Philip Thompson

Open trade helps Americans do more of what they do best

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Posted by Philip Thompson on Monday, June 29th, 2020, 3:08 PM PERMALINK

On July 1st the USMCA will finally go into force after all parties ratified the agreement and sent notifications certifying that they have taken all the required steps to be in compliance. The new trade agreement provides a much-needed update to NAFTA which went into force in 1994, 26 years ago. It began a new era of comprehensive global trade liberalization as the WTO followed suit in 1995, and both had their impetus with former president Ronald Reagan. 

A popular criticism has been the effect open trade has had on jobs, specifically the claim that trade propelled American businesses into an era of offshoring resulting in the loss of 5 million manufacturing jobs.  Free trade allows companies to search the 50 states and all the nations of the world to find the most efficient producers.  That is only part of the recent history of manufacturing employment in the U.S.  Automation and robotics have played a role in allowing American manufacturers to produce more with less employees.

But Americans have also voluntarily left the manufacturing sector in droves, enabled by the highest rates of education in the country ever, 90 percent have completed high school, and a third have completed a bachelors degree.  This new comparative advantage allows them to seek high paying, high skilled jobs outside of assembly lines. Creating trade barriers to maintain current levels of manufacturing employment risks missing the forest for the trees, in more ways than one.

For starters, protecting the rights of Americans to exchange goods and services on mutually beneficial terms, free from managed impediments, allows workers to exploit all the advantages of a free society. This includes starting businesses, innovating new products, and deploying high-skilled services. These new opportunities have resulted in a net increase in jobs. Since 1992 open trade has added 39 million jobs to the American economy as total trade increased from 20 percent of GDP to an all-time-high of 30 percent reached in 2014. And, according to the Trade Partnership, “trade-dependent U.S. jobs have grown more than four times as fast as U.S. jobs generally.”

The open trade environment, in fact, attracts foreign companies to do business in America more than anywhere else. The United States is the largest recipient of Foreign Direct Investment inflows, a sign that foreign companies see investing in America, and American workers, as a best business practice.  Together foreign companies employ 7.4 million U.S. workers, pay them on average 26 percent more than the economy wide wage, and they produce 25 percent of U.S. exports.

The reality is that in a free economy the fundamentals change as workers respond to incentives- the incentive to earn a higher income by providing things that people want without big brother bullying. According to the first U.S. Census in 1790, 90 percent of the U.S. labor force was gainfully employed in farming. As farms became industrial, employing technological innovations like the cotton gin, more Americans moved to cities to work in manufacturing. Today less than 3 percent of Americans are farmers and services industries employ 80.2 percent of Americans, manufacturing employment peaked in the 1980s. 

The new USMCA will continue this trend. The USITC estimates it will add 176,000 jobs to the economy, with 79 percent of those going to services. Rather than jeopardizing this benefit, and those to come from agreements with the UK, the EU, and Kenya by scapegoating competition, protectionists should eye domestic policy failings that prevent workers from upskilling in our most competitive sectors.

Photo Credit: Tom Fisk

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Does Leaving the WTO Achieve U.S. Trade Objectives?

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Posted by Philip Thompson, Chrysa K. Kazakou on Thursday, June 4th, 2020, 3:11 PM PERMALINK

Ronald Reagan paved the path to the WTO. Motivated by an ambition to counter unfair trade, Reagan declared “if trade is not fair for all, then trade is free in name only. I will not stand by and watch American businesses fail because of unfair trading practices abroad.

I will not stand by and watch American workers lose their jobs because other nations do not play by the rules.” Later Reagan launch the Uruguay round GATT negotiations that eventually concluded with the forming of the WTO in 1995 charged with guarding a rules-based trading system with a focus on reducing barriers to trade. Through his insistence negotiating objectives included dramatic lowering of global tariff rates, ensuring national treatment of traded goods, and protection of intellectual property.

By no means has the WTO achieved free-trade or eradicated all unfair trade practices. Recently, Senator Josh Hawley raised some common shortcomings of the WTO in a NYT op-ed, and concluded that it should be abolished. His concerns center on the fact that China, which acceded to the WTO, continues to violate the international trade system's norms without making expected market or democratic reforms. He notes that China uses forced labor and theft of intellectual property with impunity. In return, he claims, the U.S. has seen a flight of jobs overseas, and U.S. agriculture has been undercut at home due to imports.

This contrasts with what Trump’s chief trade negotiator, Robert Lighthizer, testified to the Senate Finance Committee that “if we did not have the WTO, we would need to invent it” as it “offers many opportunities for the United States to advance our interests on trade.” It is also not legally possible to abolish the WTO unilaterally. Instead, a few days later, Hawley introduced a bill to take the U.S. out of the WTO. Such a joint resolution is unamendable, does not require committee approval, and cannot be delayed. In other words, if Hawley’s resolution reaches the Senate floor within 90 legislative days after the submission of USTR’s February 28 report, it will force a Senate referendum on the merits of the United States remaining in the WTO.

Hawley’s concerns are legitimate. It’s worth considering if leaving the WTO would resolve the issues he raises while avoiding harmful unintentional consequences.

Overall, since the founding of the WTO, global tariffs have been cut in half, global trade increased from $58 billion in 1948 to above $20 trillion today. Global trade openness, the sum of imports and exports as a share of global GDP increased from 5 percent to 22 percent (peaking just before the financial crisis). U.S. has reaped the most economic value from membership adding $87 billion to the economy. While those left outside the WTO have seen their exports decrease and GDP contract.  

Inside the WTO, U.S. exports benefit from a relatively low Most-Favored Nation tariff rate imposed by partners and U.S. importers from a very low average 3.3% MFN tariff rate imposed by Washington D.C. Outside the WTO, imports to the U.S. will face an average 32% tariff rate. U.S. exports will also face discriminatory tariff rates imposed by other countries and designed with same goal in mind- to encourage membership in the trade organization. 

Inside the WTO the U.S. benefits from lower trade barriers with all 164 country members, allowing our market-based economy to concentrate on working to its comparative advantage. Since joining the WTO, industrial output increased 50%, 32 million jobs have been added, and nonfarm compensation has risen 32%.

As a member of the WTO the U.S. has access to a predictable process-oriented dispute resolution system. The U.S. wins 85.4 percent of its WTO dispute cases. In particular, the United States gets good results, when defending its own policies towards China. Between 2002-2018 the US had won 11of out 24 cases against China.

Indeed, the system could be improved to further restrain bad actors, reform appellate panel decisions, and address unresolved trade barriers such as subsidies and e-commerce. Outside the WTO, the U.S. will be immediately hit with higher tariffs and be exposed to an even more illiberal trade order. It would create radical uncertainty in the markets undermining our comparative advantage and provide little certainty towards resolving trade disputes.  

Persistent, illicit trade practices and stalled reforms at the WTO seriously hinder American importers and exporters from experiencing the full benefits of a free market. However, it is not clear that withdrawal from or abolishment of the WTO will resolve these issues or avoid creating new barriers.

Photo Credit: Tom Fisk

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