How Capitalism Will Save Us

by Steve Forbes

  Outsourcing foes will dismiss this benefit—suggesting that we have sacrificed American livelihoods to feed a gluttonous national appetite for cheaper televisions and other consumer products. But lower prices have helped spark revolutions. Remember how Henry Ford transformed society. He made the Model T affordable to working Americans. People everywhere were able to travel longer distances faster than they could before. This meant not just greater personal convenience, but also the ability to travel to work and trade in places that were once out of reach.

  If computers were as expensive now as they were in the 1960s and ’70s, only a handful of researchers funded by corporations or government would be able to use them. We would never have experienced the technology revolution that has given us wireless computing, Bluetooth, Google, and countless other innovations that have made us more productive, informed, and connected than ever before.

  REAL WORLD LESSON

  Outsourcing may destroy some jobs, but it ultimately results in more “creation” than “destruction” for the economy and Americans.

  Q WHAT’S WRONG WITH “FAIR” TRADE?

  A FAIR TRADE IS PROTECTIONISM LITE.

  Fair trade means that the United States must go tit for tat regarding other countries’ trade restrictions, even if those countries are in compliance with international bilateral trade agreements. “Fair trade” is supposed to be a middle-ground alternative to free trade. Its policies aim to achieve the benefits of trade—i.e., economic growth—while minimizing job loss and disruption.

  Like all protectionists, advocates of so-called fair trade miss the Real World benefits of free trade to the broader economy. So if Thailand, with its lower-cost labor, can make a shoe at one-tenth of the cost that a U.S. shoemaker can, then that is not “fair.” Fair traders believe we ought to impose a stiff tax on such nations, and in some cases even bar their products.

  Tufts University professor Daniel Drezner has summed up the policy positions that fall under the heading of “fair trade.” They include, in his words:

  Slowing down the number of free trade agreements signed with developing countries; relying more on “managed trade” arrangements and unilateral trade sanctions to promote U.S. exports; using escape clauses and safeguard mechanisms to slow the flood of Chinese textile imports into the United States; implementing measures to retard the pace of offshore outsourcing; and exploiting threats of protectionist action against China to force a substantial revaluation in the yuan.23

  In the Real World, fair trade is a euphemism for protectionism. As Drezner acknowledges, it is “impossible” to draw a clear line between the two. In his book U.S. Trade Strategy: Free Versus Fair, he writes:

  The fair trade orientation assumes that policymakers will be able to discern when trade should be restricted because of concerns about social dislocation and when it should not be restricted. In point of fact, a fair trade orientation will encourage every special interest group to lobby harder for protecting its sector, using a fair trade argument to do so.24

  In the Real World, Drezner writes, fair-trade policies end up having the same effect as traditional protectionism—they save the jobs of a politically adroit few, while killing off many more jobs. And they raise prices for consumers:

  Two recent examples illustrate the costs of the fair trade approach. U.S. import quotas limit the amount of sugar the United States imports. As a result, U.S. sugar prices are 350 percent higher than world market prices. Although this policy has preserved a few thousand sugar-producing jobs, it has also cost an estimated 7,500 to 10,000 jobs, as candy makers relocated production to countries with lower sugar prices. Similarly, when the United States raised the tariffs on steel in 2002–2003, it raised the costs of production for steel-using sectors. Because steel users employ roughly forty times the manpower employed by steel producers, an estimated 45,000 to 75,000 jobs were lost.25

  Like other economic policies that tout “fairness,” fair trade, in the Real World, ends up delivering on that promise only to a politically favored few. Opponents of free trade ignore fundamental principles not only of economics but of Real World common sense. Less trade means a smaller economy—a net loss for workers and consumers. It means less prosperity for most people.

  REAL WORLD LESSON

  Like all protectionism, “fair trade” results in favoritism, not fairness.

  Q ISN’T CHINA MANIPULATING ITS CURRENCY TO GAIN AN UNFAIR TRADE ADVANTAGE?

