Free Trade Is Failing America

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- No economic policy could better serve Americans than genuine free trade but open trade policies are failing Americans.

The basic idea is compelling. Let each nation do more of what it does best, and specialization will raise productivity and incomes.

Americans are not sharing in those benefits because President Obama, like President Bush, permits China and others to cheat on the rules, unchallenged and to the detriment of the U.S. interests he was elected to champion.

The World Trade Organization has greatly reduced tariffs, prohibits virtually all export subsidies, and regulates other national policies that could subvert trade, such as health and product safety standards arbitrarily slanted to favor domestic suppliers.

For these rules to optimize trade, raise productivity and boost incomes, exchange rates must adjust to reasonably reflect production costs. To buy Chinese televisions, Americans must be able to purchase yuan with dollars; however, an artificially strong dollar that overprices U.S. tractors and software in China unravels the benefits of trade by denying Americans opportunities to export to pay for those televisions.

The Currency Game

Exchange rates are established in currency markets, created by businesses trading through major financial institutions. Unfortunately, China and several other Asian governments blatantly manipulate those markets without a credible U.S. response and with ruinous consequences for the U.S. economy and American workers.

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The U.S. annually exports $2.1 trillion in goods and services, and these finance a like amount of imports. This raises U.S. gross domestic product by about $210 billion, because workers are about 10% more productive in export industries, such as software, than in import-competing industries, such as apparel.

Unfortunately, U.S. imports exceed exports by another $565 billion, and workers released from making those products go into non-trade-competing industries, such as retailing, where productivity is at least 50% lower.

This slashes GDP by $235 billion, overwhelming the gains from trade, and requires workers displaced by imports to accept lower wages. If these workers find no work at all, the loss is much greater and could reach the full $565 billion -- in actual fact, that seems to be what is happening.

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