Now that the House and Senate have approved legislation granting
the President trade promotion authority (TPA), 1 the
likelihood that the United States will achieve trade agreements
that benefit American manufacturers has improved significantly. TPA
would enhance the credibility of the United States in negotiating
agreements that open foreign markets to U.S. producers by assuring
other countries that the agreements will not be changed by
Congress.
Today, the United States is party to only three of the more than
150 international trade agreements currently in force. Each time
trade agreements are signed that exclude the United States,
American manufacturers are put at a competitive disadvantage.
The National Association of Manufacturers, for example, estimates
that U.S. manufacturers lose over $800 million per year in exports
to Chile simply because the United States has not yet secured a
free trade agreement with Chile. 2 Meanwhile, in
April, Chile concluded a free trade agreement with the European
Union (EU), which currently participates in 27 free trade
agreements and is negotiating 15 more. The United States cannot
afford to wait on the sidelines as other nations conclude free
trade agreements.
The TPA provision included in the Trade Act of 2002 (H.R. 3009),
now in conference committee, would enable the Administration to
step up to the international trade table and sign agreements that
not only expand markets for U.S. manufacturers, but also broaden
their access to lower-priced components (inputs) and increase
productivity. Expanding trade also boosts industrial innovation and
specialization, as resources are allocated to sectors in which the
United States maintains a comparative advantage--such as aircraft,
pharmaceuticals, and machine tools. These industries typically pay
more than the average manufacturing wage, so as they expand, the
average manufacturing wage should also rise.
TPA would enhance the Bush Administration's ability to negotiate a
range of trade agreements that would reduce barriers to U.S. goods
and services. These include reducing trade barriers through
multilateral venues such as the World Trade Organization (WTO);
bilateral agreements with countries such as Chile; and regional
agreements such as the Free Trade Area of the Americas (FTAA). Such
agreements, far from harming U.S. manufacturing, will make that
sector more vibrant, productive, and competitive.
H.R. 3009 must be improved, however. An amendment added to the
Senate version (S. Amdt. 3382) by Mark Dayton (D-MN) and Larry
Craig (R-ID) should not be included in the final legislation that
reaches the President's desk. That provision would permit Congress
to amend any part of a trade agreement that involves U.S. trade
remedy laws such as U.S. antidumping and countervailing duty
laws.
This approach is unwise. Other countries view U.S. trade remedy
laws as some of the most protectionist aspects of U.S. trade
policy. Including the Dayton-Craig amendment in the final
legislation would undermine the President's ability to negotiate
trade agreements successfully because it would legitimize the
efforts of countries to exclude their own politically sensitive
subjects, such as antidumping laws that frequently target U.S.
manufacturing companies, from the negotiations. Congress must
ensure that the final legislation granting trade promotion
authority to the President does not include such provisions.
International Trade: Boon or Bane of
Manufacturing?
One of the most frequently heard objections to free trade
agreements is that increased foreign trade erodes the U.S.
manufacturing base. Senator Ernest F. Hollings (D-SC) recently
argued in an opinion-editorial, for example, that as a result of
increased trade with other nations, "manufacture has been leaving
the United States in droves." 3 Critics generally argue that
free trade causes U.S. manufacturers to lose their market share as
imports increase and that it also causes them to relocate their
operations overseas where wages and labor standards are lower. But
the evidence is simply not on their side.
Consider how import levels and employment have changed in the
manufacturing sector over the past 50 years (see Chart 1):
Imports rose from $9.1 billion in 1950 to over $1 trillion in
2000--an increase of more than 13,000 percent. Manufacturing
employment rose from 15.2 million in 1950 to 18.5 million in
2000--a 21 percent increase. 4 Output in the manufacturing
sector rose at a compound annual average growth rate of 6.2 percent
between 1960 and 2000 and now accounts for $1.5 trillion. 5
These data indicate that the U.S. manufacturing sector is in fact
robust. Regardless of the level of imports, manufacturing
employment has remained relatively constant for half a century.
Competition from international trade has not cost America jobs, and
increased trade has not eroded the manufacturing base. This
observation is true for two reasons. First, the manufacturing base
serves a much larger market today than it did in the 1950s because
of a worldwide decline in tariff rates. Today, the average tariff
rate on manufactured products in developed countries is around 4
percent, down from 40 percent in 1950. 6 Lower tariff rates
overseas give U.S. manufacturers a larger overall market in which
to sell their goods.
