The Investment U e-Letter: Issue #766
Friday, February 22, 2008
Free Trade: Can 60% of American Voters Be Wrong About The Benefits of Foreign Trade?
by Alexander Green, Chairman, Investment U
Investment Director, The Oxford Club A few weeks ago, I came across an astonishing fact. A Wall Street Journal-NBC News poll found that 60% of voters believe "foreign trade has been bad for the U.S. economy." Some of these folks might benefit from a class in Economics 101 before they pull the lever this November. Don't get me wrong. I understand that free trade hurts some jobs - and some industries. (Perhaps Detroit most of all.) But free trade has been a big net winner for the U.S. economy as a whole. Let's start by defining what free trade is. Free trade is nothing but a mutual agreement to drop tariffs and non-tariff barriers on goods sold in one another's countries. As such, America generally benefits. Why? Because while all countries have trade restrictions, foreign tariffs are generally higher than U.S. tariffs. Removing them is a big plus for American exporters… Free Trade Boosts The U.S. Economy Free trade also boosts U.S. economic growth. For example, in the 13 years since NAFTA was passed, America's economy has added 26.2 million net new jobs, and gross domestic product has doubled to more than $13 trillion. Some people blame NAFTA for our illegal immigration problem with Mexico. Illegal immigration is indeed a serious problem. But NAFTA is not the culprit.
Since the passage of NAFTA in 1994, Mexico's economy has quadrupled - 600,000 new jobs were added in the last year alone. Average Mexican wages have risen from $2,000 in 1994 to more than $7,000 today. Free trade boosts: - Economic growth
- Job creation
- And income.
It gives people a reason not to emigrate. People are more likely to emigrate when they have no economic prospects at home. Does Free Trade Hurt U.S. Manufacturing? Others will argue that free trade has hurt America's manufacturing base. And, indeed, 3.3 million manufacturing jobs have been lost over the past 10 years. But, over the same period, 11 million new service jobs have sprung up. I realize this is small consolation if you work in manufacturing. However, most free trade pacts ensure that displaced workers get retrained for higher-paying work. Still not convinced that foreign trade is a good thing? Take a look at history before voting for a representative promising protectionist legislation. How Free Markets & Foreign Trade Work During the Great Depression, unemployment in the United States hit a high of 25%. One of the many foolish steps the federal government took to "save" American jobs was to create international trade restrictions. Big mistake. Predictably, other countries retaliated, blocking the import of American goods. The net result? World trade in 1933 was only one-third of what it was in 1929, making everybody poorer. The harsh truth is that free markets cause economic dislocation. This is not due to foreign trade alone, of course. The automobile industry destroyed jobs for people who made saddles, carriages and horseshoes. The advent of personal computers sent typewriter manufacturers into bankruptcy. Some people lost. Most of us gained. That's how free markets work. Incidentally, Americans who are clamoring for trade barriers against foreign goods right now are choosing a particularly bad moment: - The U.S. economy is teetering on recession, or perhaps is already in one.
- Meanwhile, Latin America is booming. So are parts of Eastern Europe.
- And India and China's economy will be engines of world growth for decades to come.
America Needs Global Emerging Markets We need these new emerging markets to buy American goods. If they were to retaliate against new protectionist measures, it could hurt us a lot more than them. Again, I'm not arguing that some U.S. workers aren't on the losing end of free trade. (I understand completely, for example, why Big Labor is opposed to free markets.) But the vast majority of us are winners. If you care about the health of the U.S. economy - and the value of your investment portfolio - you should support free trade, not oppose it. Good investing, Alex Today's Investment U Crib Sheet - In Investment U Issue #738, Blue Chip Stock: Here's A Stock that Keeps On Winning, No Matter What, we looked at the world's biggest food and beverage company. It maintains operations and books sales in nearly every corner of the globe. Talk about embracing foreign trade! As long as people need to eat, this company will thrive.
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