Trade winds

The Washington Times Weekly - - Editorials -

Fed­eral Re­serve Chair­man Ben Ber­nanke de­liv­ered a pas­sion­ate en­dorse­ment of free trade two weeks ago and warned that “a re­treat into pro­tec­tion­ism and iso­la­tion­ism would be self-de­feat­ing and, in the long run, prob­a­bly not even fea­si­ble.” Ex­plain­ing that the ben­e­fits of trade are “widely dif­fused and of­ten in­di­rect,” he ac­knowl­edged that the more eas­ily iden­ti­fied “job losses and worker dis­place­ment some­times as­so­ci­ated with ex­panded trade are a le­git­i­mate eco­nomic and so­cial is­sue.” He con­cluded that Amer­ica needs to “con­tinue to find ways to min­i­mize the pain of dis­lo­ca­tion with­out stand­ing in the way of eco­nomic growth and change.”

The in­come gains from trade, even if they are not read­ily ap­par­ent be­cause so many of them are “dif­fused and in­di­rect,” are truly as­ton­ish­ing. Since World War II, ex­panded trade has in­creased av­er­age an­nual house­hold in­come by $10,000, ac­cord­ing to sev­eral stud­ies, in­clud­ing one that projects fur­ther an­nual house­hold-in­come gains be­tween $4,000 and $12,000 if all re- main­ing trade bar­ri­ers are re­moved. Al­lud­ing to Wal-Mart, Mr. Ber­nanke noted the role of “large, im­port-in­ten­sive re­tail chains,” whose wide va­ri­eties of low­er­priced goods de­liver huge trade ben­e­fits to low- and mod­er­ate-in­come con­sumers. Com­pe­ti­tion from trade also is as­so­ci­ated with huge pro­duc­tiv­ity gains. Over the last 10 years, man­u­fac­tur­ing pro­duc­tiv­ity, which is very ex­posed to for­eign com­pe­ti­tion, has in­creased by 55 per­cent, re­flect- ing an av­er­age an­nual pro­duc­tiv­ity in­crease of 4.5 per­cent. This mir­a­cle ex­plains why man­u­fac­tur­ing out­put has in­creased by nearly 40 per­cent since 1996.

Mr. Ber­nanke ar­gued that trade’s over- all ef­fect on em­ploy­ment is “es­sen­tially none.” While im­ports as a share of gross do­mes­tic prod­uct (GDP) in­creased from 4.4 per­cent in 1965 to 16.8 per­cent last year, to­tal U.S. pay­roll em­ploy­ment in­creased from 64 mil­lion to 136 mil­lion; and the 1965 un­em­ploy­ment rate of 4.5 per­cent is vir­tu­ally iden­ti­cal to last year’s 4.6 per­cent. More­over, av­er­age in­fla­tion­ad­justed com­pen­sa­tion per hour has nearly dou­bled since 1965, al­though the gains were not evenly dis­trib­uted.

The Fed chair­man con­vinc­ingly ar­gued that free trade is “even more im­por­tant for de­vel­op­ing na­tions.” A World Bank study com­par­ing two groups of de­vel­op­ing coun­tries — “glob­al­iz­ers,” whose ra­tio of trade to GDP dou­bled over 20 years, and “non­glob­al­iz­ers,” whose trade to GDP ra­tio de­clined — found that an­nual eco­nomic growth among the glob­al­iz­ers ac­cel­er­ated from 2.9 per­cent in the 1970s to 5 per­cent in the 1990s. The growth of non­glob­al­iz­ers de­clined from 3.3 per­cent in the 1970s to 1.4 per­cent in the 1990s.

As Mr. Ber­nanke con­cluded, “We need to con­tinue to find ways to min­i­mize the pain of dis­lo­ca­tion with­out stand­ing in the way eco­nomic growth and change.” Ad­vo­cates of free trade would do well to keep that in mind if they want to al­lay the con­cerns of work­ers neg­a­tively af­fected by trade.

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