going outside of North America via air has jumped from 12 percent of total exports in 1965, to 28 percent in 1980, to a majority of 53 percent by 2004. Almost a third of the value of U.S. imports from outside North America now arrives by air.
The spread of the Internet and the plunge in the cost of international communication has allowed companies to coordinate operations around the globe. This coordination has led to a dividing up of the "supply chain" so that the various parts of a final product, from an iPod to a jumbo jetliner, can be made in dozens of countries to take advantage of differences in costs and capabilities. Services such as writing software, entering medical data, and providing technical support can now be "shipped" electronically across the globe at almost zero cost.
Falling transportation costs have stimulated trade at least as much as falling tariffs. Technological progress in the air and seas has cut the aggregate expenditures on freight for U.S. imports from 8 percent of their total value in 1974 to 4 percent in 2004. Even after those gains, importers in 2004 were still paying three times as much for shipping costs as for tariffs, leaving even more potential gains for the future. As Professor Hummels concluded in his study, "[T]echnological change in air shipping and the declining cost of rapid transportation has been a critical input into a second era of globalization during the latter half of the twentieth century."
... and Growing Opposition
The growth of trade and other measures of globalization has stirred more anxiety than gratitude among Americans. Polling data on trade paints a mixed and sometimes contradictory picture. Most polls show a majority of Americans expressing some degree of skepticism that free trade and globalization benefit most Americans, and yet other polls show a majority holding a favorable if qualified opinion. Some polls show the skepticism growing, yet polls from the early 1990s revealed widespread fear about imports and foreign investment from Japan. From the Civil War to the 1920s, Republicans won election after election running on protectionist platforms, which were popular not only with the public but also with much of the business community. Skepticism toward trade and the global economy is an American tradition dating back to our founding as a nation.
One reason why skepticism remains is the difference between "what is seen and what is unseen." The transition costs of moving to free trade are visible and lend themselves to images and anecdotes: a factory closing in North Carolina, the anxiety on the face of a laid-off steel worker, and the sweatshop conditions in factories making shirts in Honduras and soccer balls in Bangladesh. Yet the benefits that flow from free trade and globalization, while real and substantial, are diffused and often hidden from view: a dozen jobs created at a small business serving an American exporter or foreign-owned plant, lower interest rates on a loan, and $20 saved on a Saturday-afternoon shopping trip because of import competition.
Another related reason for the skepticism is the emotional appeal of arguments against trade. In a November 2007 essay, "Why Lou Dobbs Is Winning," the generally pro-trade Third Way Foundation tried to explain why the skeptics have been winning the rhetorical debate. Advocates for open trade "have lost the debate on values," the authors concluded. "While neopopulists and 'fair' traders speak compellingly of 'justice' and 'fairness,' we speak of dollars per household in economic gains, job growth, and economic efficiency.... 'Fair' traders fight with values; free traders fight with data."
That depiction is not quite right. "Fair" traders also fight with data, much of it wrong or misleading, as we shall see. But it is certainly true that those of us who advocate the embrace of free trade and globalization as the best policy for America too often confine ourselves to data. We fail to close the deal by drawing a connection from the facts to our deepest American values of fairness, compassion, competition, freedom, progress, peace, and the rule of law. The mission of this book is to make that connection.
As we build that connection, this book will challenge much of what we hear and read about trade in the American media. Here are some facts and themes from Mad about Trade that you will not hear on cable TV, talk radio, or the most popular blog sites.
Free trade is the working family's best friend. Import competition delivers lower prices and more variety, empowering consumers to get the most from their paychecks. Greater product variety from imports boosts our incomes by $400 billion a year. Those Americans who benefit the most from being able to buy imports from China through big-box retailers are the poor (chapter 2).
Trade has delivered better jobs for American workers. Most of the net new jobs created in the past decade pay more than the average manufacturing job. The American middle class today is built on millions of well-paying service-sector jobs. Despite the most recent recession, Americans today enjoy significantly higher real hourly compensation, household incomes, and family net worth than 15 years ago (chapter 3).
Most American manufacturers have managed to thrive in a global economy. Trade has helped American factories move up the value chain. We're producing more planes, pills, appliances, chemicals, semiconductors, and sophisticated equipment than in decades past. The volume of U.S. manufacturing output was 50 percent higher in 2008 than when Congress passed NAFTA in 1993 (chapter 4).
Excerpted from MAD ABOUT TRADE by DANIEL GRISWOLD Copyright © 2009 by Cato Institute. Excerpted by permission.
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