Remarks by Robert Z. Lawrence before the U.S. Grains Council Annual Board of Directors Meeting, July 19, 1999.
Remarks by Robert Z. Lawrence, Member-Nominee
President's Council of Economic Advisers
U.S. Grains Council Annual Board of Directors Meeting
Monday, July 19, 1999, Cambridge, MA
"Benefits and Concerns About Open Trade"
It is a pleasure to speak to you today. Indeed, there are few audiences who are as aware of the importance of open trade than you are. Indeed, agricultural liberalization has been a particular objective of this Administration. In the forthcoming ministerial in Seattle, the Administration plans to build on its success in the Uruguay Round and help launch a new trade round in which agriculture will be a major focus. In consultations with many constituents, we will refine our goals with respect to reducing trade barriers and subsidies, ensuring standards based on science, limiting domestic supports that distort trade, and imposing disciplines on state trading.
Yet it remains an open question whether we will be successful. In part because of opposition abroad, but also because of opposition at home. Opponents of free trade seem to be everywhere. Last week, the front page of the Wall Street Journal ran a story about the groups who are planning to come to Seattle in November to oppose further globalization efforts. This phenomenon can also be seen in our Congress, which has in recent years refused to give the President so-called Fast Track Negotiating authority. Ralph Nader, Ross Perot, and Pat Buchanan are a few of the most vocal of what a recent book of which I was a co-author dubbed "Globaphobia."
Yet our recent economic experience is surely evidence of the compatibility of strong growth, improved competitiveness, and an open economy. We are currently enjoying the longest peacetime expansion in American history, which has created over 18 million jobs. We have the lowest unemployment rates in almost three decades and the lowest core inflation rates since the mid-60's. And in the past 3 years we have seen surging productivity growth, rising real wages, and improved wage equality.
U.S. firms are again the world’s most competitive in most of the high-tech sectors of the future (aerospace, software, computers, finance, semiconductors, entertainment, and pharmaceuticals). U.S. firms make up eight of the top ten and 21 of the top 25 firms in Businessweek’s Global 1000.
Our systems of higher education, research, and innovation are the envy of the world. With the surge in productivity growth over the past 3 years, there is reason to believe that we are finally reaping the benefits of the revolution in information technology. Many now seek to learn the secrets of our success. At the CEA, we constantly receive visitors from Europe who marvel at the flexibility of our labor markets, and visitors from Asia who admire our transparent and resilient financial system.
In addition to its policies of fiscal prudence and investment in people and education, a key pillar in this Administration’s strategy has been its emphasis on opening markets abroad and keeping our market open at home. Agreements such as Uruguay Round, NAFTA, and sectoral free trade in financial services, telecommunications, and information technology are just the most prominent of the numerous agreements that have been adopted since the Clinton Administration came into office.
There is no question that as a result of declining communications and transportation costs and the elimination of barriers, we are more open to international trade today than we have been at any time in this century and probably before that. Today trade is equal to 24 percent of GDP, which means that roughly one in five purchases or sales made by Americans involve a foreigner. In 1998, our agricultural exports valued at $50.6 billion were equal to 26 percent of all cash receipts of U.S. farmers and it is estimated that one in three of our farm acres goes to producing exports.
Clearly, a stellar performance and an open economy are quite compatible.
Indeed, we should expect this because international trade yields numerous benefits, which include:
Efficiency. Trade allows us to reap efficiency gains by specializing in producing the products we can make relatively well and buying products from the rest of the world, which they make more cheaply. If we produced only the corn we consumed, our output would be cut by 17 percent; for wheat, it would be more than half.
As we expand our exports, Americans obtain more jobs with higher incomes in our most productive firms and farms. Export firms have been found to pay wage premiums on the order of 15 percent.
Because we have access to cheaper imports, wages are also higher. The ability to buy cheaper foreign products is an important complement to faster productivity growth in raising living standards and boosting real wages. Today, a dollar buys 13 percent more imported goods and services than it did in 1995. Over the same period, nominal average hourly earnings have risen from $11.43 to $13.04. This implies that by working an hour the typical production worker can now buy 29 percent more imported goods and services than she could in 1995. Imports have helped us deliver on our promise of high wage jobs.
Variety. Trade enhances consumer choice by making available products we do not produce at home or that are more precisely matched to consumer tastes. Imagine what our store shelves would look like without imported products. In some cases, imports are the only way we can obtain goods and key inputs we do not or cannot produce at home.
