Remarks by Don Boudreaux and Dan Griswold at the Cato University Fall Seminar on Saturday, October 30, 2004 in Quebec, Canada.
REMARKS OF DON BOUDREAUX
MR. DON BOUDREAUX: It is an honor to share this session with Dan Griswold, one of the most effective, eloquent, knowledgeable, and passionate proponents of free trade and globalization today.
I put this up on the board just to let you know where I come from. This is how my Virginia license plate reads.
(Laughter. Applause.)
MR. BOUDREAUX: And it’s on my Japanese made car, a Lexus actually.
(Laughter.)
MR. BOUDREAUX: Not the top of the line. Cato doesn’t pay me enough. Well, that’s not true.
There are so many things to say about free trade and globalization. The difficulty is figuring out what are the important things to put in such a short period of time. The economic literature on it is enormous. The ethical issues are large. So I’ll just pick out a few that I think are especially important and especially powerful insights into the nature of trade and why free trade is economically and ethically superior to protectionism.
The way Dan and I are dividing this, roughly, is I’m doing sort of the theoretical case, the reasons for trade. And Dan will present more of the empirical evidence on the matter.
When I teach free trade to my students, when I talk about trade to audiences, I like to start with a very simple question, and ask the audience — and I ask you — to think about this question very seriously. The question is this: Why do foreigners trade with us? And the “us,” if you’re American, you can think of “us” as the U.S. It’s always convenient that the United States is conveniently abbreviated as ‘U.S.’ It makes this provincial. But why do foreigners trade with us? Why are people in country A willing to use their time and their valuable resources and their effort and their sweat to produce things to ship off across an ocean or a geopolitical border in order to sell these things to people in country B? What’s the reason?
Keeping in mind Tom’s earlier admonition about asking rhetorical questions, let me quickly answer my own. The answer is they want to buy things from us. People sell things to us because they want to buy things from us.
Now, we can have a whole other discussion about what would happen if foreigners wanted to sell things, give things to us, and didn’t want anything from us in return. My quick answer is, well, that would be wonderful. Unfortunately, foreigners don’t want to do that. So given that we only have a short time, let’s stick with the more realistic case, that foreigners are not in the business of extending charity to we poor deprived North Americans. They ship things over to us for a purpose. And that purpose is they want to buy our things.
I will use, because there are mostly Americans in this room — I know not all — I will use the United States as the domestic example, simply because it just comes more naturally to me. But what I say applies to any country.
So why do the Japanese send things to America and accept dollars in return? It’s because they want to get things from us. What do they want to get from selling automobiles and electronics to Americans? They want to get either American goods, services or assets. In fact, there is no real alternative to that. Again, I’m putting aside the highly unrealistic assumption that they may want to just give us those things and then turn tail and run away. Which I would be happy, again, if they did. They want either our goods, our services or our assets.
Now, the way the current debate goes with trade, and actually the way it goes back a long time, is if foreigners take their export earnings, the earnings that they make from exporting things to us, the earnings they make from our buying, as imports, their things, if they take all of that money and then immediately buy an equivalent amount of American-made, domestic-made, goods and services, then we breath easy. Well, okay, in that case, trade is okay. I note that there are some trade extremists who don’t even like that kind of trade, but they are fairly rare.
So if Mr. Toyota sells us a million dollars’ worth of Camrys, and we give a million dollars to Mr. Toyota in exchange for the Camrys, Mr. Toyota then take his million dollars and then buys a million dollars’ worth of American-made software or American-produced lumber, then, wow, we’re okay. But suppose Mr. Toyota doesn’t immediately buy a million dollars’ worth of American goods and services with the million dollars he earns on selling cars to Americans. What else does he do with it?
The answer is he invests it in American assets. And here is where people become all upset. There is no issue now that irritates me more — it’s just a deep irritation in me — than to hear the public discussion about the trade deficit. Let me start with you. And this is actually a very select audience. And here I will ask for an actual show of hands. How many of you actually think you know what the trade deficit is?
MR. BOUDREAUX: I know Don Marsh knows. If you know what it is, if you think you know what it is, raise your hand.
AUDIENCE MEMBER: The number or the definition?
MR. BOUDREAUX: What is it conceptually. How would you define it.
MR. BOUDREAUX: So even in this room, certainly not everyone. I guarantee you, if you go to any audience that is not made up of people attending Cato University or an Institute for Humane Studies seminar, and you ask, and you get an honest response, how many of you know what the trade deficit is, it is maybe 1 percent or 2 percent of the people.
And yet, the term is bandied about daily. You turn on the evening news, and there is Dan Rather bemoaning the increase in the trade deficit. Or there is Peter Jennings applauding the decrease last month in the trade deficit. So people use this term, and they have no idea what they’re hearing. It sounds like it means something, “trade deficit.” It sounds bad, because of the word “deficit.”
For those of you, quickly, who don’t know what the trade deficit is, there are various different ways of defining it. The most intellectually respectable way, and the one that all intellectually respectable media outlets use it, is called the current account deficit. The current account is simply the measure of the dollar value of imports versus the dollar value of exports. So if during some period — you pick the period — a week, a month, a year, or 10 years, if during that period your country imports a greater dollar value of goods and services than it exports in goods and services during that period, your country runs a trade deficit, a current account deficit, according to the difference between exports and imports.
