Both presidential candidates have moved away from earlier support of international trade to embrace protectionist stances in the heat of the campaign. Hillary Clinton has reversed her position on the Trans Pacific Partnership which she helped negotiate and is now opposed to its ratification. Donald Trump has advocated a trade war with China and the complete abrogation of the successful NAFTA agreement with Canada and Mexico. These positions are popular with parts of the electorate, perhaps because trade is a complex issue and the benefits are realized gradually over time. Still, voters may be better able to assess the candidates' positions armed with a clearer understanding of how increased commercial interaction with other countries increases the standard of living of everyone.
Christopher HopkinsFew issues in economics are as settled as trade. When two countries cooperate to specialize in what each does best, both enjoy more output and higher wages. This is known as comparative advantage, and has been well understood since the early 1800s.
The United States is the pre-eminent creator of sophisticated computer software. Of course we are also perfectly capable of producing socks and T-shirts. But it is better for us to concentrate on the highest use of our capital and labor resources and let someone else handle the textile manufacturing who is not as proficient in writing code. Both countries benefit by specialization, and wages in both countries eventually rise.
Of course there are tradeoffs. If you run a knitting machine in a South Carolina hosiery mill, you will need to learn new skills to benefit from the advance of globalization. We cannot dismiss the impact on those caught up in the crossfire and need to do a much better job of imparting 21st century skills to workers impacted by trade.
But retreat is not the answer. Protectionism is a dead end. We know with certainty that tariff barriers and trade wars shield inefficient industries temporarily but ultimately precipitate their collapse from lethargy bred by lack of competition. This is not a theoretical proposition, but has been observed in practice countless times.
NAFTA is an example of a multilateral trade success. While not the unqualified miracle advertised by some proponents, NAFTA has been definitively beneficial on balance. Negotiated by George H. W. Bush and implemented by Bill Clinton, it is a testament to the bipartisan nature of global trade properly understood.
NAFTA has succeeded in creating a tripartite manufacturing powerhouse in North America. Allowing parts and sub assemblies to migrate freely across borders has allowed automakers to reduce costs and become competitive in foreign markets like China. Take for example the Honda CRV. Assembled in Mexico, 70 percent of its content is manufactured in the U.S. or Canada. Absent NAFTA the car would likely be built in Asia and thousands of auto jobs would have disappeared. The agreement has allowed the United States, Canada and Mexico to work together through specialization to sell more North American products to the rest of the world, raising incomes in all three countries.
Opponents of trade will point to localized job losses as evidence of the desirability of protectionism. This is largely fallacious. While manufacturing employment has fallen over the past 30 years, U.S. output of manufactured goods has expanded thanks largely to automation. We produce substantially more with fewer people due to increases in efficiency, which like trade is good for incomes in the long run. The hard part is adapting to the loss of your job and the need to retrain, a hardship we must recognize and address more compassionately.
Despite the political rhetoric, trade is both beneficial and inevitable. An informed discussion during the campaign season would be welcome.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. Advisors in Chattanooga.