Potential “Net Exports” for the United States Garnered from Free Trade Tempered by Efficient Trade Policies

Recently in the 2016 United States (U.S.) presidential debates, candidates with respect to international trade generally focus on an important question: U.S. policymakers should enact what kind of trade policies without unduly lessening free trade’s contribution to economic growth? The candidates heatedly debate issues about global trade including the Trans-Pacific Partnership (TPP), NAFTA and domestic tariffs. Striving to investigate this question, I read four assigned articles from the Wall Street Journal, to wit. “No More Protection,” “We Are All in It Together,” “The Threat of Protectionism,” and “Sugar Land Obama’s slow roll on free trade.” 

Political rhetoric sometimes consists of blaming rising imports and trade deficits upon poorly conceived trade agreements. Gold presents evidence that a slowdown in globalization will reduce companies’ earnings and therefore, their stock prices. The U.S. could show leadership after the severe economic recession (2007-2009) by adopting a commitment to free trade (Sugar Land). America’s policymakers should follow Adam Smith’s free trade mantra (Mankiw and Ball 230), and implement trade policies reflecting multilateral efficiency required by today’s globalization. First, I will discuss the core elements and issues involved in free international trade. 

The European Union (EU) should improve trade relations with China, the world’s second largest economy, by calling upon international organizations such as the International Monetary Fund and World Trade Organization to promote multilateralism (Barysch). Barysch believes that “emerging powers will have a bigger say, and take on more global responsibility.” The Chinese central planners opine that the severe economic recession indicates the shortcomings of the multilateral rules and institutions upon which the U.S. and EU economies are based (Barysch). Spence points to emerging countries’ fears: “Recession can be exported [from large to small economies].” Furthermore, emerging powers aver that multilateral rules and regulations stifle their responses during crises (Barysch). For example, emerging countries fought the Central American Free Trade Agreement (CAFTA) although it fosters regional multilateralism (Sugar Land). Appropriately, for the world’s number one economy, the U.S. working with international trade organizations can accelerate global trade; and the free flow of capital with efficient trade policies not only with China and the EU, but also with the emerging powers around the globe. 

A noted opposition to the CAFTA concerned primarily the 1 per cent increase in quotas. Such a backlash indicates the clash between globalization, i.e. “We Are All in it Together” (Spence), and the social stability of nations characterized by nationalism. In addition, social stability, free trade, and free flows of capital depend partly on robust financial-services sectors (Spence). The U.S. also struggles with national sovereignty issues because our large deficit in the current account leads to exporting jobs to lower cost countries. Donald Trump claims the rising U.S. dollar has heightened the currency debates, contributing to the anti-trade populism. Of course, currencies affect every financial transaction. Their daily trading volumes exceed that of securities. 

American politicians and pundits like to blame China’s control of its currency for U.S. trade deficits (Spence). Spence says China buys “dollar-denominated assets to reduce upward pressure on the yuan.” However, when developing economies and China is still one, keep their currencies down, then exports are increased, but these countries slowly evolve from adding new industries and/or augmenting existing comparative advantages (Spence). 

Capital flows may affect an exchange rate as much as exports and imports. China as a big trading partner with the U.S. can exert recessionary pressure here by its trade actions if such actions force investment down. Spence believes that “U.S. savings are stuck below our investment rate, and if China allows its currency to revalue then the U.S. will run a deficit with another collection of countries.” The U.S. borrows from China and Japan in order to increase our savings relative to investment (Spence). U.S. reserves remain inadequate to the task of controlling our exchange rates with major trading partners (Spence). 

Countries’ stockpiles of reserves serve several purposes: (1) prevents borrowing in times of crisis; (2) shifts away from accumulating reserves can cause the home country’s currency to fall; and (3) increases in reserves from inflows of foreign net capital rather than trade surpluses, e.g. China (Spence). U.S. trade deficits reflect the “mirror image of the difference between domestic savings and domestic investment” (Spence). Spence asserts that the overall trade deficit with China stems from their “neutralizing the impact of trade surplus and capital inflows.” After touching briefly on elements of free international trade-globalization, currencies, reserves, and trade deficits-now, after reviews of competition, tariffs, quotas, costs, and products: What should be the substance of U.S. efficient trade policies which can be empirically measured? 

Clarke and other CEOs in their article about the steel industry note that protective tariffs are trade-restricting duties, distort competition in the U.S. markets, and put U.S. industries at a competitive disadvantage. Nevertheless, the U.S. steel industry, as one prime example, has been protected from imported steel by protective tariffs (Clarke). Clarke thinks the U.S. steel industry was already healthy after industry consolidations. U.S. steelmakers do not compete freely in the global marketplace. One can recognize the union influences as well as effective lobbying. The U.S. administration has to stand up to the unions (Sugar Land). The sugar lobbyists represent “an outsized political influence by a small group of domestic producers” (Sugar Land). Import restrictions guarantee profits due to the price floor (Sugar Land). Barysch claims that EU businesses will instigate retaliatory actions against U.S. protectionist measures, e. g. antidumping duties and punitive tariffs. EU also rails against China for its intellectual property thefts and central, rigid control over currency policy (Barysch). 

Special protective tariffs also increase costs, cause less production. End-users can effectively invest in new products, facilities, and jobs by eliminating these costs (Clarke). Consumers pay more. Alarmingly, with respect to sugar import quotas, “each sugar job saved costs three jobs in manufacturing” (Sugar Land). The manufacturing jobs go to other countries where the cost of sugar is lower, resulting in more sugary products being imported into the U.S. (Sugar Land). Further, “Buy American” policies stifle projects in some U.S. states and municipalities (Sugar Land). 

Protectionist policies distort trade and have negative economic consequences. Such policies may drive up costs, limit production, and even eliminate products. Historically, U.S. tariffs contributed to the debacle known as the Depression. U.S. policies should not allow import quotas for industries that are profitable and globally competitive. If the U.S. means to 5 | P a g e embrace free trade, then it must face up to the rigors of globalization without destroying its working class. Trade agreements carefully constructed can actually lessen protective tariffs and reduce trade deficits. The next U.S. president rather than rejecting the TPP can go back to the negotiating table, and fashion modifications that are pro-trade without destroying the American working class and/or eliminating U.S. manufacturing facilities. Economic nationalism must be balanced with globalization which favors the skilled workers over the blue collar ones. American policymakers must understand currency exchange rates because currencies are the crux of international institutional transactions. Adam Smith predicted well because free trade does increase gross domestic product. American policymakers should step forward and lead from a free trade position of strength.

WORKS CITED 

Barysch, Katinka. “The Threat of Protectionism.” Wall Street Journal 01 Dec. 2008. 

Clarke, Troy et al. “No More Protection.” Wall Street Journal 14 Dec. 2006. 

Gold, Riva. “Stocks Lose Support As Global Trade Slows.” Wall Street Journal 17 October 2016, A1-2. 

Mankiw, N. Gregory and Laurence M. Ball. Macroeconomics and the Financial System. New York: Worth, 2011. 

Spence, Michael. “We Are All in It Together.” Wall Street Journal 05 Jan. 2007. 

“Sugar Land Obama’s slow roll on free trade.” Wall Street Journal 22 Aug. 2009.