Why free trade is failing
By Peter Morici
No policy could better serve the common progress of humanity than genuine free trade, but support for open trade is evaporating among American voters and foreign governments the United States hopes to engage.
The World Trade Organization has greatly reduced tariffs, prohibits virtually all export subsidies, and regulates other national policies that could subvert the trade, such as industrial development incentives and discriminatory commercial regulations.
Unfortunately, U.S. imports exceed exports by another $800 billion, and workers released from making those products go into non trade-competing industries, such as retailing, where productivity is at least 50 percent lower. This slashes GDP by about $400 billion, wipes out the gains from trade and requires workers displaced by imports to accept lower wages.
The trade deficit creates an excess supply of dollars in international currency markets, as Americans offer more dollars to purchase foreign products than foreigners seek to buy U.S. products. Simple supply and demand should drive down the value of the dollar against the yuan and other currencies, make U.S. imports more expensive and exports cheaper, and reduce the trade deficit. However, Beijing subverts this process by printing and selling yuan for dollars in currency markets, keeping its currency and exports artificially cheap.
This creates subsidies on exports equal to 8 percent of China's GDP, and Beijing offers many other subsidies to exporters, such as tax rebates and no payback bank loans. Other Asian countries are impelled to follow similar policies, lest their exports lose competitiveness to Chinese products.
U.S. firms harmed by subsidized imports from Europe, Canada or Japan can obtain relief from the Commerce Department in the form of countervailing duties but the Bush Administration refuses to apply similar WTO-compliant measures to China.
Consequently, many U.S. workers are pushed from high paying jobs, not because they can't compete, but because their president is disinterested. The ripple effect through labor markets creates great anxiety among workers and an anti free-trade sentiment that helped elect many new members of Congress.
More broadly, the Bush Administration will not likely win a global package of trade reforms through the Doha Round of multilateral negotiations, because skeptics in Congress don't see benefits from extending a system that needlessly destroys so many good jobs, China and other Asian mercantilists are profiting too much from the status quo to offer reasonable concessions, and Latin American politicians are wholly disillusioned with American prescriptions. As always, the Europeans and Japanese shy from supporting U.S. intentions when an American President is wounded by his own bad judgment.
Quite simply, free trade is failing, because President Bush refuses to stand up to Chinese mercantilism.
Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.
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