AUDIENCE MEMBER: And does that exclude asset purchases?
MR. BOUDREAUX: Yes, the current account excludes purchases, that’s right. In fact, that’s an important point. I’m getting to that now.
Now, that’s called a trade deficit. And it’s a cue to the public. When the news reporter says, bad news, America’s trade deficit rose last month by a million dollars, you’re supposed to say, oh. And then you’ll hear the talking heads talk about, well, I’m really concerned by the twin deficits. As if the budget deficit and the trade deficit are pretty much the same thing.
What most people don’t know, first of all, they don’t know really what the current account is. But put that aside. They don’t realize also that the current account deficit is always, now, by definition, offset, dollar for dollar, cent for cent, by something called the capital account. And if the current account is in deficit by $452 billion, then the capital account is in surplus by $452 billion. You add up the current account to the capital account, and they necessarily equal zero.
And so one point I want to share with you is if the current account deficit rises — if it rose last month by X number of dollars — then you could report that in one of two ways. If you’re Dan Rather, you can say the trade deficit rose last month by X billion dollars. Or you can say the capital account surplus rose last month by X billions of dollars. “Surplus” sounds so much better. “Deficit” sounds awful. It sounds like something is happening. We’re in the throes of some real problem.
Now, you still hear this a little bit. Although the cacophony of noise on this issue reached a crescendo about 10 or 12 years ago. That was when people would say, well, the trade deficit, the U.S. trade deficit, is a signal that America’s economy is becoming less competitive. It sounds right. The trade deficit increasing, the economy becoming less competitive. We’ve got to do something about it.
Of course, politicians are eager to do something about it. Richard Gephardt and other sages in Washington were eager to propose and vote for protectionist legislation that would restrict Americans’ ability to buy foreign goods, in an attempt to reduce the trade deficit. And no doubt, in the extreme, if we stopped trading with foreigners and stopped importing things from them, well, we would no longer have a trade deficit. Because, well, we would no longer have trade.
And some people actually might think that would be good. But if you know what you’re talking about, or if you just know what other people are talking about when they mention the trade deficit, then you understand that every dollar that foreigners get from importing things to us, that they don’t spend on our exports to them, they invest. They either hold it as dollar cash reserves, they buy American bonds, private or public, they buy American equity, stock in General Electric, stock in Google, or they buy American real estate, a ranch in Texas, a restaurant in Fairfax, which I happen to know a Parisian bought recently.
So if the trade deficit rises, if the thing called the trade deficit rises, that means that foreigners are investing more in America, all other things equal. Now, I don’t know about you, and maybe I’m a simpleton, but it seems to me that if foreigners are investing more in America, that is evidence of a greater trust in the future of the American economy, and not a sign that the American economy will soon go to the dogs.
Ask a simple question. And I like to ask some of my students this when I talk about this issue to them. Let’s say Bill Gates comes up to Cathy and says, Cathy, hi, I’m Bill Gates. I would like to invest in your company.
Now, there may be reasons why she doesn’t want that. But would you take that as evidence that your company is soon going to the dogs? Bill Gates is a smart guy. He’s got a lot of money. Presumably he wants to make a profit on his money. So if he comes up to you and offers to invest in you, in your company, that’s a sign that he thinks that your company has good prospects. Otherwise he wouldn’t be willing to invest.
If many foreigners approach you and wish to invest in your company, then that’s an even greater bit of evidence that the confidence that foreign investors have in your company is high, and probably justified if many of them want to do it.
For me, the way I look at the trade deficit, and even among economists I’m something of a renegade here, I think in an industrialized economy that does not receive a lot of foreign aid — and the United States is not known as a recipient of foreign aid — in that kind of an economy, a growing current account deficit is always a good sign.
Now, it truly can be that foreigners are buying with their dollars a lot of government debt. And maybe that helps to encourage Uncle Sam, or the State of Minnesota or the Los Angeles School District, to issue more government debt. I’m not a big fan of government spending, no matter how it’s financed. And so I’m not a big fan of government debt. But the very fact that foreigners are willing to take their dollars and invest them in American assets, rather than cash them out immediately as demand for American goods and services, to me is a positive sign and not a poor sign.
Now, for the first time in my life, last Monday, I went to an investment seminar. I had never been to an investment seminar before. I was just appointed to the Board of the George Mason University Foundation. And I also got appointed to the Finance Committee of the George Mason University Foundation Board. I know nothing about finance, so I went off to this investment seminar to learn the difference between a stock and a bond, and what does “market cap” mean. I didn’t know until last Monday.
One of the speakers at this investment seminar was the chief economist for a big Wall Street investment firm. And he said a lot of things actually that made good sense to me. But one of the things he said that just flabbergasted me was this. He said, well, the trade deficit is a matter of concern.
Now, in fairness to him, he understood, unlike the popular mind, unlike Dan Rather, he understood that the current account deficit is the reverse side of the capital account surplus. So that, to the extent that we run a current account deficit, foreigners are spending their U.S. dollars not on U.S. goods and services but instead on U.S. investments that are funding more R&D, funding more business startups, buying American real estate, and that this is good for the economy and it is good evidence for the economy’s future rather than something detrimental. He understood that.
