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« Okay, So Here's the Deal | Main | Market Risk: It's Everywhere! It's Everywhere! Part 1 »
Tuesday
Mar112008

Market Risk, Part II; Barriers to International Trade

A recent Wall Street Journal poll found that 60% of American voters believe that "foreign trade has been bad for the US economy."  This 60% could surely benefit from a bit of education, especially a class in economics 101 prior to voting in November.  Certainly free trade has not been without costs, and some jobs have been lost; the auto industry immediately comes to mind.  But, without question, free trade overall has  been a big net winner for the US consumer and the US economy.

 

Free trade is nothing more that a mutual agreement to drop tariffs and non-tariff barriers on goods sold in one another's country.  As such, America generally benefits because foreign tariffs are usually higher than US tariffs.  Removing them is a big benefit for American exporters.  Prior to NAFTA (North American Free Trade Agreement) Mexico already had broad access to US markets, but NAFTA leveled the playing field for American exporters, helping them to gain access to Mexican markets.  Free trade is also an engine for our economic growth.  In the thirteen years since NAFTA passed (with bipartisan support led by President Bill Clinton), 26.2 million new jobs have been created in the US, and our GDP has doubled to more than $13 trillion.  Still some argue that NAFTA and free trade has hurt America's manufacturing base.  Lou Dobbs and his regular CNN program come to mind.  What these folks overlook though is that although 3 million manufacturing jobs have been lost, over the same time period 11 million new service jobs have been created in our economy.  But, you may say, those service jobs don't pay as well.  Some may not, some may, but the net flow of new money in our economy has increased due to the far larger number of these new jobs.  Moreover, Robert Z. Lawrence, a Harvard economist found in his study of the issue that the average blue-collar worker's wages and benefits, adjusted for inflation, have risen by 11% under NAFTA.

 

I realize someone who has recently lost their job, and blames that loss on NAFTA, will be hard-pressed to see the benefit of free trade; but their reluctance to see the truth does not alter it.  All of us probably know someone who has been down sized, out sourced, or otherwise lost their job in the past few years.  The anecdotal evidence that free trade has hurt someone, somewhere, has spread throughout our culture, aided by Low Dobbs and politicians angling for votes in the "rust belt" of America.  What these stories miss however, is the fact that (according to a recent USA Today editorial and numerous other sources) American manufacturing output has increased 66% since 1993!  Obviously a much bigger force that NAFTA and free trade is in play.  That force is the huge gain in worker productivity that has allowed manufacturing output to increase dramatically while simultaneously cutting the workforce.  That, in most circles, is called economic progress.

 

Like it or not, our economy plays on a global stage now.  We have no option but to adapt to that fact.  That horse is out of the barn.  We US pilots don't especially like the fact that Richard Branson, the British multi-billionaire, has started his Virgin American Airline in our country, but he has.  Free trade is forcing us to be more competitive.  Wal-Mart and other "big box" stores are full of products that many in our country simply could not afford if they were made in America protected by high tariffs.  These types of stores are a favorite target of unions and anti-free trade types.  They have certainly hurt small "Mom and Pop" operations, but their parking lots are usually full, and they are the retailer of choice for a huge segment of our population.  This is small consolation is you have lost your manufacturing job, but most free trade pacts provide for displaced worker retraining, and the economy taken as a whole, has expanded and thrived under NAFTA.

 

Still not convinced?  Then let's look at history as it usually holds some lessons.  During the Great Depression of the 1930s, unemployment in the US hit a high of 25%.  One of the many foolish steps the federal government took to "save" job was to create international trade restrictions.  Predictably other countries retaliated, blocking the import of American goods.  Thus world trade in 1933 was only one-third of what it was in 1929.  The result was that wages and employment fell around the world.  Everyone as poorer, and the seeds for WWII were sown.

 

Some blame NAFTA for our illegal immigration problems.  But since the passage of NAFTA, the Mexican economy has quadrupled -- 600,000 new jobs were added in the last year alone.  Average Mexican wages have risen from $2,000 in 1994 to more than $7,000 today.  What would our illegal alien situation look like today if Mexico had not seen that growth over the past few years?

 

The harsh truth is that free markets cause economic dislocation.  This is not due to free trade alone, of course.  We have already cited increasing worker productivity.  Economic dislocation also occurs due to product enhancements and changing consumer tastes.  The automobile industry destroyed jobs for those who made saddles and horse-drawn carriages; personal computers destroyed the electric typewriter business; digital photography has made film obsolete.  Capitalism has been rightly described as "creative destruction."  Some people lose; most gain.  That is the nature of free markets.

 

The emerging markets of Latin America are growing.  So are parts of Eastern Europe.  China and India continue to boom.  All of these economies are hungry for American goods and services.  If they were to retaliate against new protectionist measures, it would likely hurt us a lot more than them.  I understand why Big Labor is opposed to free markets, but they are ignoring the big picture.  Almost every economist of any standing, including the venerable Alan Greenspan, have been ardent supporters of free trade because they can see the big picture.

 

This issue has come to the forefront of the current presidential campaign.  Both of the remaining Democratic candidates have indicated that they are considering unilaterally changing the NAFTA agreement.  Canada has already indicated that they will not respond favorably to our changing a long-standing agreement, and I suspect that Mexico would also be less than pleased by such action.  Thus, I believe that if our lawmakers were to suddenly loose the backbone to support free trade, our economy, and markets around the world, could suffer.  As Michael R. Bloomberg recently observed in the New York Times, speaking about the presidential candidates, surely "They must know we can't fix our economy and create jobs by isolating America from global trade."  We can only hope that their NAFTA bashing is only political pandering, and that they are really wiser than they let on.  If we care about our economy, and our investment portfolios, we should support free trade, and the candidates who do likewise.

 

I have covered a few of the issues I see as current "threats" to our retirement savings in these past two discussions.  Next I will suggest some specific investments that have proven capable of weathering the storms of the past.  Give me a week or so, then check back.

 

13 march, 2008

 

Fly/Drive Safely!

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Reader Comments (1)

NAFTA was one of the few things on which I disagreed with Bill Clinton. Now you have convinced me that I was even wrong on that.

March 15, 2008 | Unregistered Commenterweknudsen

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