Trade: The Overlooked Engine of U.S. Growth

Article excerpt

Of the several factors that contributed to our economy s amazing rebound from the traumas of the 1970s, some--like reduced marginal tax rates and a more rational monetary policy--are widely recognized. Others--like transportation deregulation and corporate takeovers--are less fully appreciated. Yet of all the policies that contributed to America's economic rejuvenation, the one that has probably caused the most confusion is trade liberalization. A disturbing number of voters and policy makers now believe America is somehow harmed by international trade.

The reality is, expanded trade has been a blessing for the U.S. economy. Trade benefits consumers by lowering prices and expanding choice. It benefits business via cheaper inputs and wider markets to sell into. Perhaps most importantly, trade benefits the overall economy by forcing American companies to be more competitive, leaner, always on their toes, and by helping ensure that resources flow to the highest-value uses. As leading trade expert Jagdish Bhagwati of Columbia University and the American Enterprise Institute summarized in a recent interview with your author, "Trade is an engine of prosperity."

One almost feels sorry for protectionists. Think of the argument they have to make. Over the same period that U.S. trade with the rest of the world has soared, our economy has enjoyed a remarkable renaissance. Are we supposed to believe everything would have turned out better under protectionism?

The data documenting trade growth over the last two decades are remarkable. Exports soared from $272 billion in 1980 to $934 billion in 1998. Imports jumped from $292 billion to $1,100 billion. Exports now account for 11 percent of ourgross domestic product--up sharply from 7 percent in 1985, meaning that trade has expanded even faster than the economy. Moreover, America's share of global trade has grown. In 1980, we accounted for 23 percent of the world's total; by 1997 this was up above 28 percent.

Today's bloom of trade began after World War II, when negotiations resulted in the General Agreement on Tariffs and Trade (GATT), an agreement that resulted in about 45,000 tariff reductions in the 23 countries participating. Further negotiations followed, with additional reductions resulting roughly every decade or two. The success of these efforts is best seen in the fact that taxes on trade (which is what a tariff is) are now 90 percent lower than they were when GATT negotiations began.

With some exceptions, America has led the way, and can be considered a free trading nation. U.S. tariffs now average less than 3 percent and we maintain few non-tariff barriers to trade. America still imposes fewer restrictions on trade than most of its major partners, though most nations are moving toward open markets.

Our support for free trade is not an act of charity, but something very much in our own interest. Trade, for instance, keeps prices down for American consumers and businesses. Between 1985 and 1999, while overall U.S. prices rose by about 45 percent, import prices went up only 4 percent.

Some would argue that expanding trade and American prosperity are not related. Perhaps our economy would be growing even faster without open trade, they suggest. There is reason to doubt this, however.

Adam Smith and other economists taught us that people and nations should concentrate their efforts in fields where they hold a comparative advantage. The U.S. presumably should not try to be the world's number-one coffee producer, though we could undoubtedly produce coffee in greenhouses (probably employing a lot of people) if we had to. Why not? Because it would reduce our living standards and wealth if we tried to "win" the coffee market instead of pursuing better opportunities elsewhere.

If we let the market operate, its incentives and price signals will tell us where we can most productively shift labor and capital in order to succeed. …