According to the National Association of Manufacturers, one-sixth
of all manufacturing output today is produced for overseas markets.
In some industries--namely, high-wage, high-tech
industries--exports play an even greater role. For example, 54
percent of aircraft production, 49 percent of machine tools, and 46
percent of turbine and generator output are produced for overseas
markets. 7
Second, increased trade provides U.S. manufacturers with access to
lower-priced intermediate inputs. Glen Barton, chief executive
officer for Caterpillar, Inc., explained the effect that such
access had on his company to the U.S. Trade Representative in 1999:
"By reducing U.S. tariffs on raw materials and components," he
said, "Caterpillar's American factories have been able to increase
efficiencies, allowing the company to better compete throughout the
world." 8
In 2000, the United States imported over $500 billion in capital
goods and industrial supplies and materials. 9 Many
companies import such products as petroleum, steel, and raw
materials because they can procure them from foreign countries at
prices that are lower than they would have to pay at home. In turn,
the lower price of these products reduces production costs, which
allows U.S. manufacturing companies to pass on savings to consumers
in the form of lower prices, as well as to expand production and
increase exports.
Conversely, raising trade barriers on these intermediary products
harms industries that import them. For example, President Bush's
March 2002 decision to raise tariffs on steel imports is beginning
to harm industries that use steel to produce products such as
automobile parts, home appliances, and furniture. According to an
article in The Wall Street Journal, Atlantic Tool & Die Inc., a
firm that makes auto parts, reports that its steel cost has
increased 20 percent as a result of the recent increase in tariffs.
10 Similarly, The Washington Post reports that steel-using
industries are also suffering from not being able to purchase
enough steel, because some suppliers are holding back steel in
anticipation of higher prices in the next few months.
11
What makes these steel tariffs especially damaging is that the
number of steel-using industries far outnumbers the number of
steel-producing industries: For every employee in a steel-producing
industry, there are 57 employees in steel-using industries.
12 Because over 50 percent of all imports are made up of
intermediary products such as steel, keeping trade barriers low on
these products would help make these manufacturing firms more
competitive, allowing them, as noted above, to pass on the savings
to consumers, expand production, and increase exports.
Competition from imports also increases productivity by giving
manufacturers greater incentive to develop new production methods
that reduce costs and improve profitability. It is therefore not
surprising that in the 1990s, productivity in the manufacturing
sector--where most international trade occurs--was twice that of
the rest of the economy. 13
A good example of how international trade increases manufacturing
productivity is the automobile sector. Between 1945 and the early
1970s, the industry was effectively insulated from foreign
competition. Not surprisingly, it experienced comparatively little
increase in productivity or innovation. As one columnist noted in
American Heritage magazine, "except in appearance, there was little
to distinguish the cars of 1973 from those of 1953."
14
By contrast, the auto industry began to experience intense
competition from Japan in the mid- to late 1970s. Between 1970 and
1980, for example, Japan's market share of retail new passenger car
sales in the United States increased from 4 percent to 21 percent.
15 The increased competition forced U.S. automobile
manufacturers to invest in new technologies that improved
productivity and enabled them to offer better, higher quality
cars.
Since 1980, the U.S. auto industry not only has increased its
productivity, but also has implemented a number of innovations that
greatly improved quality. According to the Bureau of Labor
Statistics, labor productivity has increased by 77 percent over the
past two decades. 16 Cars today are safer, offer improved
engine efficiency, and have more options available. Such gains most
likely would not have occurred as quickly without competition from
overseas markets.
Foreign Direct Investment, Productivity, and Property
Rights
The argument that trade erodes the manufacturing base assumes that
U.S. manufacturing firms will automatically decide to move to
underdeveloped countries where wages and labor standards are lower
than in the United States. If this argument were correct, global
foreign direct investment (FDI) would be distributed
disproportionately to poor countries where wages and labor
standards are the lowest.
The actual flow of FDI, however, refutes this assumption.
According to the United Nations Conference on Trade and Development
(UNCTAD), the least-developed countries, which comprise
approximately 25 percent of all countries, receive only 0.5 percent
of global foreign direct investment (FDI). 17 The reason FDI
does not flow to low-wage, low-standard countries is that firms do
not make investment decisions based solely on the cost of labor.