  A NO, CHINESE GOODS AREN’T CHEAPER BECAUSE OF “CURRENCY MANIPULATION” BUT BECAUSE THE CHINESE CAN MANUFACTURE MORE CHEAPLY WITH LOW-SKILLED LABOR.

  Trade protectionists have lately targeted China for supposedly undervaluing its currency—making the value of the yuan too low against the dollar. Thus, they allege, imported Chinese products are made artificially cheap, while American exports become more expensive. Before taking office as Treasury secretary, Timothy F. Geithner testified that President Obama “believes that China is manipulating its currency.” The president, he promised, would do all he could to assure that “countries like China cannot continue to get a free pass for undermining fair-trade principles.”26

  In fact, China has done anything but “manipulate” its currency. It has outsourced its monetary policy to the Federal Reserve: the value of the Chinese yuan has been pegged to the dollar since 1994. Both the yuan and the dollar fluctuate according to U.S. monetary policies. To appease U.S. protectionists, China has actually increased the value of the yuan some 20 percent against the dollar in recent years.

  Currency protectionists have a hidden agenda: to do their own manipulation by altering currency exchange rates to raise the prices of Chinese imports. Post–World War II trade agreements like GATT prohibit raising the cost of Chinese goods via protectionist tariffs. So fair traders want to pressure China to change the value of the yuan.

  This would result in a de facto tax on Chinese products. Chinese exports to the United States would go up in price. The cost of those Chinese socks you bought would go, say, from $2.00 to $2.50. We’d buy fewer Chinese goods. Or the price of those computer motherboards imported from China would increase, driving up the price of American computers. People would be able to afford fewer PCs; the market for Chinese parts would shrink. Result: the U.S. trade deficit would be reduced.

  Fair traders can’t accept the fact that some countries have advantages over U.S. producers when producing certain types of goods. It’s a fact of life in the Real World that Chinese goods are cheaper because China’s low-cost labor enables Chinese companies to manufacture products less expensively. But this comparative advantage does not mean the United States is at a disadvantage. Remember, trade is about two parties making an exchange based on their respective strengths and capabilities—a trade that provides more benefit to both sides than what would have been possible if no transaction had occurred.

  Importing less costly Chinese products may displace some American jobs in specific sectors of the economy. We’ve already noted that doing so creates jobs in other economic sectors, one of the reasons for low U.S. unemployment and increasing prosperity over the past several decades.

  Saving on Chinese products enables American consumers and businesses to make their dollars go further. People—including many on lower incomes—are able to live better. Meanwhile, American companies buying cheaper Chinese-manufactured goods and equipment have more capital left over for investment in new operations and jobs.

  Our trade with China also encourages the Chinese to invest here. Did you ever wonder what happens to those dollars Chinese companies get from trading with us? They exchange them for yuan from their own government, which ends up with vast pools of dollars. The Chinese government has to invest the greenbacks somewhere. Their best bet: bills and bonds from the U.S. Treasury, and also U.S. businesses.

  Thus, U.S.-China trade not only expands the U.S. economy. It enables China to help underwrite U.S. government spending. Whether some of this spending should be taking place is another matter. But dollars from C
hina ease the burden on the U.S. taxpayer.

  Bloomberg News reported that when Hillary Clinton made her first visit to China as secretary of state in February of 2009, she urged China to keep buying U.S. Treasuries, “to help finance President Barack Obama’s stimulus plan.”27 Mrs. Clinton explained that doing so was essential to both nations’ economies. “It would not be in China’s interest,” she said, if the United States lost dollars vital to stimulating its economy. “We are truly going to rise or fall together.”28

  Ironically, the very same administration that sent Mrs. Clinton to urge China to continue investing in the United States raises the specter of currency protectionism. This is typical of freetrade bashers and other freemarket opponents. They have a blinkered view of the workings of the economy. They focus on the destruction that occurs in one sector of the economy and don’t recognize the greater creation also occurring.

  Protectionists also fail to understand that currency values are not the fundamental determinant of global trade. Transactions that cross borders, like those between individuals, are about meeting one another’s needs. That’s why changing currency values over the long term have little impact on trade imbalances. Sooner or later, people go back to buying what they did before. Markets readjust the prices of products to reflect their intrinsic value.

