The Comeback (13 page)

The president should be commended for his forceful defense of free trade in general. But the differences between candidate Obama and President Obama underscore the political challenge of championing free trade in the United States, especially for Democrats, but also for Republicans as well.

The opposition to free trade is easy enough to understand. Opponents say free trade undermines American manufacturing with an influx of cheap, foreign goods; free trade exploits workers in other countries that don’t have labor laws or a minimum wage; and free trade ships jobs overseas, leaving hard-working Americans unemployed.

Certainly at a time of high U.S. unemployment, these arguments are compelling and attractive to many Americans, particularly union workers. With so many American industries, such as the steel
and automotive industries, in various stages of collapse, Americans wonder if we can survive with a declining factory base. Indeed, the popular appeal of these arguments has led to government subsidies for manufacturers, to steel tariffs, and to multi-billion-dollar bailouts of Detroit auto companies.

But the central fallacy of these arguments is that they see international trade as a zero-sum game. In other words, one nation must win, and one nation must lose. If a company shifts an American job overseas, that’s one less job in America.

The reality is something different. Certain countries are better suited at producing certain products than other countries. Each country’s economic prosperity will be much greater if it devotes its scarce resources to producing the products it is better suited and more efficient at producing, and then trading for those products it is less suited to produce.

So the reason that many factory jobs are leaving the United States is that generally other nations are more efficient at producing the same product. We might try to keep these jobs in the United States through artificial means, but since manufacturing in the United States is more costly, the overall economy suffers. It makes more sense for the United States to produce those products it is best suited to produce.

But making all products in the United States does not make sense. The beauty of free trade is that each country will do what it does best and that each company will make its own decision on where to manufacture, based on comparing costs and benefits. Every American executive would rather produce in the United States just as a matter of convenience. But when it’s more efficient to produce the same product overseas and stay competitive within the industry, that executive will make a decision based on what’s in the best interest of his or her company.

This comparison also holds true for the American workforce,
which is by far more educated than the workforces in high manufacturing countries, like China. Better educated people are more expensive to employ; better educated people also do not seek out factory jobs. Indeed, it is increasingly difficult to manufacture in the United States, not only for reasons of cost but also for finding workers who will be satisfied with factory jobs. People with college degrees do not want repetitive factory work.

As it is, we often face challenges filling the tens of millions of service jobs needed to keep our economy going. We cannot fill retail, fast food, cleaning, janitorial, gardening, driving, dishwashing, orderly, and other important and necessary jobs that are the backbone of our economy. One reason illegal immigrants are attracted to the United States is that many of these jobs are not filled, because Americans do not want them.

The kind of factory jobs Americans are filling are in the high-tech sectors, where educated workers are required to operate computers or work with complicated machinery. Instead of highly skilled Americans working in textile, steel, or automotive plants, they’re working in computing, pharmaceutical, and nanotechnology plants.

The result of this shift away from more traditional factory jobs toward high-tech factory jobs is that the U.S. economy is more efficient and our workers are more productive. Our economy is able to generate more goods and consume more goods and services at a cheaper cost. We’re doing what we do best, while other nations do what they do best. In the end, both win. International trade is not a zero-sum game.

Unfortunately, politics usually gets in the way. For instance, appeals like “Buy American” strike a patriotic chord, and on the
surface it seems like the decent thing to do to help U.S. workers. But there’s a wide chasm between the perception of “Buy American” and the reality.

In the 2009 “Recovery Act,” which totaled $787 billion, there was a “Buy American” provision. All steel, iron, and manufactured products used in stimulus-funded projects had to be produced in the United States. The same was true for all clothing, equipment, and textile products used by the Department of Homeland Security. The obvious intent behind the “Buy American” provision was to create or save American jobs in these industries.

The problem occurs when other countries retaliate with “buy local” provisions of their own. For instance, the U.S Chamber of Commerce estimates:

[a]ny net increases in U.S. employment resulting from the new “Buy American” provisions will quickly evaporate as other countries implement “buy national” policies of their own. In the event that retaliation causes U.S. companies to lose just 1 percent of potential foreign stimulus procurement opportunities, the net employment loss to the United States from the Recovery Act’s “Buy American” provisions could total 176,800. In the event retaliation escalates, U.S. job losses will mount dramatically.
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Which raises the other ugly side of protectionist policies: whatever the United States can do to shut out foreign markets and goods, so those foreign countries can do to the United States. It happens all the time. Early in his term, for instance, President George W. Bush imposed steel tariffs on foreign producers as a boon to the domestic steel companies. At the time, the administration defended the move as a way to support an all-American industry. The cynics in the audience saw it as an economically stupid way to buy votes in swing states like West Virginia and Pennsylvania.

In any case, three years after the imposition of the tariffs, the economic consequences proved too much. One study found that retaliation from foreign steel-producing countries had cost about 200,000 American manufacturing jobs, while steel prices rose as high as 30 percent, decimating the small steel-using shops across the country.
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The administration finally waved the white flag and removed the tariffs.

