by Steve Forbes
Kumar says NAFTA has also helped encourage other overseas trade. He cites his own state of Texas, where “NAFTA also helped raise …exports to Asia, Europe and Latin America, making a strong case for net trade creation.”36
By bringing down costs and pushing businesses to be more competitive, NAFTA has encouraged companies like J. H. Rose Logistics, a forty-six-million-dollar-a-year shipping logistics company in El Paso, to expand its trading horizons. President Amy Noyes initially feared that the freetrade agreement would make her company more vulnerable to lower-cost Mexican competitors. But instead of trying to beat them, she partnered with them to move freight in Mexico. Noyes told BusinessWeek magazine that becoming more competitive through these partnerships helped increase her business, as well as her U.S. workforce. In 2006 she opened a warehouse in New Mexico.
The benefits of NAFTA are clear. The real issue, as John Steele Gordon and others have written, is whether the United States can afford to turn inward in a world economy that technology has made increasingly global. It’s impossible to withdraw from this world, Gordon believes, without “turning the United States into a modern version of pre-late-nineteenth-century Japan. So the real question is not whether we should continue with NAFTA and other free trade agreements. It is how we will manage the inevitable continuing creation of a single world economy.”37
REAL WORLD LESSON
The doomsday scenario predicted by NAFTA opponents never materialized and is based on political agendas and not economics.
Q IF FREE TRADE IS GOOD FOR POOR NATIONS, THEN WHY DO FARMERS AND OTHERS IN SOME COUNTRIES PROTEST “GLOBALIZATION”?
A THE REAL CULPRIT IS NOT “GLOBALIZATION” BUT U.S. GOVERNMENT FARM SUBSIDIES THAT CREATE ARTIFICIALLY CHEAP AMERICAN AGRICULTURAL EXPORTS THAT MAKE IT DIFFICULT FOR THE FARMERS TO COMPETE.
If free trade is making people around the world richer, then why do we see all those demonstrations against globalization in India, Mexico, Thailand, and other nations? In 2008, hundreds of farmers on tractors converged on Mexico City protesting the North American Free Trade Agreement. The reason? NAFTA’s liberalized agricultural trade provisions resulted in cheap corn and grains flooding Mexico from the United States and Canada. Mexico’s poor farmers were unable to compete.
The farmers had a legitimate beef. But unfortunately—as with so many other trade protests—this was another case of mistaken identity. The problem wasn’t free trade or NAFTA but America’s long-standing government farm subsidies.
Started in the 1930s as a way of helping family farmers during the Great Depression, Herbert Hoover’s Farm Board fixed prices for wheat and cotton. If they dropped too low, the federal government would buy those crops and sell them later at a better price. Franklin Roosevelt later signed into law the Agricultural Adjustment Act, which paid farmers not to produce crops so that “oversupply” and overly low prices would be avoided.
Farm subsidies were supposed to be temporary. But they soon became permanent. Like other bad government policies, they have created a brutal imbalance in world agricultural markets: artificially cheap wheat and corn grown by government-subsidized U.S. producers are threatening the livelihoods of poor farmers who are priced out of the market. They’re also hurting the U.S. economy—and American taxpayers.
The Heritage Foundation estimates that the U.S. government spends about $25 billion annually on farm subsidies.38 Most of the money goes not to the small farmers championed by Depression-era policy makers but “to commercial farms with average incomes of $200,000 and net worths of nearly $2 million.”39
Farm subsidies are helping today’s politically powerful corporate farmers, while poor farmers abroad are suffering and U.S. citizens are paying higher taxes—and also higher food prices. Writing in Reason magazine in 2006, Daniel Griswold, Stephen Slivinski, and Christopher Preble calculated that the higher prices produced by agricultural subsidies resulted in a “food tax” of $146 per household.40
Particularly damaging are the subsidies going to U.S. corn farmers to encourage the production of corn for biofuel. According to journalist Robert Bryce, federal corn subsidies totaled $37.3 billion between 1995 and 2003, which he says is “more than twice the amount spent on wheat subsidies, three times the amount spent on soybeans, and 70 times the amount spent on tobacco.”41
Even those who believe in the need for alternative fuel have doubts about whether ethanol-related farm subsidies are worth this enormous cost. For one thing, producing ethanol is a wasteful process that expends far more energy than it saves in our gas tanks. However, the greater cost is to people in underdeveloped countries, who have seen the price of corn, as well as soybeans and other vital food staples, skyrocket because of consumption by the biofuel industry.
