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Where the trade issue is today

by Bill McGaughey

For a decade or more, the trade question has boiled below the surface. People in America’s industrialized heartland have become dismayed as factories have closed down in their community and an increasing portion of the goods which they buy in local stores were manufactured abroad. But the threat of terrorism and the Iraq war have commanded our attention. Anyone proposing an alternative course on trade has been marginalized and scorned as an “isolationist” or “protectionist” by the media and respected academics.

But then - suddenly - the issue has blossomed again thanks to the gift that we receive from democracy - the requirement that our political candidates go out into communities to meet the public. When the main presidential candidates on the Democratic side, Barack Obama and Hillary Clinton, campaigned in the Ohio and Texas primaries, the trade issue was staring them in the face.

Obama learned what bad trade policy could do as a community organizer in northern Illinois. He saw how families were ruined when their breadwinners, once employed in steel mills in that area, lost their jobs. You cannot have stable communities without adequate jobs.

Hillary Clinton’s credentials were more suspect. It was her husband, after all, who rammed NAFTA through Congress with arm-twisting and pork-barrel promises. It was she herself who once sat on the board of directors of Wal-Mart - archetypical destroyer of U.S. jobs - seeming to pay scant attention to how Wal-Mart treated its employees or forced suppliers to produce in lands with cheap labor. Her attention then was on women and the environment. Yet, Hillary Clinton, too, was now denouncing free trade.

During the debate in South Carolina, Obama tried to make an issue of Clinton’s association with Wal-Mart, contrasting her board experience with his community organizing. Clinton shot back by referring to Obama’s association with “(Tony) Rezko’s slum landlord business”. Obama was put on the defensive. Not long afterwards, it was disclosed that one of Obama’s top campaign advisors had met with a Canadian official at that nation’s consulate in Chicago and assured that man that Barack Obama’s stance on NAFTA was meant for domestic political consumption and did not necessarily represent what the candidate would do if he were elected President.

Clinton, too, has had a brush with hypocritical campaign advisors. A top advisor, Mark Penn, was also a principal in the Burson-Marsteller lobbying firm which had a contract with the Colombian government to promote a free-trade agreement between Colombia and the United States. Candidate Hillary Clinton was opposing that agreement. When it was disclosed that Mark Penn had recently met with the Colombian ambassador to the United States to discuss how to gain U.S. ratification of that agreement, the resulting publicity forced Penn to back down. He was forced to resign his position in the Clinton campaign. His lobbying firm lost the contract with Colombia.

So where do these two candidates stand? I suspect that the truth is that they do not know what to do about trade. Lacking a cure, they are reduced to telling constituents, in effect, “I feel your pain.” The few proposals they offer are, indeed, quite lame. Opposition to free trade now takes the form of opposing an agreement with Colombia where one with Peru was recently approved. This is a prescription for inflaming nationalistic resentment. We really need a comprehensive, uniform, and cooperative approach to trade envisioning a better world. We need a development policy. it should be thoughtful rather than moralistic.

In the debates, both candidates said they were in favor of ending subsidies to companies that shipped U.S. jobs abroad. DUH! That’s like discovering that the Pentagon had a subsidy to Al-Qaeda hidden somewhere in its budget. There’s a simple solution to such a problem: end the subsidy. Also, end federal subsidies that allow U.S. firms to outsource jobs. It’s a no-brainer. If federal officials are so stupid or corrupt as to pay companies to close down factories in the United States and outsource their production to foreign countries, then there’s little hope that our government can do anything right.

The Education Panacea

The trade problem is deeper than misguided subsidies. Supporters of free trade acknowledge that certain people will lose their jobs but insist that the good from such policies outweighs the bad. The general idea is that the increasing specialization of employment that comes from a global economy will place the good jobs, requiring more education, in the United States while uneducated workers in third-world countries handle the low-paying grunt work. Therefore, our young people are advised to continue their educations so as to prepare themselves for the employment bonanza soon coming their way.

I don’t believe this in a minute. I don’t even think the academics believe it. I once asked a man who had recently been president of a Big Ten university whether the education establishment was not deceiving young people in taking their money with baseless promises of a good job. His response was to say that he was on the board of directors of a multinational company and so he knew that employers valued an educated work force. In this case, the company in question was giving financial support to a university in a low-wage country where its manufacturing operations were based. I think the man answered my question. The jobs resulting from globalization will go to nations where labor is most advantageously priced - not to graduates of Big Ten colleges in the United States but to the leaner, hungrier people in other parts of the world.

If the idea that more education leads to better jobs were true, then we should be able to trace the learning in college courses to careers supplying goods and services that people are willing to pay money to obtain. Our colleges would be “training” their students in how to produce those valuable things, in other words. How realistic is it, though, for foreign customers to want what our graduates have learned in women’s studies, psychology, or literature courses, or in the humanities in general? Really, these are for our own interest and satisfaction and have little to do with jobs of the future.

The more recent insistence that we need more graduates in math and the sciences overlooks the fact that a relatively small number of people can do the technical work in industries requiring such services. A large influx of math and science grads into our future economy will make little difference in the amount or quality of useful products that we will have. It’s all so much hot air!

