- Global Competitiveness
Ed Gresser: The Importance of TradeOctober 3, 2012
The director of the ProgressiveEconomy project at the GlobalWorks Foundation argues that to grow the domestic economy, we need more foreign trade.
Adam Smith observed in the 1770s that trade is valuable because it encourages specialization and offers the consumer affordable luxuries. Franklin Roosevelt, launching the first post-war trade negotiations in 1945, said it would calm relations among powerful nations. This year, Americans need not begin trade debates with high questions of theory or universal significance, because we have practical and local problems. The country needs to reduce unemployment, and to do it, we will need to export more.
America has a gigantic domestic economy and usually grows for domestic reasons. Domestic consumption – the decisions of families to go shopping, to eat at restaurants, to buy a new car or a home – accounts for 53 percent of GDP. But this source of growth has grown weak, and isn’t likely to recover its strength soon.
Why? Americans aren’t as rich as they were five years ago. Back in 2007, the Federal Reserve found that families enjoyed about $13.5 trillion in home equity. (That is, the value of their homes minus the money they owed on mortgages.) Today the figure is down to $6.7 trillion, meaning that half the paper wealth families had counted upon as retirement security and rainy-day money is gone.
Families need to save more, and so they are buying less. From 2006 to 2011, car and light truck sales fell from 17.4 million in 2007 to 13.5 million. New-home purchases dropped from over a million to 306,000. Shoe-buying is off by nearly a pair for every man, woman, and child in the United States, falling from 2.4 billion pairs to fewer than 2.2 billion.
With fewer customers, businesses see little need to hire more workers. Thus unemployment remains high. And if unemployment is to drop, businesses will need to find customers willing to buy their goods and services when shoppers and families won’t.
Government, whose purchases make up 20 percent of GDP, can step in for a while through stimulus. But stimulus is not a beloved policy and won’t soon be repeated.
The other choice is to find foreign customers through trade. Figures show that it’s happening. In the more open world economy created by the World Trade Organization and the North American Free Trade Agreement, U.S. exports have risen from $1.5 trillion in 2009 to $2.2 trillion in 2011. Manufacturers have added $500 billion in exports, farmers and natural resource providers $50 billion apiece, and services providers $100 billion.
The effects have been powerful in factories – as a new WTO member, Russia has quadrupled its buying of American tractors, new FTA partner Korea tripled imports of semiconductor chips, and long-time top market Canada added $100 billion in imports – manufacturing employment has been growing for three years in a row. They have been more powerful still in rural America, the most export-reliant sector of the United States, where farm exports have nearly doubled, unemployment is lowest, and communities are closest to full recovery.
But the export sector remains relatively small at 14 percent of GDP, and needs to grow more strongly still to compensate for the weakness of consumption. This suggests the need for focused government policies to accelerate export growth – opening foreign markets through new-generation trade agreements, using export-promotion tools like the Ex-Im Bank to win major contracts, promoting the Internet as a vehicle for services trade, defending American rights in the WTO, and so on.
Ed Gresser is Director of the ProgressiveEconomy project at the GlobalWorks Foundation.