Examining Free Trades Cost

If we believe in the logic and goals of free trade, we have to arrive at a new model for it

If you’re a free-trader like me, the impression left by the recent 2004 U.S. trade report is hard to absorb. So, consider these facts:

  • The total 2004 U.S. trade deficit (goods and services) reached $617.7 billion, a record that tops the prior record — the 2003 deficit of $496.51 billion — by 24.4%. The 2004 deficit also is a rise in the deficit’s percentage of GDP, from 4.5% in 2003 to 5.3% in 2004.
  • Total exports of goods and services increased 12.3%, from $125.6 billion to $1.146 trillion. But, total imports of goods and services nearly doubled that rate by rising 16.28% from $246.9 billion to $1.764 trillion.
  • The manufacturing deficit rose 17.6%, from $469.45 billion in 2003 to $552.06 billion in 2004. Manufacturing exports actually rose in 2004 by 11.4% ($65.49 billion) to $623.44 billion. However, imports rose 14.42% ($148.1 billion) to $1.176 trillion.
  • The U.S. deficit in terms of Chinese goods increased 30.53%, from $124.1 billion to $162 billion. This rise of $37.9 billion is faster than the rate of increase for the overall U.S. goods deficit. While the U.S. exported $34.7 billion worth of goods to China (a $6.4 billion or 22.6% increase from 2003 to 2004), U.S. imports from China rose $44.3 billion (29.07%) to $196.7 billion.
  • Versus the European Union, the U.S. deficit of goods increased $8.85 billion (11.95%) in 2004. Exports rose $14 billion (12.4%), but imports rose $22.86 billion (12.2%.)
  • Even against Canada, the U.S. goods deficit rose $14.1 billion in 2004 (27.3%) to $65.77 billion.

Alone, these figures are not proof of economic weakness; and being a free-trader I must acknowledge our economy is strengthened by its endless choices and reasonable prices. But, there’s no looking past those numbers. They represent a serious problem for U.S. companies, and they indicate an ominous trend. Rising deficits force interest rates up, diminish the purchasing-power of every dollar, and threaten U.S. economic stability. As imports outpace exports, domestic wealth is being transferred, literally, elsewhere.

Think of “free trade” as a philosophy. It offers a powerful alternative to protectionism and socialism, but in a global economy with everyone claiming to be free-trade adherent we must have more than treaties to uphold those principles. The U.S. Business and Industry Council (www.usbusiness.org) argues that the pursuit and promotion of “free trade” is at the core of the problem. Over 20 years of seeking and installing free-trade agreements has stimulated domestic economic growth by containing inflation and developing new trading partners. But, for various reasons, the value we place on free-trade principles has not been taken up by our new trading partners. The abuses of free-trade by foreign companies and governments are too many to list.

It’s ironic that this situation is becoming so much worse even as other indicators reveal a manufacturing rebound. Demand is solid for raw materials and semi-finished goods, and once again these stocks are core elements of investors’ portfolios. It’s the sort of economy metalcasters and other manufacturers have been working to achieve for over a decade.

Now, while the outlook for manufacturing is strong, let’s remember the recent past: price shaving, rising capital costs, and increasing imports. It was not simply devotion to a principal that guided the best manufacturing organizations through this. They reorganized financially, invested effectively, and built solid relationships with customers. They adjusted in order to succeed.

We must do it again. If we believe in the logic and goals of free trade, we have to arrive at a new model for it before it’s entirely devalued as a principle.

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