Let’s suppose that advanced education enables some American to invent a product so dazzling that foreigners are lining up to buy it and help the U.S. balance of trade. The reality is that sooner or later it will be copied. We accuse the Chinese of doing that with our technologically advanced products and, no doubt, many of those accusations are true. I’ve often seen recently released films produced in the United States being hawked on the streets of Beijing. The going rate is 5 yuan (about 70 cents) per DVD. In theory, someone is breaking the law - but who the heck cares? In the 19th century, we Americans were regularly ripping off British inventions.

While the Chinese government may give lip service to protecting U.S. intellectual property and may occasionally take steps to enforce certain contracts, it’s highly unlikely that that or any government would take the steps necessary to end the pirating of foreign property to benefit its own people. Better ideas by nature lend themselves to being copied. An economy based solely on selling ideas cannot stand.

Faith in currency adjustment

The other approach to correcting the U.S. trade deficit is through currency adjustment. Those who believe in free markets favor that approach. It does have a certain validity. If the U.S. dollar weakens in value with respect to another currency such as China’s, then U.S.-made goods become cheaper for those possessing that other currency, and so foreigners would be more inclined to buy them. Eventually, trade imbalances should self-correct. A problem is that wages are so low in certain areas abroad that even a large devaluation in the dollar would not erase the wage gap. Then, too, the argument based on currency adjustments assumes that once the dollar is favorably priced, U.S. and other consumers will again buy from producers in this country.

However, as Professor Behzad Yaghmaian argues persuasively in an opinion article, the outsourcing binge of the past several decades has decimated U.S. production in many industries. If, for instance, we wish to buy a television set, we may find that no one manufactures such a product in the United States. If television sets produced in China become too expensive with the strengthening renminbi, the alternative would be to buy from a firm operating in another country. But that would not help the U.S. balance of trade. Our dollars would still be going abroad.

The U.S. dollar remained strong during many years of a deteriorating balance in merchandise trade because foreigners were willing to invest dollars in our assets, notably U.S. Treasury bills. Treasury officials loved it, so they did not complain. Such investments were favored by central bankers in China, Japan, and other places because they gave assurance of financial strength and stability.

But now the foreign bankers may have had their fill of investment in U.S. debt. The declining value of the dollar means that their dollar-denominated assets will become increasingly less valuable in terms of other currencies. Why would anyone want to continue to invest in a currency that may be worth half of its its present value in several years?

Foreigners who continue to receive dollars from merchandise trade may then recycle those dollars in assets of other countries such as those in Europe, whose sellers would then have to sell the dollars in a market with few buyers. The price of dollars would continue to drop. The process would be stopped only if we Americans had something besides our debt to sell.

We do have stock in our companies, of course. We have real estate and land. We have agricultural produce, timber, and other products. As the dollar falls, foreigners can purchase these at an increasingly reduced price. And let’s not forget, while trade continues, Americans will be sending a steady stream of dollars aboard to investors in our debt and our corporate stock. The interest on U.S. government bonds will go to the Japanese and Chinese central banks, not to U.S. citizens. None of that outflow can be taxed. We no longer “owe it (the debt) to ourselves.”

Do the politicians have it in them?

This is not a pretty picture. We have long since ceased to be a creditor nation and have, instead, become the world’s largest debtor. Unbalanced trade has brought us to this point. Like families living off their credit cards, our nation has been postponing the day of reckoning to pay for what we presently consume. This should be a burning issue for politicians. Ordinary citizens recognize the danger but the economic and political elite do not. At least, they will not communicate their concerns in an honest way. That’s the state of discussing trade issues at the present time.

From my point of view, we need to make a priority of reducing our fiscal and trade deficits that have risen so much in the years of the Bush administration. The free-trade Republicans will be of no help. The Democrats, though talking the right game, seem clueless in providing real solutions. Maybe the Independence Party can help. Ross Perot knew a “giant sucking sound” when he heard one. Maybe his heirs will acknowledge that the old man had more than a lick of sense on this question.

I think the solution lies in some form of protection to buffer our workers against immediate competition from the extremely low-priced labor found in some parts of the world while also trying to get our own cost structure down. Global trade competition is largely a matter of costs. Maybe the government will have to step in to eliminate excessive CEO compensation, control corporate takeovers and hedge fund activity, and do other things things that will be branded “socialistic” - Better that than let our economy continue on its present course to ruin. Correct ideology won't feed the kids.

We will need to lower our cost structure to compete in a global economy. An urgent need will be to combat the high cost of medicine, especially drugs, and not just throw more money at the problem in the form of universal insurance coverage. I think that government itself can provide competition with the subsidized private sector by offering free universal health-care service, to the extent of providing annual physicals and a few other things that should not cost too much.

To reduce our petroleum imports - another element in our trade deficit - we need a crash program to promote the use of alternative and renewable energy. We will need to restructure our transportation in large metropolitan areas to end energy- and time-wasting traffic jams whether by use of new technologies for commuting to and from work, telecommuting, staggered work hours, or other means.

All these things make sense to people but government leadership is lacking. Is it up to the job? Do we still have a viable democracy able to respond intelligently to a crisis?

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