The increasing use of corn for ethanol was a key reason that the price of tortilla flour in Mexico doubled in 2006, helping to stoke a massive public outcry. Writing in the journal Foreign Affairs, University of Minnesota economics professors C. Ford Runge and Benjamin Senauer called the government-subsidized biofuels industry “a grave threat to the food security of the world’s poor.”42 Corn is now cheaper because of the recession. But its price remains inflated over what it would have been if not for corn-based ethanol. In addition, studies have raised environmental concerns about toxic runoff into the Mississippi River and the Gulf of Mexico resulting from the increased amounts of fertilizer used to grow ethanol corn.
Unlike private-sector businesses, which rise and fall based on their ability to serve their market, farm subsidies are an example of how failed government programs don’t go away. Even though they hurt millions more people than they help, farm subsidies continue—because the handful of people they help are the ones who most effectively wield political power.
REAL WORLD LESSON
U.S. government farm subsidies are the “hidden” reason that some have been misled into believing free trade hurts the poor.
Q AREN’T OUR NATIONAL SECURITY AND PROSPERITY JEOPARDIZED BY CHINA, JAPAN, AND OTHER COUNTRIES HOLDING SO MUCH UNITED STATES DEBT, NOT TO MENTION GROWING STOCK IN AMERICAN COMPANIES?
A NO, AMERICANS BENEFIT WHEN FOREIGN NATIONS INVEST IN THE UNITED STATES.
Why do countries like China buy U.S. Treasury bonds? As we explained earlier, it’s largely because American companies buy Chinese goods with dollars. When their Chinese trading partners convert the dollars to yuan, their government ends up with pools of dollars. A natural place for them is in U.S. Treasury bonds.
Fifteen years ago, foreigners held only 14 percent of our publicly traded national debt. Today it is over 33 percent and rising. Freetrade critics commonly portray this in ominous terms. They worry that it represents a loss of U.S. economic virility and that this debt could be a weapon used against us.
However, in the Real World, foreign investments help us. How? By increasing the size of the potential market for U.S. Treasury bonds. The result is greater market liquidity and thus lower interest rates. If Americans were the only potential buyers, U.S. Treasury bonds would need higher yields to attract enough customers from this smaller market. Who pays for the higher interest the government would pay to bondholders? You, the taxpayer.
It’s hard to see how a foreign nation could really use our debt as a weapon. If China dumped its $740 billion of Treasury securities, the price of Treasuries would plunge—which would mean China suffering a huge capital loss. But we would not lose our military strength. If anything, China’s investment gives us the advantage. If we defaulted on our bond payments, China would experience a catastrophic setback, damaging its own economy.
Fears of foreign nations holding U.S. debt have traditionally proved groundless. Japan became a big buyer of U.S. Treasury bonds back in the eighties, and many people feared it would become stronger while America would decline. What happened? In the 1990s, Japan entered a decade-long recession because of its own domestic economic mistakes. By contrast, the United States enjoyed a long period of prosperity and an extraordinary wave of technological in
novation. Companies such as Microsoft, Intel, Cisco, Apple, eBay, and Google emerged as vigorous examples of U.S. competitiveness.
What about other nations holding stakes in our companies? In recent years a number of countries in the Middle East and Asia set up so-called sovereign wealth funds (SWFs). They buy not only Treasury bonds, but also stocks and bonds of private-sector companies. The value of sovereign wealth fund holdings in the United States has been estimated at between $1.5 trillion and $2.5 trillion.
