America is undergoing one of the greatest periods of transformation in history. Not unlike the powerful changes caused by the industrial revolution that shaped the 19th and 20th centuries, today, globalization is shaping the 21st century and the United States is leading the way.
Last year the United States attracted $180 billion in foreign direct investment. This is extremely important since inbound investment creates millions of high-wage, high-skilled American jobs that support our growing standard of living. But protectionist trends could disrupt this.
Tainted Chinese imports have become a serious problem. The Chinese government realizes this and has taken swift action, including shutting down 180 food processing plants since December and executing the former director of the its drug and safety agency for corruption.
But due to economic realities beyond that government's grasp, Chinese imports likely will continue to be a problem in the short term. That's why American importers need to step up to the plate and assume greater responsibility.
If a government policy creates many higher-paying jobs while putting fewer lower-paying ones at risk, would you favor it?
Virtually everyone would say yes. So why are free trade agreements — mechanisms that generate far greater benefits than disadvantages — perceived so negatively?
Contrary to some claims, only a very small percentage of American jobs are ever put at risk from imports. And surprising to many, U.S. employment has been strong during periods of elevated imports.
According to the Progressive Policy Institute, A Washington, D.C.-based Democratic led think tank, research indicates that at most, imports account for approximately 5 percent of layoffs, and more likely between 2 percent and 3 percent.
Despite more than five decades of evidence demonstrating the gains from liberalizing trade, the impact of international trade and open markets on the U.S. economy remains a hotly debated issue. In 2005, Congress considered renewing the President’s trade promotion authority, withdrawing from the World Trade Organization (WTO), and approving the Dominican Republic–Central American Free Trade Agreement (DR–CAFTA).
The U.S. economy is undergoing one of the greatest periods of transformation in history. The convergence of powerful technological, political, economic and cultural forces is shaping the 21st century.
But as many U.S. industries seize global opportunities derived from today's economic realities, some are experiencing difficulty. This is causing fear and anxiety among workers similar to what was experienced during the industrial revolution. In turn, it is forcing a backlash against China—the latest scapegoat based mostly on misinformation.
For example, although the U.S. economy created 64 million net new jobs from 1970 through October 2005, the number of U.S. manufacturing jobs fell from a high of 21 million in 1979 to 14.2 million in October 2005. Many blame this on imports, particularly from China. The real reason: new technologies and higher productivity have empowered fewer American workers to produce more goods in far less time.
We've seen these trends before. New technologies enabled U.S. agricultural output to skyrocket. The result: the number of farm workers fell from 9.5 million in 1940 to 2.2 million in 2004. Yet, the United States did not lose 7.3 million jobs; they shifted to emerging industries resulting in higher standards of living and a more prosperous American economy.
Imports from China only are responsible for a fraction of U.S. job losses. Importantly, they offer U.S. consumers greater choices and lower costs. In turn, this affords the American family more disposable income for education, health care and rent. In addition to keeping inflation down, inexpensive imported components help keep U.S. producers competitive.
China does, however, present new challenges. And it does not always play by the rules, especially with regard to intellectual property, production subsidies, distribution rights and transparency. But, should we isolate China as many suggest? To determine how well isolationist policies work, look no further than North Korea and Cuba: two countries where the United States has virtually no trade—and no influence.
Since its accession to the World Trade Organization in December 2001, China has significantly opened its market, cut import tariffs by nearly 40 percent, virtually eliminated import licenses and quotas, and relaxed ownership restrictions.
As a result, China and Hong Kong have become the United States' fourth largest export destination. And from 1999 through 2004, U.S. exports to China increased nearly 10 times faster than U.S. exports to the rest of the world. With a growing population of 1.3 billion people—and 200 to 300 million consumers with considerable purchasing power—China offers U.S. companies tremendous opportunities.
The demands for China to float its currency, the yuan, is another issue fraught with misinformation. During the devastating Asian financial crisis of the late 1990s, China wasn't affected because the yuan was fixed to the U.S. dollar while U.S. policymakers praised China for its currency stability. Today, due to its fragile financial sector, China probably couldn't float the yuan if it wanted to. And even if the yuan's value were to rise, the impact on the U.S. trade deficit would be minimal, according to Federal Reserve Chairman Greenspan. Why? If the yuan's value were to rise, U.S. companies would continue to seek low cost imports from other developing countries.
President Bush's November visit to China is part of an ongoing effort to strengthen the U.S.-China relationship—a vital objective in today's complex world. Viewing China as a villain won't bring back U.S. manufacturing jobs. And when China doesn't implement reforms fast enough, understand its need to modernize at a pace that won't cause violent unrest among its unemployed.
Does this mean the U.S. should ignore unfair Chinese trade practices? No. But we should base our policy decisions on economic realities, not misinformation. Only through a mutually beneficial relationship will U.S.-Chinese business partners continue to create more globally attractive products—an effort that generates higher skilled, higher paid jobs in the United States.
U.S. companies linked to the global marketplace perform better than those that only operate domestically. And the employees and communities of globally-engaged firms prosper more. But surprising to many, the benefits do not just apply to exporters.