Wage rates reflect worker productivity. Competition forces firms to
pay higher wages to workers who can produce more, and vice versa.
High-wage labor can compete against low-wage labor because the
higher productivity of that group at least compensates for higher
wages. Firms may choose to direct their investments to countries
with higher wages if they know that productivity will be
greater.
Recent evidence indicates that a key determinant of FDI is a
country's level of property rights. Finance professors Philip C.
English and William T. Moore of Texas Tech University and the
University of South Carolina, respectively, examined how the level
of property rights in a country affected the distribution of FDI
from the United States between 1989 and 1997. 18 Using the
measure of property rights published in The Heritage
Foundation/Wall Street Journal Index of Economic Freedom, 19
they found that over 80 percent of U.S. FDI went to countries that
had received either the best or second-best possible score (out of
five possible scores). Their findings indicate that one of the key
determinants in the distribution of FDI is the security of property
rights. Not coincidentally, countries that receive the best Index
scores on property rights, such as New Zealand, Australia, and the
EU countries, also tend to have high wages and labor
productivity.
Benefits of Trade for the U.S. Manufacturing Sector
U.S. manufacturing industries are not homogenous; some industries
are more exposed to foreign trade while others face no foreign
competition at all. In 2000, for example, 15 percent of
manufacturing output and 3 million manufacturing employees were not
involved in foreign trade-related categories, while 85 percent of
total output and over 13 million employees were. 20
The composition of foreign trade differs across manufacturing
industries as well. Some industries experience more intense import
competition from overseas firms than others do. Some firms face
relatively little import competition but benefit from serving a
large export market.
Measuring the ratio of imports to exports by manufacturing
category, therefore, can be a way of classifying the intensity of
import competition for manufacturing firms. 21 According to
data from the International Trade Commission, manufacturing
categories can be grouped into quintiles based on the ratio of
imports to exports. The top 20 percent of all manufacturing
categories--or the first quintile--have the highest ratios of
imports to exports. Manufacturing companies in this quintile face a
lot of foreign competition and at the same time do not have a large
export market. The bottom 20 percent--or the fifth quintile--of
manufacturing categories have the lowest ratios of imports to
exports. Manufacturing companies in this quintile face little
foreign competition and have a large export market to serve
abroad.
Table 1 shows the range of these ratios, the number of
manufacturing categories, and the share of manufacturing employment
per quintile. For example, for the 77 manufacturing categories in
the first quintile, imports are at least four times greater than
exports. The United States imported $1.8 billion worth of infant
apparel in 2000 but exported only $148 million worth of infant
apparel, making the ratio of imports to exports for infant apparel
equal to 12.5. Because the ratio of imports to exports exceeds
4.05, infant apparel is included in the first quintile. By
contrast, for almost all of the manufacturing categories in the
fourth and fifth quintiles, exports exceed imports (i.e., the ratio
of imports to exports was less than 1)--these industries can be
considered "exporting" industries. It is instructive to note that
manufacturing firms that fall into these last two quintiles employ
nearly half of all manufacturing workers.
Exporting industries are the ones in which the United States has a
competitive advantage--such as the aircraft, machinery, electronic
equipment, pharmaceutical, and semiconductor industries--and which
require large amounts of capital investment and technical skills to
produce the goods. As such, these industries tend to pay higher
wages on average.
By contrast, industries with very few exports and high levels of
imports (the first quintile)--such as the apparel, leather goods,
and footwear sectors--tend to be labor-intensive and do not require
large amounts of capital investment. As such, these industries
generally pay wages lower than the industry average.
This finding is illustrated in Chart 2, which shows the difference
in average wage per hour for a manufacturing category compared with
the average manufacturing hourly wage for all industries. In 2000,
the average wage per hour in all manufacturing industries was
$15.20. Manufacturing firms in the first quintile paid, on average,
$13.20 per hour, or $2.00 less than the industry average.
Manufacturing firms in the fifth quintile paid, on average, a wage
per hour equal to $16.47, or $1.27 greater than the industry
average.
How Congress can Improve U.S.