But, he said, the problem is it can stop. And it’s true. That would be a problem. If suddenly the vast bulk of people, a large swath of people, who are investing in the domestic economy decided to stop investing in the American economy, that’s a problem. But there is nothing unique about the trade deficit funding investment as compared to investment being made by private citizens.
Here is a mental experiment. I think it works. I’ve thought about it. And maybe there is a flaw you can point out to me in my reasoning. It’s good for me personally if I save more, if I live a more frugal life, waste less money on fine wine and put more money into my 401(k), buy stocks and bonds. It’s good for me. It’s good for all of us individually if we save more.
And it’s good for me, given whatever level of savings I have, whether it be negative, zero or positive, whatever level of saving I have, it’s good for me if other people in the economy of which I am part saves more. Because that means that there is a greater amount of research and development funding, there are more factories that go up, more worker training, more business startups, the whole panoply of things that are funded with investment.
Now, given whatever level of savings I have — and that’s a matter of my personal choice — given whatever level of savings I have, does it matter to me, or should it matter to me, if the new factory built across town or the extra research and development being launched by, say, the 3M Company in Minnesota, should it matter to me if the dollars to fund that research and development and start that new factory come from my neighbor across the street, come from a stranger in Florida, or come from a stranger in France or Tokyo?
I don’t see that it makes any difference to me. What’s important to me is to be part of an economy in which a sufficient number of people defer current consumption in order to save so that capital goods can be accumulated, so that the productivity of workers, and the economy, increases steadily over time. It is good for me personally to save more, regardless of how much other people are saving.
But given my savings rate, it makes no difference to me who is doing the saving apart from me. The agency that issues their passport, in my view, does nothing to affect the worthiness of their investment. A factory funded by a foreigner across town is just as productive, just as good, as a factory funded by neighbor across town or a stranger in Japan.
Therefore, I get very distressed and actually “distressed” — is not the right word — I get agitated beyond all rational calculation by discussions about the trade deficit. I do not see it as a problem. People don’t understand what it means, first of all. Secondly, I think to the extent that the current account is in deficit, that’s almost surely a sign that the American economy, compared to other economies — and everything is relative — compared to other economies, has a promising future.
Again, just ask yourself: Would you invest money in an economy that you thought was going to the dogs? The answer is no. If you were holding currency in that economy, and you thought it was going to the dogs within a few months or a year, you would cash out in goods and services rather than invest in a new factory there or invest in a company located in that country. Well, you probably wouldn’t even buy government debt in that country.
I think another point to always keep in mind in the trade debate — and this came up in one of the earlier talks, but it bears being driven home — there is nothing unique about trade or trade patterns in causing economic change. We focus on changes in trade patterns as a source of unemployment because it’s fairly easy to demonize foreigners. Keep in mind, so-called protectionism is not only — and it is this, but it’s not only — our government doing something to foreign producers. It is our government doing something to us.
Protectionism, I think it’s more proper to think of it, and more accurate to think of protectionism or high tariffs, as your own government telling you, look you would like, I know, to buy that foreign-made good or service, but I’m not going to let you. Or I’m going to impose a penalty on you if you do so. It’s something done to domestic citizens by those citizens’ own government, whose presumably ostensible reason for existence is to improve the life of that citizen. So it’s an attack on domestic citizens’ freedom, and it reduces their prosperity, maybe a little, maybe a lot, depending upon how big the trade protection is.
But as I said, there is nothing unique about changes in trade patterns that cause unemployment. The example I like to use this year is the following: Fifty years ago this past summer, so 50 years ago just a few months ago, Dr. Jonas Salk and Dr. Sabin introduced the first successful — and it was remarkably successful immediately — vaccine against polio. It wiped out polio as a disease that we in the West have to worry about.
Now, that’s an economic change. It didn’t have anything directly to do with foreign trade. But think of the devastation it imposed on the American economy. All those people who worked in wheelchair factories, their jobs were wiped out. People who made crutches, their jobs were wiped out. People who made iron lung machines for severe polio victims, their jobs were wiped out. Nurses and doctors and hospitals who specialized in caring for polio victims, their jobs were wiped out.
Well, it’s true, the jobs were wiped out. Would anybody say, well, we should rethink that polio vaccine thing? We might not want to introduce it now.
The point here is any economic change — any economic change — creates changes in production patterns, because you have new consumer patterns of buying that have to be satisfied by new producer patterns of producing. And you can only produce more here if you produce less here. So when consumers shift their demands from this sector and move it to that sector, workers and firms in this sector will suffer. But workers and firms in that sector will prosper. Over time, because of the dynamism and flexibility of the economy, everybody’s livelihood over time everyone’s livelihood increases.
I’ll give you another example of a devastating change in consumer tastes that is wiping out all sorts of jobs, turning high profits into no profits or losses. The Atkins Diet. It’s just devastating. Because all those workers in high carb factories, workers in pasta factories, breweries, chocolate factories, bakeries, these people are losing jobs because consumers are buying fewer high carb goodies.
