Thursday, January 6, 2011

Free Trade Agreements and U.S. Jobs

While we are paying attention to weightier matters that our government is dealing with such as whether WikiLeaks founder Julian Assange is a pervert or whether John Boehner, the incoming Speaker of the House, cries too much, United States government representatives has been busy working on the final touches on the Korea-U.S. Trade Agreement (KORUS). This would be the largest free trade agreement for the U.S. since the signing of the North American Free Trade Agreement.

Even before the latest economic downturn, there was a lot of talk regarding globalization and its impact on the United States economy. Many people who are lamenting the loss of thousands of manufacturing jobs in the U.S. to overseas alternatives have called for the U.S. to retreat from global cooperative agreements. They build their argument by focusing on merely one aspect of the trade agreements while ignoring the structural benefits provided.

Anti-free traders or protectionists, as they are more commonly known, claim that these free trade agreements only work to hurt our economy by exposing our companies to increased competition. Free trade agreements work to eliminate trade barriers such as tariffs, thus making foreign-produced goods cheaper since they no longer have to pay a tax on the import. Thus, protectionists predict that foreign goods will flood the U.S. market and cause a loss of even more jobs.

There are two problems with this argument. First, it neglects the fact that in trade agreements all signatories reduce their tariffs on imports. According to the International Trade Administration (http://trade.gov/fta/korea/), Korean exporters currently pay, on average, a 2.8 percent tariff on all goods brought into the United States. Obviously, under KORUS they would no longer have this expense. However, conversely, under the agreement U.S. exporters would no longer be obligated to pay an average tariff of 6.2 percent on goods shipped to Korea. According to my third grade math teacher, 6.2 is greater than 2.8, which means that U.S. companies would benefit greater than their Korean counterparts.

The other problem with their argument is simply that it betrays a lack of confidence in U.S. products and their ability to compete in the global market when there is a level playing field. If their lack of confidence is grounded in fact, then we do have something to worry about since we would be fighting an uphill battle against the physics of the natural market – wherein the market will allocate societies resources to those producers who are most efficient and effective at utilizing those resources. And if that is the case, then by advocating protectionism, we are not addressing the root cause of our economic woes, but merely trying to cover up the symptoms. If their confidence is not grounded in fact, then that means that American products and services will thrive once they become unencumbered by the burden of trade barriers.

Furthermore, if someone is interested in trying to save manufacturing jobs in America, fighting against free trade agreements is counter productive. Let’s return to the U.S.-Korea trade situation. If KORUS does not pass, it means that U.S.-based manufacturers will have to continue to pay 6.2 percent tariffs on all goods exported to Korea. This burden would encourage U.S. manufacturers to find a source to manufacture their product either in Korea or in a country that has a free trade agreement with Korea. Thus, arguing against KORUS to save U.S. manufacturing jobs would be counter-productive.

Anyway you slice it, the protectionist argument against free trade agreements is about as questionable as the personal exploits of Julian Assange and should cause us to cry as much as John Boehner if it begins to have some sway in our congress.

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