Kansas Business Review Abstracts |
Vol.20, No.2, Winter 1996-97 |
Robert B. Catlett, Assistant Professor of Economics, Emporia State University.
Forecasting economic activity is challenging, especially in southeast Kansas,
where historical trends are neither smooth nor continuous. Overall, it appears
as though the nonfarm sector of the area's economy is in the process of a broad-based
expansion, with the region's largest sectors having a significant impact on
the course the economy is charting. The only industries which have unusually
rapid growth rates are small in nature and have faced significant losses in
the past. If the modest expansion which began recently is to continue beyond
the near term, the manufacturing and service sectors would seem to play a pivotal
role. The contribution of other sectors which are expanding puts the region
in a position to experience accelerating growth and momentum.
Let me begin by stating my bias: I am a free trader. If you listen to
the popular media, or some of our presidential candidates, you know that being
a free trader has not been a popular position lately. History has been a much
kinder judge of the benefits of free trade, but the mis-impression has been
partly our fault. Those of us who believe in free trade need to make our case
better because the facts are on our side. Unfortunately, rhetoric is often much
louder than facts.
First, I think it is important to define what it means to be for "free trade."
Put simply, I believe that as we reduce barriers to trade, more jobs will be
created. Higher-paying jobs will replace lower-paying jobs, and the standard
of living for all Americans will rise. Free trade rewards the most efficient
society, the society with the most advanced technology, and the society with
the highest skilled and educated workforce; that is why the United States is
best positioned to benefit from free trade.
It is also important to say what free traders do not stand for: we do not advocate
entering into trade agreements that are unfair to the United States. We must
demand "fair" trade in order to have "free" trade. Once we have an agreement
we consider fair, it must be vigorously enforced. Too often we enter into sound
trade agreements only to see other countries default on their responsibilities
and not give the U.S. access to their markets as they promised. This situation
is unacceptable and undermines the support of Americans for these agreements.
We need some muscle behind them and some resolve and determination to make them
work as intended. The question is: How do we do this? Prior to the NAFTA [North
American Free Trade Agreement] and the World Trade Organization [WTO], we relied
mostly on unilateral measures to enforce agreements. The so-called "section
301" authority allows the U.S. to impose trade sanctions on countries that violate
agreements or raise unfair trade barriers. Scholars have debated the usefulness
of section 301, but there is no doubt that countries have changed their behavior
under the threat of a 301 action.
Now we have multilateral organizations to resolve trade disputes. If the U.S.
feels that another country has violated the NAFTA or the GATT [General Agreement
on Tariffs and Trade] it can take the case to a panel of judges; if we win we
get relief from the unfair trade practice. Some can argue about the effectiveness
or fairness of these processes--I, for one, have some problems with the NAFTA
Chapter 19 procedures--but this is clearly a major development in world trade.
A dispute between two countries can be decided by an independent body, with
both countries willing to live with the decision.
I understand that this system raises concerns that the U.S. is losing some of
its sovereignty to these trade organizations, but this new way of resolving
disputes should have a tremendously positive impact on U.S. trade; therefore,
it seems in our best interest. Let's look at some facts. Before the WTO the
U.S. had to use the GATT dispute resolution process. This process encouraged
countries to work out their disputes; however, if negotiations failed, a panel
would issue a decision. The U.S. brought 28 cases to the panel and won 25 of
them, or 89 percent. On the other hand, other countries brought actions against
the U.S. 26 times, and the U.S. lost 14 of these, or 54 percent, so we won more
than we lost. The problem was that the GATT had no teeth and nothing required
countries to comply with the panel decision.
The WTO changes all of that. Now, when the U.S. wins a decision, the other country
will be forced to negotiate with us or face sanctions: we finally have a dispute
process mechanism which requires our trading partners to live up to their side
of the bargain. It is important to note that the WTO will never require the
U.S. to change its own laws; our sovereignty is not in jeopardy. We can always
decide to pay compensation instead of changing a law found to be unfair, and
we can always choose to drop out of the WTO, although I believe it is in our
best interest to participate. These multilateral trade organizations will certainly
play an increasing role in dispute settlement in the future: they are the most
effective way to enforce the agreements with our foreign trading partners.