Now, you can save those jobs. You can try to freeze the economy, just freeze dry it, and prevent any kind of economic change from disrupting anyone’s life. That’s kind of the ideal that a lot of Social Democrats have. Any threat of any change in your life is somehow the result of unfairness and something being wrong in the world, and it requires government intervention to protect you from that change. I find it difficult to conceive of the amount of tyranny that would have to be unleashed in an economy to protect and to prevent all economic change. I can’t even describe it. But if you think about it, you can see it pretty easily. Okay, Ms. Gornicke, you are spending your money in this way today. You must do that for the rest of your life. In fact, don’t die, because that’s going to cause a change in spending patterns.
(Laughter.)
MR. BOUDREAUX: So we’re going to have to figure out some way to keep you alive forever and keep those spending patterns going. Maybe we will bequeath your spending patterns to your daughter and your granddaughter, so that now and for the rest of time, no one changes their spending patterns.
And even if you did do it, the economy would just dry up. That kind of tyranny and that kind of stasis in the economy would dry it up. It would just turn us into this great mass of poverty.
The reason foreign trade gets singled out, or the reason we can single out foreign trade, is, frankly, it’s still a fairly small portion of the American economy. So restricting a little bit of it here and a little of it there doesn’t cause any noticeable deterioration in our living standards. And that’s a good thing. But just recognize, there is nothing special about foreign trade to distinguish it from any kind of economic change.
I will say one last thing in the last minute, before I turn the floor over to Dan. I get, when I talk about free trade, a lot of the following kind of responses: Free trade is good in theory, but it doesn’t really work in practice.
First of all, if I have a theory that is only good in theory and never good in practice, it’s not good in theory.
(Laughter.)
MR. BOUDREAUX: It’s a really bad theory. But all theories do have the places where they apply and places where they don’t. But the world is full of a lot of evidence that free trade works.
I like to point to one just south of the border here, the United States. For all of its problems and Lord knows, I spend my life pointing out problems with the U.S. Government and U.S. policy when the 1787 Constitution was written and then ratified two years later, it was, by and large and they didn’t use the term but it was, by and large, a free trade pact. It was designed to create a free trade zone on what became a transcontinental nation.
And the very fact that one of the things that the U.S. Supreme Court has done consistently well over the past 200 odd years is to maintain the free trade zone nature of the United States, by preventing Pennsylvania from erecting protectionist trade barriers from goods and services coming in from Ohio, and preventing Minnesota from restricting imports from Louisiana and Hawaii, and so on, by maintaining this giant free trade zone, the United States has become a hugely integrated, highly specialized economy. Which I have no doubt is probably the single biggest source of America’s wealth.
There are other examples, but a sterling example of the success of free trade is right under every American’s nose every day of the week. And that is his or her own United States of America.
And if those principles work within this huge continent, spanning different weather patterns, different landscapes, different cultures let’s face it, the culture in south Alabama is different from the culture in Queens, New York if that free trade zone works so well, so smoothly and it does then I see no reason, among many others, I see no reason for believing that free trade between the U.S. and Canada and Mexico, free trade between the United States and Japan, free trade across the world, would not be beneficial.
So I will cut myself short very quickly there and turn the floor over to my good buddy Dan Griswold.
(Applause.)
(End of Mr. Boudreaux’s remarks.)
REMARKS OF DAN GRISWOLD
MR. DAN GRISWOLD: Tom Palmer has an influence on me. I’m going to try to implement a few of his ideas, and stand before you here — I even have my little note cards — and we’ll see how it goes.
AUDIENCE MEMBER: Are they numbered?
MR. GRISWOLD: Yes, they are numbered.
And I’m going to keep track of time. I always have the best of intentions. I often, when I give speeches, intend to put my watch on. But nine times out of 10, I get so excited, caught up in the moment, I forget to start my watch. So I’ll do that right now.
I’m happy to talk about explaining free trade. It took me until I was about 35 to figure out that that’s my calling in life, explaining free trade. And doing it not just to the high and mighty in Washington, but I think to people around the country and hopefully around the world. I’ve spent two thirds of my adult life outside of Washington. Twelve of those years were in Colorado Springs, Colorado, as an editorial page editor, writing daily editorials for 100,000 different households in a community that’s very much a slice of middle America.
I did find, the more I wrote about trade and economics, the more interested I became in it. And so I went back for some remedial training and got my master’s degree in international trade at LSE, and here I am. But I’m glad to talk to you about explaining free trade, because it is an important issue. You see it on the television every night. It is determining the shape of our world.
And there is an issue here. Economists, yes, on the one hand, on the other hand; but polls show that 90 percent or more of economists say free trade is a good thing. Countries that are open to trade are better off. There isn’t much debate among economists. The only ones that seems to question that are basically on the payroll of unions, typically.
But the public doesn’t see it that way. In a general sort of way, the public is in favor of trade. And there are a lot of different polls on this. People have a general notion that trade is good for the country, but… And then there is a whole bunch of qualifications. Maybe 60 percent, maybe two out of three people, will give a general kind of assent to trade. But then they have all sorts of qualifications.
