Executive Briefings

Making the Case for Free Trade

We feel compelled to defend most of the opinions that we hold. Politics, religion, sports: they're all grist for often-heated table talk. But some opinions are so deeply ingrained that we don't think of them as opinions at all. That's especially true within communities of like-minded thinkers, who rarely bother to explain their shared assumptions to outsiders. Take our world of supply-chain managers, vendors, consultants, academics and, yes, journalists. We're quick to debate the fine points of this or that trade policy or import quota. What we don't do very often, or very well, is reaffirm the fundamental value of free trade. To the American worker who has lost his job to cheap overseas competition, we have little to say.

Maybe that's one reason why the general public is soured on free trade, at least with respect to the way it impacts their daily lives. They seem to like the general idea of it; when asked if free trade in principle is good or bad for the U.S., a majority will usually answer in the affirmative. But drill down to the domestic casualties, and they'll offer a different opinion. An NBC News/Wall Street Journal poll conducted last fall found 69 percent of respondents believing that free trade agreements have resulted in a loss of U.S. jobs, while only 18 percent believed they have created jobs. With unemployment still hovering above 9 percent, and rising fears of a double-dip recession, the issue is becoming ever more sensitive.

So let's ask the question: What's so great about free trade, anyway? It leads to open markets, obviously, and the country with the cheapest labor invariably wins out. It creates a seemingly one-way pipeline of jobs from developed to developing nations. It hollows out the industrial core of societies that were built on their manufacturing prowess. It degrades working conditions and environmental standards around the world. It benefits only multinationals, who pledge no allegiance to any country. So say the critics.

Here is what we need to say. Those who would slam the door on free trade are proceeding from a conception of the U.S. that is no longer valid. For much of the 20th Century, the nation's domestic economy was so big, and growing so quickly, that there was little need for tapping foreign markets. To be sure, we were hurt over the years by repeated attempts to restrict trade through protectionism, most notably the Smoot-Hawley Tariff Act of 1930. But the American economic engine was powerful enough to sustain domestic business and workers alike, raise the standard of living and create the consumption-based economy under which we exist today.

The prosperity gap between the U.S. and the rest of the world grew even more pronounced in the years after World War II, when ours was the only viable economic superpower left standing. Gradually, other nations, especially in Asia, emerged from the rubble and asserted themselves by undercutting U.S. labor costs and producing a flood of cheap goods for bargain-hungry American consumers. Then came the awakening giant called China, and we began to intuit that our days as the world's dominant economy might be numbered. As domestic growth slowed, we could no longer afford to take an insular view of global commerce. Free trade was a threat to our placidity, but it also offered the only path to continued economic expansion.

Those few glorious decades of the 20th Century turned out to be an anomaly. "Our political expectations have not been adjusted," says Marianne Rowden, president and chief executive officer of the American Association of Exporters and Importers. "The period we're in now is much more the historical norm than the post-World War II period." To put it bluntly: we need the rest of the world.

If you approach the issue solely from the standpoint of lost manufacturing jobs, then the critics have it right. The pain of an unemployed autoworker can't be denied. But the larger picture tells another story. As Rowden points out, the economy has always gone through wrenching changes in the job market. A century ago, some 40 percent of the American workforce was engaged in farming. Economists fretted about the shift from agricultural to industrial jobs. They worried that the country would no longer be able to feed itself. But productivity gains in agriculture kept Americans from starving, even with a lot less arable land and far fewer farm workers.

Now we're seeing the same kind of upheavals occurring in the manufacturing sector. Technology has drastically reduced the number of bodies it takes to make a car, a computer or a pair of bluejeans. And a good portion of the remaining jobs have been outsourced to cheaper foreign suppliers. So free trade produces plenty of losers - but it creates many more winners in the end. That's the story that is seldom told in the media. Cheaper raw materials from overseas reduce overall costs for U.S.-based producers, making them more competitive in global markets. Spurred by advances in technology, a wealth of new opportunities - not just minimum-wage service positions - spring up at home to take the place of those lost jobs. Moreover, a well-constructed free trade agreement offers reciprocal access to signatories' markets, boosting prospects for American exporters. China, Brazil and India, to name a few, are rapidly developing a consuming middle class that will be unreachable by U.S. exporters if we don't engage in two-way trade with those countries today.

"A key reason why the general public is reluctant to embrace free trade is that many do not understand the benefits," said William Poole, then-president of the Federal Reserve Bank of St. Louis, in a speech delivered in 2004. "And the reason people do not understand the benefits is that they do not understand the interactions and connections across markets."

Free trade doesn't mean unfettered commerce. Bilateral and multilateral agreements need to contain strong protections for workers and the environment. Existing regulations on product quality and safety still must be followed. Nor can we ignore humanitarian issues such as the mining of conflict minerals and the use of child labor in global supply chains. But such legitimate concerns shouldn't be wielded as bludgeons by labor unions and protected domestic industries, whose unstated goal is to beat down any and all trade agreements. With a little diligence on the part of negotiators, free trade can be fair trade.

The challenge lies in getting the word out to the general public. As Rowden says, the story has to be told in "human terms" - not with the cold statistics favored by economists. While the pain that accompanies change can't be ignored, Americans need to be convinced that free trade is ultimately in everyone's best interest.

