ECONOMIC ANALYSIS: Think before demonizing free-trade agreements

March 7, 2005

E c o n o m i s t s approach the issue of free trade with something resembling religious zeal. Outside of a few high-visibility defectors, such as CNN's Lou Dobbs and columnist Paul Craig Roberts, we've found that the pros of liberalized trade between nations heavily outweigh the cons.

That's hardly the case in the general populace. The Indiana Senate's recent approval of a meaningless but symbolic call on Congress for a moratorium on free-trade agreements with other countries is yet another symptom of what we consider to be a depressing fact of life. Namely, that slamming trade in general, and competition from imported goods in particular, continues to be a sure-fire applause line across the state as it is through much of the country.

The facts that are mustered to support this position too often go unchallenged.

We should never make the mistake of accepting the idea that we are worse off today, economically, than we used to be. Despite the recent recession and the job uncertainty it has created for some, real disposable personal income on a per-capita basis is roughly double what it was in 1967 and four times higher than it was in 1940.

There has been a tremendous increase in trade "openness" in the U.S. economy and throughout the world. Trade used to account for about 11 percent of the national economy in 1970, but it is about 25 percent of the economy today.

The increase in trade and in prosperity is no coincidence. Countries that trade more are richer. Periods of history that have more open trade are better economic times. Times in our history when trade has been restricted have been very bad times.

We do not make trade decisions in a vacuum. Indiana businesses compete abroad with regions such as the Pacific Rim and the European Union that have made sweeping changes in their trade rules. NAFTA and the other FTAs are a reflection of that reality.

There has been an eagerness by some to seize every piece of bad news about the Indiana economy and say it is due to NAFTA. Many have stated in print that we "know" that NAFTA has destroyed American jobs.

But they do not explain this: Since NAFTA was enacted, the U.S. economy has created 24 million net new jobs. So if we are going to talk about NAFTA and jobs, we need to look at both sides of the balance sheet.

But in all honesty, these free trade agreements aren't just about jobs. After all, it is the growth in the macro-economy that creates jobs in our economy, and trade agreements are only part of that.

What the FTAs are doing is forcing our economy to be more efficient. That's been good for consumers, especially low-income families, because they pay much lower prices for their basic needs. That's been good for companies and their employees here who have seen their marketplace grow and their access to investment capital expand.

But there's no question its been bad for some companies/employees who have lost market share or gone out of business due to competition from elsewhere.

That's an important problem and one that all of us in Indiana should expect our leaders to address through worker retraining and re-investment. But if we step back from our commitment to more open trade, we hold the economy hostage to the most inefficient sectors, making the economy a less attractive place to invest, and ultimately shrinking the pie for everyone.

Barkey is an economist and director of economic and policy studies at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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