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Defending Free Trade

Its costs have been exaggerated and its benefits neglected.

11:00 PM, Feb 25, 2009 • By DUNCAN CURRIE
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Even before Wall Street imploded and the U.S. economy sunk deeper into a nasty recession, Americans were souring on free trade. In recent months, the backlash against globalization has been exacerbated by rising unemployment and a sense of economic crisis. During the 2008 campaign, Barack Obama railed against free trade as he and Hillary Clinton tussled over primary votes in Rust Belt states such as Ohio and Pennsylvania. Now Obama has an opportunity to embrace a more responsible position and display true presidential leadership on a critically important issue.

Unfortunately, the economic stimulus plan he signed last week contains a "Buy American" provision that U.S. trading partners have fiercely opposed. The controversial clause says that all public works projects funded by the stimulus must use American-made iron, steel, and manufactured goods. In an attempt to placate anxious foreign officials, U.S. lawmakers required that the "Buy American" plank be "applied in a manner consistent with U.S. obligations under international agreements."

Of course, even if the United States does not violate its World Trade Organization (WTO) obligations, the "Buy American" language could still spark a damaging trade fight. Writing in a New York Times online forum, Columbia economist Jagdish Bhagwati said it was "naive" to think the "WTO-consistency qualifier" would be sufficient to forestall retaliatory actions. He predicted that "countries like Brazil, China, and India" would respond in kind. If they did, Bhagwati added, we would be looking at "a WTO-consistent trade war."

Treasury chief Timothy Geithner didn't help matters when, in a written statement to the Senate Finance Committee during his confirmation process, he announced that "President Obama--backed by the conclusions of a broad range of economists--believes that China is manipulating its currency." This fueled speculation that the Obama administration would pressure Beijing to boost the value of the yuan and make the U.S. dollar relatively weaker. Meanwhile, foreign governments are worried that America's subsidies to its troubled domestic auto industry "could lead to distortion and protectionism" (in the words of German chancellor Angela Merkel).

On the campaign trail, Obama pledged to "renegotiate" the North American Free Trade Agreement (NAFTA) if elected. When asked about NAFTA at his press conference last week with Canadian prime minister Stephen Harper, Obama mentioned the perils of protectionism but also expressed his hope that U.S. and Canadians officials could find a way to add new labor and environmental provisions to the trade accord. During his time in the Senate, Obama opposed bilateral free trade deals with Colombia, Panama, and South Korea, all of which were signed by the Bush administration and still await congressional approval. Obama has yet to clarify how he will handle these trade pacts as president. In mid-January, New York Democrat Charlie Rangel, chair of the House panel that oversees trade, signaled that Obama "wants to work with Republicans and Democrats to get those trade agreements moving," according to Reuters. Congressional Democrats blocked the Colombia, Panama, and South Korea accords while George W. Bush was in office. Though House speaker Nancy Pelosi and other leading Democrats may prove more flexible under President Obama, they will be wary of riling organized labor.

Free trade is easy to demagogue even in good economic times, let alone during a harsh recession. Americans often exaggerate the costs of trade liberalization and neglect its benefits. In a 2005 New York Fed study, economists Erica Groshen, Bart Hobijn, and Margaret McConnell found that "trade has only modestly affected aggregate U.S. employment." More specifically, "Through year-end 2003, the number of jobs embodied in net imports did not exceed 2.4 percent of the country's total employment."

Foreign competition has certainly affected the U.S. manufacturing sector, but so has technology. As American Enterprise Institute economist Philip Levy has noted, "The long-term decline of American manufacturing jobs has much more to do with technological change than with trade. We're producing more stuff with fewer workers." Economists Martin Baily of the Brookings Institution and Robert Lawrence of Harvard have calculated that between 2000 and 2003, trade was responsible for "only 11 percent of the total manufacturing job loss."