So being a free trader to me means entering into fair agreements and setting
up a system to enforce those agreements. But it also means recognizing that
some industries, and people, can be hurt by these policies: there are winners
and losers. Although good, high-paying jobs are created by free trade, others
are lost, primarily to parts of the world where labor is cheaper or environmental
standards are lower. That is why we should take appropriate measures to soften
the blow of free trade on these industries. The NAFTA implementing legislation,
for example, provides for job training and placement for those who lose their
job as a result of the NAFTA. I would advocate having similar provisions in
future trade agreements.
A multitude of studies by economists attribute hundreds of thousands of high-paying
jobs to trade, so why is free trade such an unpopular position to take? A lot
of it has to do with how trade is portrayed in the popular media. International
trade is a very complex issue--every country in the world has its own trade
laws. Trade is impacted by international treaties, multinational agreements,
and by huge world trade organizations. Jobs are created, jobs are lost, and
jobs are moved from one country to another every day because of trade policies.
The media over-simplify the issue and try to label people as heroes or villains.
Those companies that have operations outside of the U.S. are vilified; consumers
who buy foreign-made products are labeled anti-American. The so-called "heroes"
are all-too-often people who want to build a wall around America--a wall to
protect all U.S. industry, whether or not it hurts consumers or stifles innovation.
They seek to eliminate the trade deficit, which they believe is the source of
all that is wrong with the U.S. employment situation, and would have us believe
that our massive trade deficit results in the loss of good-paying jobs and reduces
our standard of living. But this name calling misses the point. Look at the
numbers! During the 1980s, when the trade deficit was at its peak, relative
to the Gross Domestic product, income increased significantly for the average
American family. Further more, the year of our last trade surplus was 1975.
That year our unemployment rate was as high as 8.5 percent. In 1995, the U.S.
ran one of its largest trade deficits ever--$111 billion--but the unemployment
rate was about five percent.
The manufacturing sector tells a similar story. According to the U.S. Bureau
of Labor Statistics and the U.S. Department of Commerce, the trade deficit has
varied widely over the past 20 years, yet manufacturing jobs have remained fairly
constant. In fact, manufacturing as a percentage of the economy is about the
same as it was in 1967: 21 percent (U.S. Department of Commerce). Furthermore,
employment in the manufacturing sector increased by 100,000 in 1995, this despite
the $111 billion trade deficit. Obviously, I'm not arguing that trade deficits
are good for America; however, I do believe that they have less effect on employment
than the media portrays. In fact, it may have very little effect at all--at
least, that's what the numbers seem to indicate.
So what exactly does the U.S. trade deficit mean? Robert Samuelson, writing
in the Washington Post recently, has a plausible theory.1 He argues that our
trade deficit is fueled in part by the need for dollars by foreign countries.
These countries want dollars to replace weak domestic currency and to trade
in the world market. In order to get these dollars they are willing to sell
products to the U.S. at a lower price. This is a win for the American consumer.
Americans are able to buy more goods at a lower price and our standard of living
is increased.
It is easy to focus on jobs, and not the consumer, when debating the merits
of free trade. Even then we seem to focus on job losses, not job gains and pay
gains. The protectionists rarely mention the consumer's interest in it all,
yet we are all consumers and the consumer is the reason we trade in the first
place. American consumers sometimes want goods made elsewhere, because they
are cheaper, better made, or because you cannot get them here. For whatever
reason, that is why we trade--we want things made in other countries. And that
is one of the reasons why the U.S. runs a trade deficit--American consumers
have the desire, and the money, to buy these foreign-made goods. When consumers
make individual choices to purchase foreign goods they do not see this as negative
because it contributes to the trade deficit. They see it as a benefit.
The conservative Heritage Foundation in Washington offers a useful example.