Ninety percent plus will say trade is bad for workers. It’s good for the country, bad for workers. You figure it out. But 90 percent or more will say trade is good, as long as we require minimum labor and environmental standards in poor countries. All sorts of qualifications. So you see this gap.
And this, despite 200 plus years of having “The Wealth of Nations.” And if you haven’t read “The Wealth of Nations,” it’s such a wonderful book, and it’s so applicable to today. Adam Smith’s writing is just so lively and applicable. Frederic Bastiat, I’m not sure how anybody could explain free trade better than Frederic Bastiat. And yet, here we are, 150 years later, still debating, trying to explain free trade.
Why is it such an uphill battle? There are a number of reasons. One, and Frederic Bastiat said this, what is seen and what is unseen. The cost of free trade we see. It’s so visible. It’s that factory in North Carolina that gets shut down. Or that factory in Canada that gets put out of business because of competition. Where the benefits tend to be spread out and harder to see, more of a challenge for a TV news crew to find that.
Secondly, the political scales are imbalanced. Those benefits are diffused. It’s saving $10 when you go to Wal Mart from free trade. You’re hardly aware of it. But the cost, the textile industry in the United States, they have a lot to lose from free trade, or at least they think they do. They will hire the lobbyists. They will fly off to Washington. They’ll buy the ads in the newspaper. Diffused benefits from free trade, concentrated costs. Therefore, the people who benefit from protectionism tend to be more noisy and more influential.
Another reason is, in some ways we’re victims of our own success. Free trade has been on the ascendancy in the postwar era. It’s the rule rather than the exception in countries like the United States and Canada. And therefore, everything that people have a gripe about, they blame it on free trade. Yes, we’ve opened up our economy and look, all these problems. They blame it on free trade.
Well, enough whining about it. What do we do about it? What I would like to talk to you today about, I thought I would give you four or five tactical approaches. When you’re in that cocktail party or you’re talking over the lunch counter, or you’re talking to your mom and dad or your uncle on the phone, tactical approaches, and then, three battleground, choosing your terrain. Three battleground. My two boys like to play videogames. Think of it as I’m going to show you four or five techniques, buttons you can push, and then three really neat battle scenes to go to battle with the protectionists. Here are some tactical things. I’m going to go through them fairly rapidly.
Know your facts. There is no substitute for being informed about an issue. Having that well chosen, appropriate statistic or number, that illustration. Read the newspaper. Go to www.freetrade.org. Don has his license plate. That’s the URL of the Center for Trade Policy Studies. You will find all sorts of good facts and figures and information about trade.
Talk in concrete language. Use lively, real life, flesh and blood examples. Yes, the theory is on our side. Yes, there are abstract arguments for trade, and they are wonderful to explore. But put the flesh on the bones with examples. For example, the trade deficit. I love everything Don said. That is one of my passions, too, helping people understand the trade deficit.
One of the best things, and people use it all the time somebody mentioned it to me a day or two ago right here I run a trade deficit every year with my dentist. I buy services from my dentist. She doesn’t buy a thing from me. And yet I am better off. Who would complain about that? And the money comes around. That’s the kind of example that often works.
Another very important tactic is to put protectionists on the defensive. Instead of defending free trade from all of these different angles, point to protection. And there is still plenty of protectionism around in the United States, in Canada, on textiles, apparel, agriculture. We all know about that. Point the spotlight on those and say, look what protectionism is doing to these people and our country. Talk about it. Put them on the defensive, and say, how can you defend this protectionist regime? And I am going to give some details about that in a minute.
Another tactic, acknowledge the pain up front. Yes, some people lose from free trade. Even a devout free trader like me. Some people are losers. Not every single person or every single company wins. One, that is intellectually honest to acknowledge that up front. But two, it makes you look compassionate and credible. It’s just a good technique.
And finally, and this is going to lead into these three arenas of battle, and that is go with the prejudices of your audience. It ties in a little bit to what I was talking about yesterday, and back to Will Wilkinson’s presentation. Use their language and values to make your case. Go with what works, what resonates with people, using facts, using appropriate arguments, but working with what you’ve got.
First, there are two approaches that I’ve found less persuasive. They are perfectly legitimate, but for some reason they just don’t resonate with people. One is the rights argument. This resonates with libertarians. You would all love this. I could make this argument and no other, and a lot of you would agree with me. What right does the government have to tell me how I spend my money? If I want to buy something in China or Africa or India, that’s my basic right. Government should stay out.
Most people, they just don’t buy that. They want to hear something more concrete.
The other one that doesn’t seem to work that well are the consumer benefits. And any economist will tell you, that’s the big payoff from trade lower prices, better quality, more choice. And that is the big economic payoff. But for some reason it doesn’t resonate. It doesn’t arouse the passions of people. I’ve thought about it a little bit. I think one reason is we have this sense that consuming is sort of grubby and selfish. Consuming is just not enough. You can’t want to consume more. We think of two Lexuses in the driveway and eating too much.
Lou Dobbs, in his book I had to read it; it comes with the territory he dismisses the consumer benefits as “saving a few cents on tee shirts and trinkets.” It’s so easily lightly dismissed as that. And it’s too diffused. People just can’t relate to saving $20 here, $30 there, when they see a factory shutting down and 4,000 people laid off.
