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Free Trade: Strip the Myth Away

By James K. Glassman
Tuesday, March 26 1996; Page A13


Ross Perot is a decent bet to run for president again, Pat Buchanan shows no signs of slinking away, and Ralph Nader may even be a candidate. These noisy neo-protectionists, along with others in Congress, will ensure that trade – especially the NAFTA deal with Mexico – remains a hot issue through the election.

Good! If Bill Clinton and Bob Dole can muster the guts, they can bury forever the uninformed, emotional arguments against free trade that have swept this country.

Clinton and Dole certainly have the facts on their side. Begin with the North American Free Trade Agreement itself. By agreeing to lower its tariffs, Mexico made U.S. goods cheaper and more affordable to Mexican citizens. So the United States sold more of them than it did before NAF\TA.

In 1993, U.S. exports to Mexico were $42 billion. In 1994, the first year of NAFTA, they jumped to $51 billion. In 1995, when the peso crisis hit and Mexico fell into a near-depression, exports from the U.S. dropped (since Mexicans didn't have the money to buy them), but they were still $47 billion.

The peso crisis itself was unrelated to NAFTA. It was the result of a string of violent political events, an unstable currency and the over-enthusiasm of foreign investors for Mexican bonds. But, says the U.S. Commerce Department, "There is no doubt that NAFTA helped limit U.S. export losses, preserving U.S. jobs."

Compare what happened when a similar crisis hit Mexico in 1982. Mexico raised its tariffs on foreign goods to 100 percent, and U.S. exports to the country fell by half. But this time around, because of NAFTA, Mexico could raise tariffs only on its non-U.S. (and non-Canadian) trading partners.

Let's look at a typical exporter. In 1993, AlliedSignal Corp. sold 16 million Ohio-made spark plugs to Mexico. In 1994, the first year of NAFTA, the company sold 21 million. Then, in 1995, exports fell back to 19 million.

"In spite of the peso devaluation," says Paul Boudreau of AlliedSignal, "we sold more spark plugs than before NAFTA." This year, Boudreau says, sales to Mexico will increase at least 10 percent.

What about imports? As part of the NAFTA bargain, the United States cut its own tariffs, thus making Mexican goods cheaper here. And, indeed, Mexico is exporting more to the United States than it did before. But it's hardly flooding our market.

Mexican goods now account for 8.3 percent of all the imports U.S. citizens buy. That's up from 6.8 percent but it's still a small number. By contrast, U.S. goods account for 74 percent of all imports that Mexicans buy, up from 69 percent.

Also, the Commerce Department reports, "there are some indications in the data that Mexican imports are substituting for imports from other countries." In other words, we're importing goods from Mexico that, in the past, we imported from, say, Korea. So NAFTA might increase imports from Mexico but not increase imports overall.

Still, I don't want to get carried away by the typical politician's argument that denigrates imports as job killers and glorifies exports as job creators. That approach misses the point about trade. The purpose of trade is to import. Exports are simply the price we pay.

As individuals, we understand this simple truth. We work so we can buy things. We don't buy things so we can work. By lowering tariff barriers and encouraging imports, we can buy good things more cheaply. In other words, with free trade, it will take fewer hours of our work to buy a Mexican-made shirt than a U.S.-made one.

Will U.S. shirt-makers lose their jobs because of lower tariffs? Perhaps. But, since Americans will spend less money overall on shirts, they'll have more money left to buy domestic products and services, like computers or meals in restaurants, creating jobs in those sectors. Or they can save the money, creating more jobs through investment. Or they can work fewer hours, enriching their lives through more leisure.

Even if free trade doesn't create jobs, it allows the United States to concentrate on high-skill sectors where we have our "comparative advantage" over other countries. For example, a recent study by the Institute for International Economics and the Manufacturing Institute found that production workers at exporting plants earned 6.5 percent more than other production workers.

Another myth is that the balance of trade between two countries has any meaning. Critics of NAFTA, for instance, note that last year Mexico sold more to us than we sold to Mexico. But look at how we conduct our own lives: As a corporate lawyer, you may send your shirts to a laundry that doesn't buy legal services from you. Therefore, you run a massive trade deficit with the laundry.

Big deal. The laundry can clean your shirts far more cheaply (in time and dollars) than you can. This savings lets you invest more time and money in selling your legal services to completely different clients. That's why we trade.

While the new Economic Report of the President contains an excellent section on the value of free trade, the White House is ambivalent about pushing the issue forcefully. In an article in the current issue of Foreign Affairs, Marc Levinson blames the Clinton administration for fanning the flames of protectionism, rather than dousing them.

Dole, too, has balked on a bill that would make it easier for Chile to join NAFTA. "There's a lack of political will among both parties to take on the issue of free trade," said William C. Lane, an official of Caterpillar Inc., at a Heritage Foundation symposium.

That's a shame. Stripped of myth and cant, free trade has a powerful case to make. The question now is: In an election year, who has the courage to do the stripping?

© Copyright 1996 The Washington Post Company

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