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Foreign Trade Angst

Patrick Buchanan’s recent syndicated column titled “New Deal for U.S. Manufacturers” stokes the fires of misunderstanding and panic. Mr. Buchanan, my longtime friend, is right about a lot of things, but he’s wrong about trade.

First, he laments, “Europeans, Japanese, Canadians and Chinese sell us so much more than they buy from us, because they have rigged the rules of world trade.” But so what? I buy more from my grocer than he buys from me. It wouldn’t make a difference if I lived 2 feet south of the U.S.-Canadian border and my grocer lived 2 feet north of it.

Like many, Buchanan worries about our foreign trade deficit, pointing out that it’s reaching an annual rate of $816 billion, and that means “dependency on foreigners.” Actually, the foreign dependency is a two-way street. I’ll explain it, starting with the alleged trade deficit I run with my grocer.

When I purchase $100 worth of groceries, my goods account (groceries) rises by $100, but my capital account (money) falls by $100. That means there’s really a balance in my trade account. By the same token, my grocer’s goods account (groceries) falls by $100 but his capital account (money) rises by $100, also a balance in his trade account.

Mr. Buchanan writes, “Imports surged to $188 billion for the month [of July], as our dependency on foreigners for the vital necessities of our national life ever deepens.” That means we imported $188 billion worth of goods. Do foreigners keep all those dollars they earned under a mattress? They are not that stupid. They use those dollars to import capital goods such as U.S. stocks, bonds and U.S. Treasury notes.

They might use some of it to build factories in the U.S. such as Honda, Novartis and Samsung. The dollar amount of those purchases is going to equalize the value of what we import. We sport a huge surplus in our capital account with foreigners. As such, they are dependent on us for a safe and profitable place to invest their earnings. That dependency contributes to our economic growth.

Then there’s Buchanan’s worry about U.S. manufacturing job loss. U.S. farming has a similar history. Farm employment peaked between 1840 and 1870. In 1900, 40 percent of American workers were employed in farming; today, it’s less than two percent. Technological advances made that possible. U.S. manufacturing employment reached its peak in 1950 and has been in decline ever since.

This has more to do with technological innovation than outsourcing. It’s a worldwide phenomenon. Since 2000, China has lost 4.5 million manufacturing jobs compared to the loss of 3.1 million in the U.S. Nine of the top 10 manufacturing countries, who produce 75 percent of the world’s manufacturing output (the U.S., Japan, Germany, China, Britain, France, Italy, Korea, Canada, and Mexico), have lost manufacturing jobs, Italy being the exception. Because of technological progress, manufacturing output has risen while manufacturing employment has fallen.

I’m one of those whom Pat calls “robotic free-traders.” That might be another label for those of us who support peaceable, voluntary exchange, and I plead guilty. Buchanan, like so many others, points to the government subsidies and tariff protections given to businesses in other countries, a practice from which we can’t plead complete innocence. Protectionists call for “free trade but fair trade.” They call for a “level playing field.”

In effect, they’re saying that if other governments rip off their citizens with business subsidies and import duties, forcing them to pay higher prices, our government should retaliate by using the same tools to rip off its citizens.

The next time I see Pat, I might ask him what he would do if we both were at sea in a rowboat and I shot a hole in my end of the boat. Would he retaliate by shooting a hole in his end?