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Meet the Street: Is Freer Trade the Answer to U.S. Economic Woes?

An economist with Credit Suisse dissects the Bush free-trade plan.
Author:

With unemployment reaching a six-year high of 5.8% in December and massive layoffs continuing at major U.S. corporations, it's no surprise that President Bush has been advocating freer world trade as a way of stimulating the U.S. economy and creating more jobs.


Christoph Bianchet,
U.S. Economist,
Credit Suisse Asset Management

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Christoph Bianchet, U.S. economist for Credit Suisse Asset Management, believes the president's push for greater trade will have positive long-term benefits for the U.S. economy, even if the trade deficit remains at $300 billion or more. But Bianchet explains here why it probably won't be the short-term solution that Bush is seeking.

TSC: President Bush has been traveling the Mississippi stumping for greater free trade as a way of creating more jobs for Americans. There's also a bill in the Senate on this very issue. What can you tell us about this bill?

Bianchet:

The bill in the Senate is a provision for presidential "fast track" negotiating ability -- power with other countries to come up with trade agreements globally under the World Trade Organization, which would prevent the Congress from interfering with current negotiations. Their only authority, in the end, is to approve or disapprove what the president and other leaders, under the World Trade Organization, agree on.

TSC: How unusual is this "fast track" approach?

Bianchet:

In terms of general legislation, it is unusual, but just keep in mind that Bill Clinton had fast-track authority until it expired in 1994, and the Congress simply did not renew it, in spite of Clinton's lobbying to have it reinstated. So, it has been in place for various trade negotiations, including the Uruguay Round of trade negotiations. President Bush is simply taking a new stab at it.

TSC: With which countries is the U.S. likely to be expanding free trade?

There are two key issues here at stake: freer trade among nations globally, which means bringing tariffs down with almost everybody on the globe. And the other thing President Bush is pushing for is this so called FTAA, "Free Trade of the Americas," which would include more Latin American countries.

We're likely to see more trade between the U.S. and the European Union. China, too, is going to be a huge issue going forward with it joining the WTO and submitting to the rules of the WTO. It will undoubtedly affect global trading patterns. Africa could have some impact on the European Union in terms of export of agricultural goods, but they are not organized enough as individual nations.

TSC: Do you expect that this will, indeed, create more jobs and is this what the North American Free Trade Association (NAFTA) has shown us?

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Bianchet:

One thing NAFTA has shown us is that you will always find compelling evidence for both sides of a trade argument. While I have not seen specific figures to the effect of how many U.S. jobs may have been created since NAFTA, trading volumes between the U.S. and our North American counterparts has increased significantly. Trade volume with Mexico has tripled, and when you look at U.S. exports to Mexico alone, they have doubled since NAFTA. So, certainly, there is an argument to be made that the U.S. export industry is profiting from our free-trade agreement with Mexico.

In the short term, however, more free trade, or freer trade agreements, are not going to result in more jobs, simply because it will take years for any new free trade agreement to make its way through the World Trade Organization and the various legislative bodies, including Congress. So, it is a bit misleading for Bush to say that free trade automatically equals more jobs. I believe that will happen in the long term but it's not a short-term measure that will take us out of the current economic slump.

TSC: While exports to Mexico may be a success story, from the U.S.' point of view, the U.S. trade deficit is sizable. In fact, you project that the data to be released Friday by the Commerce Department will place the U.S. trade deficit for the 12 months ended Nov. 30 at $358 billion. Couldn't freer trade exacerbate the U.S. trade deficit and end up hurting, instead of helping, domestic jobs?

Bianchet:

There is some argument to be made that the U.S. export market is profiting quite substantially since the introduction of NAFTA. Whether imports, which have also increased in volume, are taking away, or substituting

for domestic jobs, is an issue, and is always on the agenda of the more liberal side of politics.

But as a trained economist in the dogma of competitive forces, I am a strong believer in the mutual benefits of free trade. It is so compelling to see that free trade is mutually beneficial for all countries around the world. And the American consumer could benefit from lower import prices, as well.

TSC: But couldn't lower import prices increase the trade deficit and more importantly, hurt American manufacturing and jobs?

Bianchet:

Yes, but the trade deficit is really an interesting figure when you start digging into the details because a lot of this trade that counts as imports is actually imports from U.S. affiliates, so this figure is probably exaggerated by 30% to 40%.

Having said that, I will admit that the deficit could get worse, but in the end, longer term, it's mutually beneficial for all countries that engage in free trade. So I think longer term, Mr. Bush is right. Free trade will create more jobs -- not destroy them -- because in an open economy you are constantly reminded that it's all about competitiveness and invention on a global scale.

And that makes U.S. goods more attractive on a global scale.