Competitiveness
Clearly, trade does not harm the manufacturing sector; it improves
it. But unless Congress grants the President trade promotion
authority to negotiate more trade agreements, the U.S.
manufacturing sector will remain at a growing competitive
disadvantage against firms in Canada, Singapore, Chile, and other
countries that are moving forward more quickly with free
trade.
Consider the case of Chile again. In 1997, Chile began to lower
tariffs on manufactured goods based on agreements it had negotiated
with Canada, Mexico, and some South American countries. Today,
countries that do not have a free trade agreement with Chile pay a
uniform 8 percent tariff on all imports. Those that have secured a
free trade agreement with Chile pay either no import tariffs or a
reduced rate. As the National Association of Manufacturers points
out, the failure of the United States to secure a free trade
agreement with Chile has resulted in a loss of $800 million in
exports to Chile each year. 22
Chile recently concluded a free trade agreement with the EU, which
already has 27 free trade agreements in force and is negotiating 15
more. It is time for America, which is party to only three such
agreements, to step up to the free trade table.
If the United States negotiates more free trade agreements with
other countries, it will not entail a significant lowering of
tariffs on foreign imports because U.S. tariff rates on
manufacturing imports are already low. The average U.S. tariff rate
on foreign imports is just 1.8 percent, and 91 percent of foreign
imports face a tariff rate of 5.1 percent or less. (See Chart 3.)
Only 9 percent of manufactured imports face a tariff rate greater
than that. (See Table 2.)
The highest tariff rates are typically applied on
import-dominated industries, such as textiles and apparel, leather,
and footwear, ostensibly to protect workers in these industries
from foreign competition. But these tariffs come at a high cost,
because tariffs raise the price that consumers pay for a good.
Trade restrictions in the textile industry cost consumers about $24
billion annually to "protect" about 170,000 jobs--or about $140,000
for each job "saved" per year. 23 The average annual salary
for a textile employee is $23,549. 24 Thus, the cost to
consumers of saving just one textile job is about six times what a
textile employee makes in a year. It would be cheaper to pay
textile employees their annual salaries not to work than it is to
protect the sector with trade barriers. Nevertheless, even in the
textile and apparel sector--one of the most highly protected
sectors in the United States--jobs are being lost. Employment in
this sector has fallen from 2.3 million employees in 1970 to 1
million employees in 2001. 25 The data show that most of
these displaced workers find new employment. The reason: The
dynamic U.S. economy is constantly generating new jobs--almost 23
million new jobs have been generated since 1992. 26 One
study found, for example, that nearly 90 percent of workers who had
lost their textile and apparel job found a new one, similar to the
national average of 93 percent for all sectors. More significant,
those who found a new job outside of the apparel industry
experienced a 34 percent increase in pay. 27
Such data indicate that the alternative for workers who lose their
job is not a permanent state of unemployment, but rather new
employment, often at higher wages. The findings also suggest that
the United States does not need to protect industries such as
textile and apparel manufacturing at such a large cost to the
economy.
To help make U.S. manufacturers more competitive in the global
economy, Congress should ensure that the version of H.R. 3009 that
emerges from the conference committee:
Provides trade promotion authority for the President . TPA assures
countries that the agreements they sign with the United States will
be subject only to a straight up-or-down vote in Congress without
countless amendments and delays. Is amended to remove the
Dayton-Craig provision now in the Senate version. It is important
that President Bush have the authority to negotiate all areas of
U.S. trade policy, even such trade-remedy laws as antidumping and
countervailing duty laws. The provision introduced by Senators Mark
Dayton (D-MN) and Larry Craig (R-ID) would permit Congress to amend
any part of a trade agreement that involves these laws, which other
countries view as some of the most protectionist in U.S. trade
policy. Such a provision would undermine the President's ability to
address these policies in future trade negotiations while
legitimizing the efforts of potential trading partners to exclude
from any agreement their own politically sensitive subjects, such
as antidumping laws that target U.S. manufacturing companies.
Conclusion
Trade does not erode the manufacturing sector as critics claim. In
fact, trade strengthens the manufacturing sector because it expands
markets for U.S. goods, provides manufacturers with access to
lower-priced inputs, and increases productivity.
Increased trade also allows manufacturers to specialize in goods
for which the United States has a comparative advantage. Such
industries generally require large amounts of capital investment
and high skill levels, and therefore generally pay higher hourly
wages than the industry average. Claims that trade erodes the
manufacturing base are, in fact, baseless.