  Few people today recall that similar charges of currency manipulation were leveled against Japan during the Nixon administration in the late sixties. The yen-to-dollar ratio at that time was 360 to 1. Today it’s about 100 to 1, a devaluation of almost 70 percent. But the trade deficit between the United States and Japan persists.

  The only thing that currency protectionism accomplishes is wreaking havoc in an economy by increasing the supply of money. In the 1970s the Nixon administration thought that devaluing the dollar would improve our trade balance and lift the economy. Instead we got rip-roaring inflation and a chain of ever-more-serious recessions. Unemployment went higher and higher, peaking at almost 11 percent in 1982.

  The administration of George W. Bush fell prey to the same misconception. It permitted the dollar to grow weak, thinking that would reduce our trade deficit. What happened? Most of that extra money printed by the Federal Reserve went into housing. The trade deficit was brought down, but at an enormous cost: a momentous housing bubble that produced stomach-churning volatility and the most severe recession in at least thirty years.

  REAL WORLD LESSON

  Accusations of “currency manipulation” are a cover for anti-free trade policies, including U.S. currency protectionism.

  Q SHOULD WE BE AFRAID OF CHINA AND INDIA?

  A NOT IN THE NEAR TERM. CHINA AND INDIA HAVE A LONG WAY TO GO BEFORE THEIR ECONOMIES PULL AHEAD OF THE UNITED STATES.

  According to a 2008 Gallup poll, only 33 percent of Americans still see the United States as the world’s foremost economic power. Four out of ten believe the most economically powerful nation in the world today is China. This is a big change from 2000, when 65 percent of Americans thought the United States led the global economy.

  Increasingly, people see a growing threat to the United States, not only from China but also from India—or as some refer to them collectively, “Chindia.” The rapid economic growth of these nations, their immense populations, and their industrious, well-educated citizens seem to point toward a future where Chindia will prevail and America will decline.

  These fears are nothing new. Every ten or twenty years, new “threats” to U.S. economic power emerge. In the 1960s and ‘70s, it was the Germans. Fears of Japan were rampant in the 1980s. People were horrified when the Japanese bought New York’s iconic Rockefeller Center. Worriers cried that we were losing our lead to Tokyo. Few people could have imagined back then that apprehensions about the Germans and the Japanese would seem almost quaint decades later.

  However, to some, the 2009 economic crisis seems to offer compelling evidence that the United States really is growing weaker. But China and other nations have a long way to go before they become as economically powerful as the United States. With a gross domestic product of more than $14 trillion, the U.S. economy is in fact more than three times the size of Japan’s. Despite our population being one-fourth the size of China’s, our economy is about four times larger. In other words, China’s per-capita income is barely one-sixteenth that of the United States.

  Despite their considerable strides, China and India—and also Japan—still lack many of America’s capabilities and advantages. India, for example, has had a protectionist bent. The country is still working to overcome its vast, stultifying regulatory regime, which severely hampered its economy for decades. Only in 1991 did India begin a sustained push for liberalization. Much of India is still connected by dirt roads. Its infrastructure is only now being developed. Paved highways, although expanding, are few and far between.

  Japan hasn’t really recovered from the recession of the nineties. Its conformist culture is not often conducive to entrepreneurship. Failure has a huge social stigma. China, too, has plenty of problems. It’s made some progress. But the rule of law is far from established. It doesn’t have an independent judiciary. It’s hard to resolve disputes; decisions are often made for political reasons. China’s capital markets are also in their infancy. Noted Columbia University economist Jagdish N. Bhagwati has written that China’s problems include

  inefficient State Operating Enterprises, still much poverty, and a terribly weak financial sector. Its demographic structure, thanks to the draconian and effective one-child policy, also is lopsided, closer to that of Europe than of India. These problems cast a shadow over China’s ability to sustain its high growth rate.