Well, let’s go to the arenas where we can be on stronger ground and where it will resonate, where you play to people’s prejudices. What is important to people out there? Well, people want to talk about exports. They want to talk about production. They want to talk about jobs. Well, let’s talk about those three things in terms of free trade.
Free trade is good for producers. One, obviously, the export opportunities. In the United States, 75 percent of the world’s spending power is outside of the United States. In Canada, it’s like 95 percent. All these arguments apply even more to Canada, because you’re an economy one tenth the size of the United States. It’s even more necessary that you trade in the world.
When it comes to farming, 96 percent of the stomachs in the world are outside the United States. Our producers need to export. And when you export, you can specialize. You can enjoy economies of scale. People can immediately grasp that. Yes, exports are good. Reaching new markets is good. And wages are higher in export industries. These are good jobs that are typically created. They pay 13 to 18 percent higher than your typical job in exporting industries.
Also, another point is companies and businesses are huge importers. Half of what is imported to the United States are not consumer products but are imports that go to businesses. They are raw materials, energy and lumber and cement and that sort of thing. They are intermediate components, parts, auto parts, computer parts, that go in for final assembly. And then of course there is capital machinery, machines that come in that make U.S. companies more competitive.
Here are some examples: A typical American computer, yes, it has “Dell” stamped on it or “Hewlett Packard,” good American companies. Most of it is made overseas. Maybe some of the most important parts are made in the United States, the brains of it, but the components, the hard drives, the flat panel display screens, 60 percent of a typical American computer is made in the Far East. We are much better off because of that. We can afford computers in our homes, in our businesses. Our whole economy is more productive.
Steel was not one of President Bush’s finest moments. He imposed tariffs on steel in March of 2002. Yes, it probably kept one or two aging steel mills in business, but it raised the price of steel for a broad swath of U.S. industry the automobile industry, the tool and die industry and other metal fabrication businesses, the construction industry they use lots of steel. We fought the battle with steel.
Bill Clinton held out against the steel industry. He did not impose tariffs. George W. Bush did.
One of the arguments we made that was quite effective in Congress in stopping steel protection in Congress was we pointed out that for every job in the steel industry, there are 40 jobs in the United States in industries that use steel as a component in its production. Again, a perfectly legitimate free trade argument, but playing on this public desire to defend jobs. You want to protect jobs? There are more jobs in jeopardy from higher steel prices than are protected by higher steel prices.
Sugar is another favorite one. Yes, the steel protection costs U.S. consumers almost $2 billion a year, $20 a year to a typical American household. But it costs jobs. Chicago used to be ringed by confectionery companies, who would take sugar in, crank out Lifesavers and candy bars. There were other factories in the Midwest that used to do that. It wasn’t long ago that a Lifesaver factory in Holland, Michigan said, we’re moving to Canada, because Canada allows sugar to be bought at the global price. We’re losing jobs because of sugar protection.
So again, you’re emphasizing the producer. You’re putting protectionists on the defensive. The sugar program is costing manufacturing jobs. The steel tariffs are costing manufacturing jobs.
Finally, exports. And here I’ll just echo what Don said about the trade deficit. When foreigners sell us something, they have to do something with those dollars. They can’t pay their workers. They can’t pay their suppliers. Those dollars come back to the United States. They come back to buy our goods and services. They also come back to invest.
All this of course is equally applicable to Canada. What happens when we raise trade barriers? It’s harder for foreigners to earn those dollars to spend in our markets. So when you push down imports into the United States through trade protection, you’re also going to see exports fall. You’re going to see foreign investment fall.
And of course you invite retaliation, too. If we raise our trade barriers, other countries raise theirs. So import barriers put exports at risk. It’s a very important point to make.
A quick word about production. Oh, America, Canada, is de industrializing. Well, here is where some simple facts can work so well. I just love to point out that, in the United States, we are manufacturing 45 percent more stuff than we were a decade ago. The Federal Reserve keeps track of manufacturing production. It’s up 45 percent in the last 10 years. It’s double what it was in 1980. It’s triple what it was in the good old 1960’s. And by the way, it’s up 36 percent in Canada in the last 10 years, industrial output.
We’re producing more stuff with fewer workers because they are so much more productive. Is that bad that our workers are more productive?
I got a call last week from somebody on the Editorial Board of the National Post here in Canada. It was a Tuesday morning. They said, we’ve got an op ed that came in about trade with China, and it’s more protectionist than we thought it would be. Would you give us an op ed on why trade with China is good for Canada? And by the way, can we have it by 4:00 this afternoon?
Well, of course I had written a lot about why trade with China is good for the United States. So I was able to pull up some of those files. I didn’t use search and replace, but I could have.
(Laughter.)
MR. GRISWOLD: Take out the “United States” and put in “Canada.” Through the Internet, I found some great numbers, including that number about Canadian industrial production, and put it in the op ed. And Wednesday morning, October 20th, it ran in the National Post. I wish I had remembered to bring a copy of it.
