Somewhere along the line, free trade got a bad rap.
So much so that when President Obama recently discussed his plans to level the playing field for trade with Asia, and more specifically China, he referred to his initiative as the Trans-Pacific Partnership – avoiding the stigma of labeling the program with the “free trade” moniker.
Americans have a love-hate relationship with free trade.
On the one hand, we clamor for the low price advantages on everything from blenders to bikes. Yet we bellyache about the loss of American jobs and low-cost imports that undercut the competitiveness of U.S. products in the global marketplace.
China is the elephant in the room that everyone sees but no one seems able to control. China not only pays its factory workers a fraction of what their counterparts would make in the U.S., it manipulates its currency to artificially depress prices to increase its competitive edge.
China’s Ministry of Labor and Social Security sets the national wage floor at about $0.68 per hour. But manufacturing provinces like the coastal Guangdong region have the authority to fix their minimum wage far below the national standard. In 2006, the last time the province posted it wage standards, the required minimum was ¥2.69 or about $0.39 an hour.
Beijing And Its Secrets
Every U.S. Treasury Secretary over the past decade has faced unrelenting pressure to whip the Chinese into line. In 2008, the Chinese grudgingly allowed the value of the yuan to float away from its perverted peg with the U.S. dollar. In its typically inscrutable fashion, however, Beijing refused to reveal the basket of currencies to which it had linked its currency.
This past week, Treasury Secretary Tim Geithner delayed a crucial report on global currency policies that points a searing finger at continued manipulation by the Chinese. Geithner is betting international diplomacy will work better than U.S. pressure to get China to strengthen the yuan.
In reality, the L.A. Clippers will win an NBA championship long before China ever allows its currency to float at a true market rate.
While trade pacts have their share of critics, there can be no denying the value these unions play, especially during tough times.
In 1994, the U.S. and Canada enlarged an existing free trade deal to include Mexico. Two years earlier, the Maastricht Treaty created the European Union, clearing the way for the 1999 debut of the euro, which is shared by 16 countries.
Although many Americans still focus on the negatives of the North American Free Trade Agreement, Nafta, it is recognized around the world as a success. Nafta has been a source of strength for the North American economies from the moment it went into effect in 1994. Bear in mind that Canada, the United States and Mexico don’t just sell goods and services to one another. We also make things together and sell them to the rest of the world.
Impact of Nafta
Trade among Nafta’s 444 million people amounts to $2.6 billion a day, triple 1994’s level. The zone generates a combined annual output of about $17 trillion. By comparison, output in the euro region, home to 330 million people, totals $13.6 trillion.
Recently, the U.S. dollar, along with Mexico’s peso and Canada’s dollar, is outperforming all other major currencies for the first time since at least 1998. Cross-border trade among all three members has steadily climbed along with a resurrection of U.S. demand. Most traders believe the currencies for all three nations will probably continue their rally as the U.S. recovery lifts the rest of the world’s largest trading bloc out of recession.
Setting aside the anomaly that is China, free trade has, and continues to, provide lasting benefits to the American consumer. The car market is a case in point.
Since 1995, the Consumer Price Index (CPI) for automobiles sold in the U.S. has remained relatively flat. In contrast, over the past 15 years, the average aggregate price of all other consumer items has escalated about 45 percent. Stated differently, the price of new cars, adjusted for quality and inflation, has been falling every year by -2.50 percent on average.
Most economists now agree that if the Big Three automakers had continued to hold their 90 percent market share and been completely protected from foreign competitors like Toyota and Honda, cars would be less affordable than they are today. Foreign competition also has pressured American carmakers to produce a better and higher quality product.
There is no question that free trade is a double-edged sword.
U.S. politicians like Ohio Democratic House Member Tim Ryan or Al Franken, the newly elected Senator from Minnesota, argue that free trade puts a lot of Americans out of work. They’re right. But that’s only half the story.
Trade with China creates millions of U.S. jobs, by saving U.S. consumers and companies billions of dollars every year. This helps U.S. firms like Wal-Mart who buy Chinese goods to operate more efficiently, potentially hiring more workers. It also puts billions of extra dollars in the pockets of American consumers from the cost savings that in turn can be spent on other domestic goods and services from restaurants to retailers.
When times are tough, as they have been over the past few years, it only natural to seek higher walls to protect what we have. But as an economic policy, protectionism has been, and always will be, a mistake.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com.