  But the prospects of China registering “miracle” growth rates for much longer are also cast in doubt by her communist politics. China lacks currently the four elements of a functioning democracy: NGOs, a free press, opposition parties and an independent judiciary. The result is growing social disruptions as commissars and their cronies grab land, for example.29

  The Chicken Littles who predict our economic decline overlook a key American advantage: our unique entrepreneurial spirit and political traditions. They don’t appreciate the role of America’s system of democratic capitalism—i.e., a government with independent courts that enforce contracts and property rights and a political system that protects private ownership, as well as economic and political freedom.

  These traditions set America apart from its competitors and are the foundation of our economic strength. Yet most of us take them for granted and underestimate their importance. Thus, journalist Robert Samuelson acknowledges, many wonder why the U.S. economy “doesn’t do worse when there are so many reasons that it should.”30

  Those fearing America’s decline might do well to recall history. Interviewed in U.S. News & World Report, Walter Russell Mead, senior fellow at the Council on Foreign Relations, notes that we’ve had many financial meltdowns. However, “those crises haven’t sunk us in 300 years.”31

  REAL WORLD LESSON

  Experts have long underestimated the importance of America’s entrepreneurial culture as a factor in its economic strength and world leadership position.

  Q DID NAFTA HURT OR HELP THE UNITED STATES?

  A NAFTA HAS CREATED A VIBRANT NORTH AMERICAN FREETRADE ZONE THAT HAS INCREASED JOBS AND OPPORTUNITIES NOT ONLY FOR THE UNITED STATES, BUT FOR CANADA AND MEXICO AS WELL.

  Signed into law back in 1993, the North American Free Trade Agreement (NAFTA) continues to be controversial. Barack Obama and Hillary Clinton both criticized the agreement during the 2008 presidential campaign, going so far as to suggest it should be renegotiated. Critics allege that it has led to a loss of some one million American manufacturing jobs and has not achieved its goal of helping the U.S. economy.

  In fact, NAFTA has supercharged trade among the United States, Canada, and Mexico, creating an immense, dynamic market. As historian John Steele Gordon has written on AmericanHeritage.com, NAFTA

  created a huge free trade a
rea of more than eight million square miles, 430 million people, and almost uncountable economic resources. It is the largest free trade area in the world in terms of gross domestic product, $15.3 trillion in 2006.

  Since 1993, overall trade in goods between the three countries has almost tripled, from $297 billion in 1993 to $883 billion in 2006. American exports of goods to Canada and Mexico are up 157 percent, services up 125 percent.32

  What about those one million jobs that were supposedly lost? In fact, since the agreement was signed and up until the recession, the nation’s unemployment rate actually fell. Wages, on average, rose, too. According to a 2008 report from the National Center for Policy Analysis,

  U.S. employment rose from 110.8 million in 1993 to 137.6 million in 2007, an increase of 24 percent. The U.S. unemployment rate averaged 5.1 percent for the first 13 years after NAFTA, compared to 7.1 percent during the 13 years prior to the agreement.

  Moreover, increased openness to trade has been accompanied by a more rapid rise in wages. For example, from 1979 to 1993 U.S. business-sector real hourly compensation rose at an annual rate of 0.7 percent each year, or 11 percent over the entire period. Between 1993 and 2007, however, real wages rose 1.5 percent annually, for a total of 23.6 percent.33

  That massive exodus of American jobs and investment to Mexico that many feared simply did not happen. Between 1994 and 2001, American manufacturing companies invested more than $200 billion in new plants and equipment in the United States and invested just $2.2 billion in Mexico.

  According to the Cato Institute’s Daniel Griswold, “U.S. investment in Mexico did increase after NAFTA, along with trade, but those flows are a trickle compared to what we invest domestically.”34

  What NAFTA did do was help boost U.S. exports. According to Anil Kumar, a senior economist at the Federal Reserve Bank of Dallas, between 1993 and 2004, U.S. exports to Mexico more than doubled, rising from $42 billion in 1993 to $111 billion. American sales to Canada, meanwhile, nearly doubled—rising from $100 billion to $189 billion.35 Exports from Mexico and Canada to the United States increased substantially. This has meant more economic activity. Remember, trade takes place between parties when both think it is beneficial.