Such economically short-sighted and politically motivated policies are one factor hindering the nation’s economic growth. It happened under a Republican administration, and it’s happening under a Democratic administration. Despite President Obama’s best efforts, the main reason why nothing has been done to pass the pending free-trade agreements is because Democrats in Congress are beholden to the labor unions. Considering how much money the unions give to the Democratic Party, it’s hard to blame them.

Since 1990, labor unions have contributed over $700 million (92 percent of union money) to Democrats. In 2008, unions contributed $68.2 million directly to the Democratic Party, according to the Center for Responsive Politics.
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In addition, unions spent heavily on their own advertisements to get President Obama and other Democrats elected. The AFL-CIO borrowed over $30 million to support Democrats in the 2008 cycle. SEIU headquarters required every local affiliate to pay a $6 per member per month contribution or pay a 50 percent fine. The support of the Democrats does not come without strings. The unions expect something in return for their generous support of the Democratic Party, and stalling passage of free-trade agreements is exactly what the unions had in mind.

It’s not that Republicans are immune to patriotic appeals to “Buy American,” but at least in the case of the GOP, we can assign it to pure economic ignorance. For Democrats, it’s a shameful lesson in “pay-to-play” politics.

In terms of innovation, there remains the matter of intellectual property rights when it comes to free trade. The fact is that there is very little the United States can do to combat content piracy and patent stealing in foreign countries. Going abroad, it’s easy to find a copy of almost any American movie or song at rock-bottom prices right off the street. World Trade Organization members are required to adhere to IP protections, but even these provisions are hard to enforce and violations hard to prove, except on a massive scale.

And the piracy isn’t just movies and songs illegally downloaded over the Internet or burned onto a DVD. Sometimes foreign IP piracy takes the form of stolen computer codes and counterfeit consumer electronics. Most of these rip-offs are sold abroad, but they are also sometimes smuggled back into the United States and sold on the black market. This type of international IP piracy poses serious problems for innovative companies. Two recent examples highlight the severity of the problem.

On June 8, 2010, a former research chemist for DuPont who had accepted a position at Peking University College of Engineering in China pleaded guilty to trade secret theft. In 2009, while still working for DuPont, he had attempted to
send documents detailing a proprietary chemical process and samples of chemical compounds to himself at the University.

In July 2010, a former General Motors (GM) employee and her husband were arrested for selling GM trade secrets relating to hybrid-vehicle technology to Chery Automobile, a Chinese automotive manufacturer and a competitor of GM. GM estimated the value of the trade secrets to be more than $40 million.

Protecting our innovators’ intellectual property, along with protecting American-style fair use rights, should be part of our free-trade policies. It doesn’t help Apple to sell iPods to Colombia if some enterprising Colombian counterfeiter is going to take that iPod and produce it on the black market.

Here are some specific policy prescriptions:

Pass free-trade agreements with Panama, Colombia, and South Korea.
These FTAs have been stalled in Congress for four years. Former Colombian President Alvaro Uribe said his one goal before leaving office in the summer of 2010 was to see the FTA with the United States ratified. It did not happen. In addition to the economic benefits, FTA agreements bring nations closer together. Colombia and Panama are honorable U.S. allies in an increasingly volatile region of the world. To keep their populations from embracing Hugo Chavez–style thuggery, we should be doing all we can to help grow their economy. Our message to them should be: there are benefits to allying yourself with the United States.

Encourage and enter worldwide trade negotiations and agreements.
We should be seeking other free-trade opportunities worldwide. The United States should make reopening the
Doha Round a priority. Additionally, we need to keep the pressure on emerging nations like China, India, and Brazil to embrace international trade and to open their markets. Doha’s success depends largely on these nations’ willingness to play ball. As U.S. Trade Representative Ron Kirk said last year, “In order for the Doha Round to move forward, the world’s big emerging economies must make their just contributions.”
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Eliminate “Buy America” provisions from proposals and laws.
Despite their patriotic intent, “Buy American” provisions end up hurting the American workforce. Forcing companies to do business with only American companies drives up costs on everyone. Moreover, foreign nations tend to retaliate with their own “buy local” provisions, leading to a vicious cycle of protectionist policies. Although we should always support and promote American industries, “Buy American” is a counterproductive way to do it.

Encourage foreign investors and businesses to do business here.
Much like “Buy American” provisions, politicians are adept at criticizing foreign investment in the United States on patriotic grounds. For instance, in 2006, controversy swirled around a United Arab Emirates company’s attempt to run six U.S. ports, because of national security fears. The critics’ logic amounted to nothing more than that the UAE was in the Middle East and that there are terrorists in the Middle East, ergo, handing over management of U.S. ports was akin to inviting terrorists inside the country. It was pure demagoguery. The six ports were already owned by a British company. In any case, following the uproar, the deal eventually fell through.