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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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In their 2005 study, Groshen, Hobijn, and McConnell discussed how free trade encourages "specialization" among individual countries and thereby reduces the cost of producing goods and services. "Specialization makes trading partners richer because each exchanges goods it produces efficiently for goods that its partners can produce at lower cost," they wrote. As Cato Institute trade expert Daniel Griswold explained in a 2007 report, "Trade is not about more jobs or fewer jobs, but about better jobs." It has made the U.S. economy and U.S. workers more productive. While trade competition causes job displacement, "the number of people dislocated from their jobs each year because of shifting trade patterns is relatively small in America's dynamic market economy where 'job churn' is a normal, healthy fact of life."

What about China and its undervalued currency? Economists Christian Broda and John Romalis of the University of Chicago's Booth School of Business argue that Chinese exports have provided a significant boost to low-income American consumers. Broda and Romalis estimate that between 1994 and 2005, U.S. trade with China "helped reduce the relative price index of the poor by around 0.3 percentage points per year. This effect alone can offset around 30 percent of the rise in official inequality we have seen over this period." They reckon that "while the expansion of trade with low-wage countries triggers a fall in relative wages for the unskilled in the U.S., it also leads to a fall in the price of goods that are heavily consumed by the poor," and "this beneficial price effect can potentially more than offset the standard negative relative wage effect."

Swiss National Bank economists Raphael Auer and Andreas Fischer recently examined how cheap imports from nine low-income countries--Brazil, China, India, Indonesia, Malaysia, Mexico, the Philippines, Thailand, and Vietnam--have affected the U.S. Producer Price Index (PPI) inflation rate. Auer and Fischer concluded that "from 1997 to 2006, imports from [the nine] low-income countries reduced the U.S. PPI inflation rate in the manufacturing sector by about two percentage points (each year). China accounts for over half of the total effect."

The U.S. manufacturing sector is currently hemorrhaging jobs, but so are manufacturing sectors around the world, due to the sharp drop in global demand. As the dismal economic news has accumulated, the temptation to turn protectionist has grown. The international community needs America to offer a robust defense of free trade. Too bad that, as Jagdish Bhagwati told me, "We are failing to provide the leadership."

Duncan Currie is managing editor of the American.