Competition. Trade is an important source of competition in our economy. Free trade complements anti-trust in constraining domestic monopolies. This leads to lower prices for consumers and greater productive efficiency.
Innovation. Trade stimulates innovation and technological improvements. We need only recall the major improvements in our domestic steel and automobile industries in response to foreign challenges. Studies of both Japan and the United States find a positive relationship between industrial total factor productivity growth and import growth. Giving our exporters access to global markets encourages more spending on R&D. It is no surprise that the manufacturing and agricultural sectors of our economy are the sectors with both the highest exposure to trade and the fastest productivity growth.
Competitiveness. To compete effectively in world markets, our producers need access to the best components and equipment at world prices. Most complex products today require the combination of both high- and low-skill activities. By purchasing inputs from abroad our firms can leverage their high-skill activities. An example: today’s personal computers often come equipped with U.S. software and micro-processors but many other components are made in Asia and elsewhere. Erecting barriers to imports has an unseen boomerang effect on exports. By increasing the costs of inputs that producers use to generate goods and services, protection damages the position of U.S. exporters. It is no surprise that major exporters like Caterpillar are so concerned about higher steel prices, or producers of computers like IBM oppose protection on flat-panel display screens.
Spare Capacity. It is also apparent that by being part of an international economy, and drawing on spare capacity in the rest of the world, our economy has been able to enjoy particularly rapid employment growth, without fear of inflation. This has allowed the Federal Reserve more leeway to keep interest rates low and reduce unemployment. In this way, imports have helped boost employment.
With all these benefits from trade, with the strength of our economic performance, with the fact that our market is already very open and others are now eager to open their markets, what explains the concerns about open trade to which I referred above?
I’d like to distinguish between and discuss two sets of concerns. The first relates to the economic impact of trade, the second to issues of governance and the rules for trade. I believe it is important to deal with these concerns. In some cases, they are exaggerated or misplaced. But there are also cases where the concerns are legitimate, and this Administration has pursued policies to deal with them. Let me deal with each set in turn.
Low wage competition. One foolhardy claim is that we simply cannot compete with low- wage countries. This folly was best captured by Ross Perot’s claims that free trade with Mexico would generate a giant sucking sound as jobs migrated to Mexico. The truth is that we certainly can compete. The reason is that it’s the cost of production, not just the wage rate that matters. And our costs can be lower as long as we’re sufficiently productive. Wage rates in Mexico may be a seventh of those in the United States but it turns out so is output per worker. This means that the way we compete is through higher productivity, not through lower wages.
Deficits = job loss. A second foolhardy view is the naive belief that trade deficits automatically cost jobs. Look at our economy today and two things are striking. First, we have a very large deficit, and second, we are closer to full employment than we have been in 3 decades.
But there are more sophisticated views, which are less easily dismissed:
Trade, as with other changes, may create losers as well as winners.
Dislocation. In the short run, as we’ve seen recently in sectors such as steel, oil, textiles, and mining and agriculture, increased imports or reduced exports can cause job loss. Clearly the financial crisis overseas and a boom in world production have placed some rural communities today in great stress.
Inequality. A second concern is that trade is the dominant reason we have seen growing wage inequality. This could certainly be true in theory. However, most economists who have studied this question looking at the period up through the mid-90's, when we did see the premiums earned by skilled workers rise, attribute this phenomenon to technology rather than trade. Many suggest that only 10 or 15 percent of the skill-premium increase is attributable to trade.
But more recent experience is very interesting. Since 1995 we have seen particularly rapid gains for those at the bottom of the income distribution. According to the Economic Policy Institute, those in the lowest quintile have had real wage increases of 10.3 percent, almost twice the 5 percent increase for those at the top. And this despite the problems that have occurred in world markets as a result of the Asian crisis.
I would emphasize, however, that trade protection is not the answer to either of these concerns. Protection inevitably raises costs to consumers that far outweigh the gains to producers. While there may be a limited role in cushioning some of the change to give industries an opportunity to adjust -- as the President has recently provided in the case of the lamb industry -- preventing change would permanently deprive us of the benefits which I have already described. The key response lies in an economy that is sufficiently flexible to meet the challenge of reaping those benefits.
1. Maintain growth at home and abroad. Keeping the economy as close to full employment while maintaining low inflation. It is interesting for example to look at what has happened to dislocated workers as the economy has moved closer to full employment.