As other countries move ahead with trade agreements, however,
American manufacturers, consumers, and workers are being left
behind. To enable the President to negotiate more agreements,
Congress must not delay in granting trade promotion
authority.
Aaron
Schavey is a Policy Analyst in the Center for
International Trade and Economics at The Heritage Foundation.
--------------------------------------------------------------------------------
1. The House passed the Bipartisan Trade Promotion Authority Act of 2001 (H.R. 3005) in December 2001, and the Senate agreed to a broader trade legislation package, the Trade Act of 2002 (H.R. 3009), including trade promotion authority. The bill is currently in conference. See http://thomas.loc.gov/cgi-bin/bdquery/z?d107:h.r.03009.
2. National Association of Manufacturers, "Absence of Chilean Trade Agreement Costing U.S. over $800 Million per Year," October 2001, at /static/reportimages/993AB4374B9B0981B2378C92F616189C.pdf.
3. Ernest F. Hollings, "The Delusion of Free Trade," The New York Times, April 25, 2002, p. 31.
4. Council of Economic Advisers, Economic Report of the President 2002, Table B-46 and Table B-103, at http://w3.access.gpo.g ov/eop/, and WEFA, World Market Monitor, 1999.
5. Ibid., Table B-12.
6. "Playing Games with Prosperity," The Economist, July 26, 2001.
7. National Association of Manufacturers, "Statement on the Current State of Manufacturing," testimony before the Committee on Commerce, Science and Transportation, U.S. Senate, June 21, 2001.
8. Letter to Charlene Barshefsky, U.S. Trade Representative, from Glen Barton, CEO, Caterpillar, Inc., May 21, 1999.
9. Council of Economic Advisers, Economic Report of the President 2002, Table B-104.
10. Neil King Jr. and Robert Guy Matthews, "U.S. Feels the Pain of Steel Tariffs as Prices Rise, Supply Is Reduced," The Wall Street Journal, May 31, 2002.
11. "Next Steps on Steel," The Washington Post, June 5, 2002.
12. Consuming Industries Trade Action Coalition, "In 201 Remedy Hearing, Georgia Congressmen Support Interests of Downstream Industries," November 9, 2001, at http://www.citac-trade.org/latest/release_09_11_2001.htm.
13. National Association of Manufacturers, "Statement on the Current State of Manufacturing."
14. John Steele Gordon, "Death of a Marque," American Heritage, April 1, 2001.
15. U.S. Department of Transportation, National Transportation Statistics 2000, Table 1-14, at http://www.bts.gov/btsprod/nts/Ch1_web/1-14.htm.
16. U.S. Department of Labor, Bureau of Labor Statistics, at http://www.bls.gov (May 2002).
17. United Nations Conference on Trade and Development, "FDI Increases to the World's Poorest Countries," Media Summary, May 10, 2001.
18. Philip C. English II and William T. Moore, "Property Rights Ambiguity and the Effect of Foreign Investment Decisions on Firm Value," in Gerald P. O'Driscoll, Jr., Kim R. Holmes, and Mary Anastasia O'Grady, 2002 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2002), pp. 49-57.
19. Ibid., pp. 51-52.
20. U.S. International Trade Commission and U.S. Bureau of the Census, Annual Survey of Manufacturers 2000.
21. The U.S. International Trade Commission provides import and export data at the six-digit North American Industrial Classification System (NAICS) level.
22. National Association of Manufacturers, "Absence of Chilean Trade Agreement Costing U.S. Over $800 Million per Year," October 2001.
23. Doug Irwin, Free Trade Under Fire (Princeton, N.J.: Princeton University Press, 2002), p. 93.
24. U.S. Department of Labor, Bureau of Labor Statistics, at http://www.bls.gov (June 2002).
25. U.S. Department of Labor, Bureau of Labor Statistics, "National Employment, Hours, and Earnings," at http://data.bls.gov/labjava/outside.jsp?survey=ee (May 2002).
26. Ibid.
27. Alfred J. Field and Edward M. Graham, "Is There a Special
Case for Import Protection for the Textile and Apparel Sectors
Based on Labour Adjustment?" World Economy, March 1997, p.
141.