Many of these funds are investing on behalf of Middle Eastern governments—the largest sovereign wealth fund, for example, is in Abu Dhabi. Singapore and Norway also have major funds. Some feared SWFs would make investments or use their holdings for political purposes. So far these funds have been generally passive investors, and there has been little, if anything, to justify concerns. However, the key here is transparency—disclosing these funds’ investment criteria and major holdings.
Congress sought to encourage this very transparency when it passed the Foreign Investment and National Security Act in 2007. The legislation provides a framework for greater scrutiny when a foreign government or entity attempts to take actual or de facto control of strategically sensitive corporations.
Such precautions are perfectly reasonable. However, SWFs mainly benefit investors. Their pools of money help lift stock prices. The banking crisis would have been infinitely worse if sovereign wealth funds hadn’t poured tens of billions into beleaguered financial institutions such as Citigroup.
With the economic downturn, fears of foreign ownership have for the moment subsided; government has the opposite concern—foreigners cutting back on U.S. investment. The Bush administration’s weak-dollar policy, intended to slow those cheap foreign exports, was too successful in accomplishing that mission. We’re now suffering the consequences. Unfortunately, the Obama administration has been no better than its predecessor at grasping the connection between foreign investment, free trade, and a strong, stable dollar. Why should investors and central banks around the world invest in U.S. assets when their value is steadily declining?
REAL WORLD LESSON
Foreign investment in U.S. government bonds and corporate securities helps the economy and eases the burden on U.S. taxpayers.
Q WHY ARE FEARS OF TRADE DEFICITS SO MUCH BALONEY?
A BECAUSE TRADE DEFICITS ALONE SIGNIFY NOTHING ABOUT A COUNTRY’S ECONOMIC HEALTH AND WEALTH.
People care about America’s trade deficit because they think it’s a sign of weakness—like a company losing money. The financial press regularly runs stories like one from the Associated Press that announced in 2005, “Trade Deficit Hits $58.3 Billion in January.” The story reported that this second-highest trade deficit in history was being caused by “Americans’ appetite for foreign consumer products and automobiles.”43 The record deficit was cited as proof that trade policies of the Bush administration were not working. In the recession of 2009, the AP reported, “Trade Deficit Falls for 7th Straight Month in February,” which was said to be “fresh evidence the economy’s downward spiral may be easing.”44
In fact, the story was the reverse. The smaller trade deficit was the result of anything but increased economic strength. Americans were buying fewer goods from overseas because they had less money in the recession. So what if the gap between imports and exports had narrowed? The United States was going through the worst recession in thirty years. How could that possibly be good news?
Trade deficits are meaningless. Forbes magazine has had a ninety-two-year trade deficit with its paper suppliers. We buy their paper so we can make money selling magazines. The company sells us paper because that’s their business. They don’t buy anything from us except, perhaps, a few subscriptions. What’s wrong with that?
Nothing. The trade between Forbes and its paper vendor is only one aspect of our respective businesses. We’re buying more from them than they buy from us. But the transaction is mutually beneficial: We’re getting a product essential to the operation of our business. They’re getting money. A “balance of trade” exists in this equal benefit.
Remember, for an exchange to take place in a free market, both partners have to benefit. Similarly, American companies buy from Chinese companies because it is mutually beneficial. WalMart, for example, may import more goods than it sells in China. Nonetheless, it extracts a huge benefit. The retail giant has built a hugely profitable business based on being able to offer low-priced products to its price-conscious American customers. And the customers benefit, too, from getting more value for their money.
In other words, a trade balance may at first glance appear “lopsided” because one trading partner may realize the benefit elsewhere—in another area of a company’s business, or in another sector of the economy.
Complaints about America’s “trade deficit” ignore the benefit realized by the United States in the form of capital that returns to the economy—as foreign investment in either Treasury bonds or equities that help corporations expand their businesses. It also ignores American companies’ exporting services and expertise overseas, such as Intel putting facilities in Malaysia that sell chips to Japan. People who decry trade deficits as an indicator that America is losing jobs often don’t know that jobs are being created elsewhere.
