The Political Costs of Free Trade

Years divisible by four are not good for free trade. When Americans go about the quadrennial chore of choosing a president, the candidates seeking their votes know one thing: everyone disadvantaged by the free international movement of goods and services and jobs knows who they are. But the winners—consumers who get cheaper goods, shareholders in businesses that profit from free trade, workers whose jobs are created by free trade—are a diffuse group, often unaware that their good fortune is a result of free trade.

So we are witnessing the spectacle of John Kerry, by next week certain to have a lock on the Democratic presidential nomination, calling for a review and possible revamping of all trade agreements, including the North Atlantic Free Trade Agreement (NAFTA) and the Africa/Caribbean trade agreement for which he once voted, and the treatment of businessmen who invest abroad as “unpatriotic” or worse—traitorous Benedict Arnolds, to be shamed and taxed.

In response, a president who once defiantly flaunted his free trade credentials in the face of protectionists, is forced to appease critics with headline-catching but minor concessions, such as the imposition of import quotas on made-in-China brassieres. And to watch with some annoyance as leaders of his own party join Democrats in calling for the sacking of his economic adviser because he was sufficiently impolitic to say that outsourcing is a good thing, since it lowers the costs of American firms, making them more competitive in world markets, and keeping prices lower for the nation’s consumers.

The election-year rhetoric is not the only reason to worry that the free trade regime is coming unraveled. The World Trade Organization (WTO) has decided that American tax laws that favor U.S. exporters to the tune of $4 billion annually warrant the imposition by the EU of punitive tariffs. Those tariffs, which will affect 1,700 products and steadily increase to more than $600 million annually by next year, are scheduled to go into effect today unless Congress repeals the offending statutes. Which it won’t—not today and not before Bush or a new president is inaugurated and a new Congress seated in January 2005. Pascal Lamy, the EU trade commissioner, is hoping that the new duties, low at first but increasing by 1 percent per month, will pressure Congress into repealing the offending laws sooner rather than later, but since the falling dollar will offset the impact of the new tariffs on the competitiveness of American goods, his hopes are doomed to remain unrealized.

All of this to-ing and fro-ing is to be expected in this election year. Also to be expected was that German chancellor Gerhard Schröder would use his recent meeting with President Bush to call for a strengthening of the dollar, although why an American president should aid a German chancellor who plotted against him at the UN during the debates over Iraq, and seems unable to introduce meaningful economic reforms in his own country, remains a mystery.

Fortunately, the picture brightens, at least a bit, if we look beyond the political posturing to what is going on below the political radar.

Most important is the backlash against the protectionists that is coming from Washington think tanks and what this town calls “opinion formers,” a phrase that seems to describe those who influence the opinions of other “opinion formers.” Data are being marshaled to show that the bulk of the job losses that so trouble voters (despite a rather low unemployment rate of 5.7 percent) are due to the vagaries of the business cycle, and to the enormous recent improvement in productivity, rather than to displacement of workers by imports. Federal Reserve Board chairman Alan Greenspan has pointed out that during the free-trading 1990s, the U.S. economy created 24 million more jobs than it destroyed, and that in normal times the job “churn” in America totals two million jobs every month. Or, as Martin Wolf puts it in the Financial Times, between 7 and 8 percent of U.S. private-sector jobs are lost every quarter, but employment nevertheless increases, thanks to the rapid re-employment of workers in newly created jobs.

While the battle for the minds of voters and politicians is being waged, laborers in the free-trade vineyard are quietly going about their jobs. Supachai Panitchpakdi, director-general of the WTO, is calling on the United States, which he notes “has been the driving force behind eight rounds of multilateral trade negotiations,” to reassert leadership in the battle for freer trade.

Bob Zoellick, the U.S. Trade Representative, is answering the call. Earlier this month he met with representatives from Africa and the EU in Kenya, and announced, “Little by little, we are making progress.” From the notably impatient Zoellick, that is high praise indeed. It may well be that the total breakdown of the trade talks in Cancun last year has focused the participants’ minds on the fragility of the free trading regime.

India, a major beneficiary of outsourcing of software design and call centers, now says it is prepared to discuss reducing its agricultural subsidies and trade barriers; African nations say are willing to be more flexible on issues that are of concern to them; the U.S. and the EU allege that they are willing to consider reducing their trade-distorting agricultural subsidies.

So give two cheers for Bob Zoellick and his EU counterpart, Pascal Lamy. But hold the third until Zoellick can persuade this country’s politicians to stop protecting our sugar and cotton industries, and until Lamy announces that the French are willing to abandon their Common Agricultural Policy. Meanwhile, hope that, with trade as with other issues, politicians in the heat of election campaigns say things they intend to “clarify” when elected.

This article appeared in London’s Sunday Times on February 27, 2004.