Every 2 years, the Bureau of Labor statistics conducts a survey of workers who were displaced from jobs they had held for 3 years or more. It is striking to contrast the experience when unemployment was high in 1991-93 and when it was low in 1995-97.
First, the number of displaced workers declined by about 25 percent.
Second, by the time the survey was taken only about half of those displaced had jobs in the early period, versus about 64 percent in the latter.
Third, in 1991-93 re-employed workers experienced a decline of 16 percent in their wages; between 1995 and 1997 the decline was just 2 percent.
This does not mean losing your job is not painful. But it does mean once you find a job you can do much better the stronger is the overall economy.
The United States has been the principle engine of global economic growth but we’ve had financial crises in many parts of the world. Foreign growth is good for us. It provides us with markets for our exports. Our Treasury and Federal Reserve have played instrumental roles in managing the global crises and designing a new financial architecture to make the world economy more stable in the future.
2. A second policy response relates to government assistance in providing re-employment services. The Administration has developed numerous policies to assist search and training. A major new mechanism is the Federal government job and talent banks servicing millions of workers today. America’s job bank posts roughly 700,000 jobs on any given day; its talent bank has a total of 112,000 resumes in July 98. In 1998, the President signed the Workforce Investment Act with individual training accounts and lifelong earning tax credits.
3. For the long run, the key lies in education and training. Regardless of whether the underlying source is international competition or technological change, the key is education.
4. Finally, making sure that work does pay. Here in particular there is a role both for minimum wages set at reasonable levels and for an earned income tax credit. These are all areas in which the Administration has taken the lead.
The second set of issues relates more closely to trade policy. There are concerns that an open global trading system will undermine domestic sovereignty and hurt health, labor, and the environment.
Here, too, I believe there are fundamental misconceptions. By joining international organizations and signing trade agreements, the United States does not give up its ability to determine its own fate. It’s the same as with any contract. It makes sense to sign a contract as long as the benefits outweigh the costs. And indeed if the contract no longer pays, one simply must pay compensation. In exactly the same way, the United States derives benefits by participating in agreements in which both other countries and we open their markets.
We benefit from a rules-based system and have been actively using it to our advantage. Over the past 4 years, the Administration has brought and won 13 separate cases in agriculture. If it happens that others bring cases and we are found in breech we have the choice of desisting in our behavior or providing compensation.
In fact, the problem we have faced -- only in agriculture cases in beef and bananas -- is how to make sure that the WTO can be more effective in enforcing compliance with its rules. We have obtained favorable rulings and not obtained compliance from the EU. But these situations are the exception. We expect that in the new trade round to be launched in Seattle, we will be able to make improvements to the system.
Another concern relates to the rules of the trading system. These have shifted heavily from border barriers to concerns about other policies. Some of the most contentious are health, environment, and labor. The key in these cases is how to achieve the correct balance between domestic autonomy on the one hand, and the attainment of desirable international norms on the other.
I fear that ideologies on both sides threaten the trading system. On the one hand, we have those who insist we should only trade with countries that are exactly like us. On the other hand, there are those who believe there is no role for trade to deal with even the most egregious human rights abuses, and no room to make exceptions even where trade can undermine the environment.
It seems to me that we need to recognize the need for balance in these areas. To think creatively about how those trade-offs can be made. One example of such creativity was the side agreements to the NAFTA that emphasized enforcement and did not seek harmonization. Another direction of achieving balance lies in the health area – which has become extremely contentious in our relations with Europe.
Should the Europeans keep out our beef or prevent the sale of genetically modified food, even if there are no scientific support for their position? I think not. Indeed, the Administration's central goal is achieving respect for internationally recognized science. At the same time, however, as Secretary Glickman has recently suggested, there may be a role for private firms to voluntarily inform consumers about how their products are made.
Some suggest we should simply have free markets without any government regulation. But we have seen that good regulation is an important complement to the market. In the food area, the role of genuinely independent regulators who enjoy the public trust is particularly important in allowing the market to flourish.
So in sum, we do need an intelligent approach to realize the full benefits of trade. This is an approach the Clinton Administration has followed. We need supportive macro and adjustment policies to make change in general more achievable. We need international rules and systems that enforce basic principles that maintain an open global community but which do not tread too strongly on the legitimate means of expression for national diversity. Finally, we need to ensure that we provide working and farming Americans with the best tools available to take advantage of trade and our booming economy.
Robert Z. Lawrence
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