Writer Sheldon Richman aptly sums up the absurdity of trade-deficit fears:
If tomorrow Japan became the 51st state, we would no longer be aware of any trade deficit or surplus involving it and the United States…. Who knows what the trade picture is between Maine and New Jersey? Who cares? I don’t either. If it makes sense to worry about the deficit between the United States and Japan, then maybe we should worry about the deficits among the states. But why stop there? Maybe Philadelphia has an intolerable deficit with Toledo that we’re not being told about. Neighborhoods can have deficits too. Come to think of it, I have a huge deficit with the corporation that owns my favorite supermarket. I spend a couple hundred dollars a month there, but that corporation buys nothing from me. On the other hand, I rarely purchase things from the people who do buy from me. Are we wrong not to worry about these bilateral deficits? Would it make sense to strive to have all bilateral trade relations balance out? The fact is, if the balance of trade doesn’t matter at the personal, neighborhood, or city level, it doesn’t matter at the national level.
Freetrade bashers don’t realize that America has had a trade deficit with the rest of the world for 350 of its 400 years. The only time America had a trade surplus was from World War I until the early seventies. If you looked only at trade flows, the U.S. economy could easily be mistaken for Zimbabwe writ large, and not the engine of the world’s prosperity that it actually is.
When it comes to evaluating the health of an economy, you need to look at the whole picture. A focus on the trade deficit ignores an economy’s ability to innovate. It overlooks flows of capital and the fact that foreign entrepreneurs and scientists and engineers still want to come to us by the hundreds of thousands each year.
REAL WORLD LESSON
Because the nature of trade is to produce mutual benefit, there can be no such thing as a “trade deficit.”
Q WHY WOULD A GOLD STANDARD BE BETTER FOR THE GLOBAL ECONOMY?
A BECAUSE IT WOULD PRODUCE MORE STABLE CURRENCIES AND LEAD TO MORE INVESTMENT.
Imagine how chaotic life would be if the government was always changing the number of minutes in an hour: Say you agree to work eight hours per day at twenty-five dollars an hour. Suddenly, the government decrees that an hour is seventy instead of sixty minutes. Instead of making two hundred dollars for working eight sixty-minute hours, you’re working eight seventy-minute hours—eighty more minutes for the same money. Your work has been devalued by about 15 percent.
Think of the economic uncertainty this would cause. If you were a piano teacher, for example, how could you commit to giving lessons for one hundred dollars an hour each week when you could not be certain how long an hour would be—and how much you’d r
eally be making?
Fluctuating currency produces the same kind of confusion. How do you know whether you should invest, say, in U.S. Treasury bonds, if the dollar value of your holding may soon decrease? Economist Judith Shelton has described the confusion of today’s system:
Price signals are distorted by gyrating currencies that create a “house of mirrors” atmosphere for asset valuation, leaving investors without an accurate reflection of global economic opportunity and risk. Misdirected capital flows and economic dislocations stem from distorted perceptions about the relative returns from seemingly productive investment projects.
…You cannot build a new global financial architecture on a foundation of quicksand. Individuals who bring their goods and services to the marketplace need a meaningful unit of account and reliable store of value so they can make logical economic decisions. Entrepreneurial endeavors should not be undercut by monetary manipulation. Government officials who insist on maintaining “flexibility” in the name of national autonomy are resorting to the last refuge of scoundrels…Hardworking men and women simply want a form of money they can trust.45
We detailed earlier how the fluctuation of the dollar in today’s system of “fiat currency” is a key cause of today’s global recession. Alan Greenspan, who chaired the Fed for nearly twenty years, and his successor, Ben Bernanke, have allowed the dollar to be treated like a yo-yo. Compounding this destructive foolishness was the Bush administration’s belief that a weak dollar would help improve our trade balance.
While our trade deficit shrank, George W. Bush’s three Treasury chiefs all ignored the fact that volatile money damages business investment. Investing—in startups, existing businesses, securities, or anything else—is risky enough. Currency fluctuations are a deadly dampener on these necessary activities because they increase uncertainty, making investments even less attractive. Fear of the future decline of the dollar is one reason that China—despite the cajoling of Hillary Clinton and the Obama administration—has expressed fear of buying more Treasury bonds.