But the other guy, they let me read his piece before I responded to it. He said, oh, sure, trade might lead to lower prices in certain products. But what good is that if nobody has a job?
That’s the kind of mindset out there. And that’s why the consumer argument just seems to not work.
Well, let’s talk about jobs. All right, you want to talk about jobs? Let’s talk about trade and jobs. Again, acknowledge the pain. And here I will add some figures to go with Don’s excellent suggestion. People do not appreciate the tremendous churn in a dynamic market economy. Our eye is always on the net jobs gained and jobs lost. Underneath that number are millions of jobs that are created and destroyed every year. This is the creative destruction Joseph Schumpeter talked about.
The U.S. Labor Department has actually tried to calculate total jobs lost, total jobs gained. And what they found is that in a typical year, there are something like 30 million jobs in the U.S. economy that are eliminated. Half of them permanently. Fifteen million jobs every year just disappear, never to come back again. The other 15 million are seasonal type jobs that disappear and then pop up again.
How many jobs do you think are lost from trade every year? It’s about 400,000. Imports from China, other places, displacing U.S. production, outsourcing, that sort of thing, 400,000 jobs. Put it in context. The U.S. economy has 138 million jobs. 350,000 people every week are lining up for unemployment insurance. There is a story behind every one of them. That’s 15 million jobs. So the 400,000 jobs lost each year from trade and outsourcing is 2 percent 2 percent of the total jobs displaced in the U.S. economy.
What eliminates the other 98 percent? As Don pointed out, changing consumer tastes, new technology, domestic competition. Now, here, let’s put some flesh and blood on that, as I mentioned.
Kodak, the good old camera company, they announced earlier this year they were laying off 15,000 people. Fifteen thousand jobs lost. Because of outsourcing? Because of trade? No. Because of those nifty digital cameras that I bet just about everybody in this room owns. You contributed to putting a Kodak worker out of work with that digital camera. I hope you’re ashamed of yourself.
(Laughter.)
MR. GRISWOLD: But would we think of banning digital cameras to save jobs? It would be ludicrous. And yet, that’s what we’re talking about when we’re talking about controlling outsourcing, raising barriers to imports from Canada.
What I like to say is let’s not just talk about those people who have lost their jobs from trade. Let’s talk about everybody who has lost their jobs. And this is where you can put other people on the defensive. You say, we need to straighten out our education system. We need more choice in education. We need portability of health benefits. Why is it when somebody loses their job, they lose their health benefits? We need to have health savings accounts, so their health insurance can move with them when they change jobs.
Another area of positive terrain for us that we shouldn’t give up is the poor and, yes, Gene, the children. I don’t know if Gene is in here. But let me say free trade is good for the children. Let me give you some evidence.
Here at home, and actually in general, the highest trade barriers remaining in the United States are aimed at products that are disproportionately consumed by poor people at home and produced by poor people abroad. Think of it. Our highest trade barriers are on farm products, on textiles and apparel and shoes. And not just all shoes. We have our highest trade barriers on low end shoes, the kind you would buy in a Pay Less Shoe Store. But not on the kind you would buy in a Gucci store.
There is a new Democratic think tank in Washington called the Progressive Policy Institute. They’re wrong about a lot of things; they’re great on trade. They issued a study a few months back that pointed out — I love this — the tariff on imported silk underwear into the United States is virtually zero. But the tariff on imported synthetic or low grade cotton is higher. So if you wear silk underwear, you get a low tariff. If you wear the regular kind of underwear like the rest of us, you pay a high tariff. This study calculated that a single mother with two children earning $20,000 a year pays an effective tariff on the goods she consumes that’s three times higher than what a single executive earning $100,000 a year would pay.
Our existing trade barriers are biased against the poor at home.
I didn’t make up this line. A trade rep in Washington likes to say that his goal is to make sure that every discount store in America is a duty free shop for working families. I like that.
How about the world’s poor? Let’s talk about that for a second. Here’s a headline you probably didn’t see in your local newspaper, but the World Bank issued a press release in April. Every year they try to count how many poor people there are in the world. And by poor they mean living on less than a dollar a day, the equivalent of a dollar a day. And this was the headline on their press release: Global Poverty Down By Half Since 1981.
The anti globalization people, they’re right, there has been a whole lot of globalization going on in the last two or three decades. We can all agree on that. Of course, in their eyes, everything has gone to hell in a hand basket since then. Remind people that global poverty is down by half. Forty percent of the world’s people used to live on a dollar a day or less in 1981. It’s 21 percent today. And by the way, virtually all that progress has happened in poor countries that have progressively globalized. Places like Sub Saharan Africa, there is very little progress. In fact, the number of poor is rising in those places.
The World Bank could not find a single example of a poor country that had kept its markets closed, chased away foreign investment, and made progress against poverty. In other words, all the poor countries that followed our example, most of them have made progress against poverty. Those that follow the teachings of the anti globalization people have made no progress.
Oxfam, you talk about citing a reluctant authority. Oxfam is a sort of center left NGO. The evidence became so overwhelming, they issued a study a couple of years ago. It was critical of a lot of things in the global economy. But they came down firmly on the side of trade being a friend of the poor. And they pointed out that by getting rid of these rich country trade barriers, we could deliver twice as much income to poor countries as all the aid we give them.