Companies that import, invest abroad or are recipients of foreign direct investment (FDI) also prosper more than their domestically focused counterparts. And the reasons are not always obvious.
According to the report, Why Global Commitment Really Matters!, U.S. companies that export have faster growth rates and fail less often than companies that do not. They also offer better opportunities for advancement. Lewis and Richardson, authors of the report, say blue-collar earnings in exporting firms are 13 percent higher than those in non-exporting plants. White-collar employees obtain better wages too—18 percent more than their non-exporting counterparts. Benefits also include improved medical insurance and paid leave.
The report contends that U.S. plants which are recipients of FDI employ workers with 19 percent higher productivity, provide them with more machinery and equipment and use more cutting-edge technology than their counterparts that are not globally-engaged. Similarly, U.S. companies that have investments abroad use more advanced manufacturing technology than U.S. non-multinationals. The result: worker productivity is 11 percent higher in large U.S. multinationals and 33 percent higher in small ones, as compared to their U.S. counterparts not invested abroad.
Importers benefit from access to the best value the world has to offer. In 2004, for example, more than half the $1.5 trillion in U.S. imports were capital goods, and industrial supplies and materials—imports often used in the production of finished products. In turn, this helps U.S. producers to be more globally competitive and increase sales.
U.S. communities that host globally-engaged companies also experience positive spillovers in terms of wages, technology and skills. Furthermore, revenue generated from global integration flows throughout local communities and spreads risk should the United States enter a period of slow or negative economic growth. This often translates into a more stable workforce and tax base.
In 1950, U.S. trade accounted for less than 5.5 percent of U.S. economic growth. Today, it has become an integral part of everyday life, accounting for 25 percent. And the benefits are far reaching. In 2005, Gary Clyde Hufbauer of the Institute for International Economics, said trade and globalization have generated an increase in U.S. income of approximately $1 trillion annually, measured in 2003 dollars. This translates into an income gain of about $10,000 for the average American household per year.
Although the pursuit of international trade and investment carries risks, the dangers of solely operating domestically could be greater for many firms. Global engagement, which generates many benefits, is an important key to success in our competitive business environment.
The United States always has been a leading proponent of free trade. However, many now believe this leadership position is at stake—especially since U.S. willingness to accept World Trade organization (WTO) rulings is questioned.
For example, both WTO and NAFTA committees have ruled that Canadian lumber subsidization evidence is insufficient. Nevertheless, the U.S. continues to impose tariffs on Canadian softwood lumber exports to the U.S. This dispute has been unresolved since 1982.
International trade is a primary generator of business growth in Western New York. And a tremendous number of jobs are dependent on it.
How do we know this?
New York state is the third-largest exporter of manufactured goods compared to all other states. Based on U.S. Census Bureau calculations, more than 280,000 New York jobs are directly dependent on merchandise exports, which pay 13 percent to 18 percent more than the national average wage. And a tremendous number of jobs are dependent on New York’s service exports, as well as indirect exports.
Trade is also essential to our region.
In the Buffalo-Niagara Falls metropolitan area, the manufacturing sectors with the largest employment are also among the state’s top merchandise export industries. What does this mean?
Take the local transportation equipment industry for instance. It is Buffalo-Niagara’s largest manufacturing employer and New York’s second largest merchandise export. It stands to reason: As Ontario auto producers (one of our principal customers) buy more auto parts from local manufacturers, we benefit.
Jack Davis, the outspoken trade protectionist who attempted to unseat Rep. Tom Reynolds in the 26th Congressional district last November, has made trade the scapegoat of virtually all our economic problems. Although his intentions are good, his trade policy recommendations, if implemented, would be disastrous for Western New York. If Davis had his way, he would raise import barriers in an attempt to isolate producers from foreign competition. In response, foreign countries would retaliate by keeping U.S. products out. This would have an enormously negative impact on New York State, especially local auto parts producers who heavily rely on Ontario auto factory orders.
Overall, we would lose more jobs than gained.
According to a U.S. International Trade Commission study, if all U.S. trade barriers had been eliminated in 1999, 175,000 full-time American workers would have been displaced (representing only one one-hundredth of 1 percent of the labor force), but 192,400 full-time jobs would have been created. The result: a net gain of nearly 17,400 jobs. Plus, total output would have increased by $58.8 billion.
If trade is not causing manufacturing jobs to decline, what is? New technologies and innovation, which have significantly boosted U.S. productivity, are primarily responsible. This has enabled fewer workers to generate much more output than ever before.
Nevertheless, Mr. Davis advocates protectionism to prop up failing manufacturing industries. This would only make the situation worse. Federal Reserve Chairman Alan Greenspan has repeated that creeping protectionism must be thwarted and reversed.
Consider this: Would we have wanted to stop rising productivity in the U.S. agricultural industry that caused the number of farm jobs to fall from 9.5 million in 1940 to 2.2 million today?
Currently, U.S. agricultural output can virtually feed the world. America did not “lose” 7.3 million farm jobs: They shifted to emerging industries. As a result, we became more efficient and prosperous.
Trade is not the cause of Western New York’s economic ills. It’s one of the few bright spots on our economic horizon.
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