Friday, June 6, 2008

McCain's New Trade Theory

In rereading John McCain's June 3 speech in New Orleans, I was struck in particular by one sentence in the prepared text. "Lowering trade barriers to American goods and services," he said, does four things: "creates more and better jobs; keeps inflation under control; keeps interest rates low; and makes more goods affordable to more Americans."

This version of Straight Talk went right over my head. As I see it:
  • The first claim is the most defensible. Increased exports would create more and better jobs if the access were real. Lower tariffs are usually touted by "free traders" as the principal gain from "free trade" agreements. But what about the factors that neither the FTAs nor the multilateral rules address: currency misalignment, border tax adjustments, other subsidy practices, unsafe products and processes, etc.? How can the proverbial playing field be said to level if these obstacles to, and distortions of, free trade go uncorrected and even unaddressed? Their impact can be, and often is, far more significant than the barriers that are eliminated. (Border tax adjustments alone create a two-way disadvantage for American producers that averages 15-20 percent. China's undervalued renminbi creates an additional two-way disadvantage that may be as much as double the level of its 17 percent value added tax.) Knowing that I will be branded a protectionist for saying so, the free trade emperor has no clothes. I'm not arguing that free trade is not a worthy goal, only that the much touted FTAs are seriously deficient, sometimes for what they include and in every case for what they ignore.
  • Improving market access for US exports does not reduce inflationary pressure in the US. On the contrary, everything else being equal, they increase it. Exports are a "leakage" from the domestic economy that leave more money chasing fewer goods in our market. That's inflationary.
  • Improving market access for US exports also does not keep interest rates low. Actually, the US has kept its rates low by running trade deficits, shipping dollars abroad to settle our accounts, and then borrowing back what we need to cover the budget deficits of government and households. Massive borrowing from our trading partners in Asia and the Mid East is what accounts for our "success" in this reagrad.
  • Improving market access for US exports also does not make more goods affordable to more Americans. On the contrary, they remove goods from the domestic economy, thus making fewer goods available and raising prices, everything else being equal.
What Sen. McCain might have wanted to say, but didn't, was that he seeks to continue the Bush administration's mindless pursuit of FTAs, its dereliction of duty with respect to currency policy, and aiding and abetting of off-shoring. This would be a great issue for the two candidates to hash out with one another in front a national television audience.

Charles Blum

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