Trading Nations

What effect does trade have on our economy?

Diagram of US trade flows. Author: Tony Cohen. Source: Wikipedia

Of all the issues raised in the current political season, surely the most overrated has been free trade. To hear the candidates talk about it, you’d think the worst issue affecting our economy has been bad trade deals with Canada, Mexico, and China. While these three countries happen to be our biggest trading partners, trade just isn’t that big a deal in our economy. In the $18 trillion of goods and services that we produce and consumer every year, about 20% originated in or were destined somewhere else. By contrast, trade is over 75% of Canada’s economy. And a “trading nation” like Singapore has imports and exports equal to more than 2 times its entire economy.

Certainly, low-skilled labor in the developing world has hurt employment over here. It’s estimated that between 1 and 2 million US workers have lost their jobs over the past decade due to trade with China—about 1% of our workforce. But we have an economy that regularly hires and fires 10 million workers every month. Certainly, the loss of a million jobs is important. A lot more jobs have been lost to technology, though, or due to low oil and natural gas prices.

Employment losses due to free trade with low-wage countries are a subset of the problem of what to do for people who don’t have the skills to find a decent job in the modern economy. Globally, there’s just not as much demand for low-skilled labor as there used to be, so the jobs are migrating to where they can be done the cheapest. China is losing jobs to Vietnam; Columbia is losing jobs to the Philippines.

Long Beach marine port. Photo: William Borg. Source: Wikimedia

The global economy has more workers than it knows how to employ productively. Huge developing economies like China, India, and Brazil are shifting from fast-growing export businesses to more domestic services growth. In order to move them along, we need to trade more with them, not less. In any case, the globalization toothpaste is out of the tube. Global supply chain management is now a smart-phone app.

For fifty years people understood that protective tariffs and trade wars were part of what led to the Great Depression. The Smoot-Hawley tariff didn’t protect American jobs, it destroyed them. The most competitive industries in the US now—software, consumer products, entertainment—also have the lowest level of government protection. If we want a competitive economy, everyone in it—businesses, regulators, and individuals—is going to have to compete.

Douglas R. Tengdin, CFA

Chief Investment Officer

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