Let me just give you one example that I like to use. Vietnam is a poor country, still nominally communist anyway. But they have been globalizing. They are where China was maybe 20 years ago. They are heavily dependent on rice. Higher rice prices actually increase the prosperity of people in Vietnam, because they are such good producers and natural exporters. And there was a study that came out a couple of years ago that showed the direct correlation between higher rice prices and Vietnamese children in school rather than working in the fields.
Poor people love their kids as much as we do. When they get the extra money, the first thing they do is get their kids out of the factory or, more likely, the farm and into school.
I like to point out, we have a rice program in the United States that subsidizes rice, sends rice around the world, drives down the global price. Our rice program, our rice subsidies in the United States, are keeping poor little girls in Vietnam in the fields rather than in school. It’s just a fact.
And also free trade is raising standards, environmental and labor standards, around the world. You got that message from Carol.
Let me end up with a few thoughts about war and peace and democracy, another area where we’re on solid terrain and where this does resonate with people more than the consumer issues. And this is especially effective in the post 9/11 world. September 11th made my job of promoting immigration more difficult. It made the job of promoting trade liberalization a little bit easier.
Bob Zoellick, the U.S. Trade Representative, was fast out of the block. He had an op ed in the Post about a month after September 11th, saying this is one more reason to progressively pursue global trade, because trade promotes higher living standards, human rights, democracy, more cooperation among nations. And he was on solid ground. That was not an opportunistic argument; it was a factual argument.
I think this especially works with older audiences. Kind of the World War II audience, people who can remember, or at least their parents can remember, the Great Depression. We had the Smoot Hawley Tariff Act in 1930. It was a disaster by all measures. Let’s remind people of that. It’s good history.
Yes, Smoot Hawley did not cause the Great Depression, but it certainly didn’t end it. It didn’t create jobs. It deepened and prolonged the Great Depression. It launched a downward global spiral in trade, by encouraging trade barriers abroad that exacerbated international tensions and helped lay the groundwork for World War II.
One of the many good decisions made during and after World War II was, in the United States, to turn away from protectionism towards freer trade. We launched the GATT. We told the Europeans, get your act together. Start trading more with each other. And you have to say, that’s been a spectacular success over there. So let’s remind people of that. And it was bipartisan, JFK, Eisenhower, Truman. It’s just good history. Let’s remind people of that.
And also the facts are with us on this. I issued a study in January of this year, where I documented that countries that are open to trade are more likely to be democracies and respect human rights. Remind people of that. Concrete examples. South Korea, Taiwan, Chile, Mexico, Ghana, all these countries that embarked on economic liberalization, which laid the groundwork for political liberalization.
So free trade begets a growing middleclass and things like democracy. And again, Freedom House, in New York, the think tank, has documented that more people, a higher share of the world’s people, are living under democracies today, where they enjoy political and civil liberties, than at any time in human history. Another headline you probably didn’t see in the New York Times recently, but it’s true.
And finally, free trade has spread peace around the world. By encouraging democracy, democracies are less likely to fight wars with each other. In fact, they virtually never do. But also globalization has given governments one more reason not to go to war. Because it disrupts trade. It raises the cost of war. It doesn’t prevent war, but it gives leaders one more reason to stop and think before they go to war.
Here’s another headline I bet you didn’t see in one of the major papers. This was actually an Associated Press headline from April. I just love this. It’s so understated, just buried there on the Internet. According to the Associated Press, “war declining worldwide, studies say.” And sure enough, according to this Swedish think tank, the number of people who died in international wars last year was about 20,000, the lowest figure in the postwar era. 700,000 people died in 1951.
According to the World Bank, civil wars are declining in those less developed regions that are globalizing.
And that ties into the war on terrorism, of course. Let me just say something quickly about that, and then I’ll conclude. The Middle East is one of the least globalized regions in the world. Their share of global trade and investment has been declining significantly. Outside of oil, they offer virtually nothing to the rest of the world.
Mohammed Atta was not poor. He had a master’s degree. He just didn’t have a future. He came from a stagnant country, socially, politically, economically. We need to encourage, among other things, for countries in the Middle East to trade more with each other.
I’ll just give you one last flesh and blood example, and then I’ll close. We have cotton subsidies in the United States. They deliver subsidies to 25,000 U.S. cotton farmers, with an average per capita wealth of $800,000. That drives down the global price of cotton. Where are the cotton producers in poor countries? Well, among them are Sub Saharan African countries like Mali. Mali is one of the few Muslim majority countries in the world that is free, that has a democracy, where people enjoy full civil and political liberties.
How do we encourage that sort of political and economic reform in the Muslim world? We drive down the global price of their chief commodity export through our cotton program, extracting $250 million a year from that part of the world, where that is no small change.
Free trade makes us freer as individuals. It makes us better off as consumers. It makes us more productive as workers and producers, lifting hundreds of millions of people out of poverty around the world and spreading democracy, human rights and peace around the world. I just ask, what’s left to explain?
Thank you.
(Applause.)
(End of Mr. Griswold’s remarks.)