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We feel compelled to defend most of the opinions that we hold. Politics, religion, sports: they're all grist for often-heated table talk. But some opinions are so deeply ingrained that we don't think of them as opinions at all. That's especially true within communities of like-minded thinkers, who rarely bother to explain their shared assumptions to outsiders. Take our world of supply-chain managers, vendors, consultants, academics and, yes, journalists. We're quick to debate the fine points of this or that trade policy or import quota. What we don't do very often, or very well, is reaffirm the fundamental value of free trade. To the American worker who has lost his job to cheap overseas competition, we have little to say.

Maybe that's one reason why the general public is soured on free trade, at least with respect to the way it impacts their daily lives. They seem to like the general idea of it; when asked if free trade in principle is good or bad for the U.S., a majority will usually answer in the affirmative. But drill down to the domestic casualties, and they'll offer a different opinion. An NBC News/Wall Street Journal poll conducted last fall found 69 percent of respondents believing that free trade agreements have resulted in a loss of U.S. jobs, while only 18 percent believed they have created jobs. With unemployment still hovering above 9 percent, and rising fears of a double-dip recession, the issue is becoming ever more sensitive.

So let's ask the question: What's so great about free trade, anyway? It leads to open markets, obviously, and the country with the cheapest labor invariably wins out. It creates a seemingly one-way pipeline of jobs from developed to developing nations. It hollows out the industrial core of societies that were built on their manufacturing prowess. It degrades working conditions and environmental standards around the world. It benefits only multinationals, who pledge no allegiance to any country. So say the critics.

Here is what we need to say. Those who would slam the door on free trade are proceeding from a conception of the U.S. that is no longer valid. For much of the 20th Century, the nation's domestic economy was so big, and growing so quickly, that there was little need for tapping foreign markets. To be sure, we were hurt over the years by repeated attempts to restrict trade through protectionism, most notably the Smoot-Hawley Tariff Act of 1930. But the American economic engine was powerful enough to sustain domestic business and workers alike, raise the standard of living and create the consumption-based economy under which we exist today.

The prosperity gap between the U.S. and the rest of the world grew even more pronounced in the years after World War II, when ours was the only viable economic superpower left standing. Gradually, other nations, especially in Asia, emerged from the rubble and asserted themselves by undercutting U.S. labor costs and producing a flood of cheap goods for bargain-hungry American consumers. Then came the awakening giant called China, and we began to intuit that our days as the world's dominant economy might be numbered. As domestic growth slowed, we could no longer afford to take an insular view of global commerce. Free trade was a threat to our placidity, but it also offered the only path to continued economic expansion.

Those few glorious decades of the 20th Century turned out to be an anomaly. "Our political expectations have not been adjusted," says Marianne Rowden, president and chief executive officer of the American Association of Exporters and Importers. "The period we're in now is much more the historical norm than the post-World War II period." To put it bluntly: we need the rest of the world.

If you approach the issue solely from the standpoint of lost manufacturing jobs, then the critics have it right. The pain of an unemployed autoworker can't be denied. But the larger picture tells another story. As Rowden points out, the economy has always gone through wrenching changes in the job market. A century ago, some 40 percent of the American workforce was engaged in farming. Economists fretted about the shift from agricultural to industrial jobs. They worried that the country would no longer be able to feed itself. But productivity gains in agriculture kept Americans from starving, even with a lot less arable land and far fewer farm workers.

Now we're seeing the same kind of upheavals occurring in the manufacturing sector. Technology has drastically reduced the number of bodies it takes to make a car, a computer or a pair of bluejeans. And a good portion of the remaining jobs have been outsourced to cheaper foreign suppliers. So free trade produces plenty of losers - but it creates many more winners in the end. That's the story that is seldom told in the media. Cheaper raw materials from overseas reduce overall costs for U.S.-based producers, making them more competitive in global markets. Spurred by advances in technology, a wealth of new opportunities - not just minimum-wage service positions - spring up at home to take the place of those lost jobs. Moreover, a well-constructed free trade agreement offers reciprocal access to signatories' markets, boosting prospects for American exporters. China, Brazil and India, to name a few, are rapidly developing a consuming middle class that will be unreachable by U.S. exporters if we don't engage in two-way trade with those countries today.

"A key reason why the general public is reluctant to embrace free trade is that many do not understand the benefits," said William Poole, then-president of the Federal Reserve Bank of St. Louis, in a speech delivered in 2004. "And the reason people do not understand the benefits is that they do not understand the interactions and connections across markets."

Free trade doesn't mean unfettered commerce. Bilateral and multilateral agreements need to contain strong protections for workers and the environment. Existing regulations on product quality and safety still must be followed. Nor can we ignore humanitarian issues such as the mining of conflict minerals and the use of child labor in global supply chains. But such legitimate concerns shouldn't be wielded as bludgeons by labor unions and protected domestic industries, whose unstated goal is to beat down any and all trade agreements. With a little diligence on the part of negotiators, free trade can be fair trade.

The challenge lies in getting the word out to the general public. As Rowden says, the story has to be told in "human terms" - not with the cold statistics favored by economists. While the pain that accompanies change can't be ignored, Americans need to be convinced that free trade is ultimately in everyone's best interest.

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