Suppose I go to the supermarket and buy $150.00 worth of groceries. A protectionist
would say that the grocer has a trade surplus of $150.00 while I have a trade
deficit of $150.00. Yet I would not see it that way at all; indeed, I spent
$150.00 but I received $150.00 worth of groceries. The transaction was mutually
beneficial. Protectionists do not see it that way, however; they want to deny
American consumers the right to enter into similar transactions. They want to
stop so-called "cheaply-made foreign goods" from coming into the country in
order to eliminate the trade deficit. Such a policy would be very harmful for
consumers.
Tariffs already cost American consumers hundreds of millions of dollars every
year. This is a tax imposed by the federal government on goods coming into the
country to protect domestic industries, but it is very costly to individuals
and the economy as a whole. Increasing barriers, as suggested by some, would
only add to the cost of these goods and further harm the American consumer.
Fortunately for American consumers and workers the protectionist view will not
prevail in the long run, because it is not a good policy. Technology has made
the world a smaller place; American workers produce goods sold all over the
globe. It is in our best interest to lower trade barriers worldwide and to open
markets for our goods.
I will cite one example of an industry that is dependent on foreign markets
for its future prosperity. It is one that is vital to the economy of Kansas
as well as to my state of Iowa: agriculture. In the United States we produce
more agricultural commodities than we consume, so we must sell this surplus
overseas. In Iowa we export about 40 percent of our production, and I suspect
it may be even higher in Kansas.
The U.S. Department of Agriculture projects that by the year 2000 exports will
account for 31 percent of farm income, compared to 13 percent for the rest of
the economy. How many farmers can give up 31 percent of their income and still
survive? So market access will become increasingly important in the future.
Traditionally, agriculture has been one of the most protected industries. The
Uruguay Round of the GATT was really the first substantive negotiation to open
markets to agricultural products. We need to continue this trend, in agriculture
and other industries. But the World Trade Organization must evolve beyond the
issues of tariffs and quotas to ensure market access. Future rounds of negotiations
will focus on trade restraints that are less obvious but equally important.
Here are a few of the issues I feel that the WTO will need to focus on as we
enter the new century. The first issue is what we call anti-competitive practices,
or ACPs. Many countries are able to restrain trade through business practices
or systems. One example of this is the Japanese distribution system for photographic
products, such as film. As you may know, the United States has taken a case
to the WTO on behalf of Kodak. The case alleges that the distribution system
itself keeps U.S.-made film out of the Japanese market.
Another example is when nations band together into a cartel to control the supply
of a product. European and Asian steel manufacturers have recently joined forces
to the detriment of U.S. steel exporters. Finally, many countries have regulatory
systems that act as trade barriers. For instance, the European Union's (EU)
eco-labeling system has the effect of barring many U.S. products from their
market that pose no threat to the environment.
The WTO must address all of these anti-competitive practices if it is to have
credibility as a free-trade organization, and it must also begin to look at
state trading enterprises, or STEs. These are state-run organizations that tightly
control the exports or imports of a given product. This is the opposite of free
trading. The New Zealand and Canadian wheat boards are examples of STEs. Also,
China is able to keep a lot of our agricultural products out of their vast market
through the use of state trading enterprises; therefore, future negotiations
must focus on how these organizations work and their adverse effect on trade.
Finally, a significant issue for agricultural trade will be the interpretation
and enforcement of the sanitary/phytosanitary provisions of the Uruguay Round,
over which the U.S. currently has two disputes with the EU. First, we have asked
for a WTO decision on the EU's refusal to accept beef treated with growth hormones.
There is no scientific basis for keeping this beef out of their market as it
poses no environmental or health threat. It is simply an excuse to protect their
local farmers from competition.
The second issue is genetically-altered corn. The European Union will be making
a decision in November on whether to accept Bt corn. Again, there is no scientific
basis to keep this corn out of their market, so we hope the EU chooses to avoid
another trade dispute with the United States.
On all of these issues the WTO will play a vital role. Through the WTO working
groups, the member nations can work to eliminate these barriers to trade. If
a particular country still insists on using these unfair practices it will be
subject to a WTO decision and, ultimately, retaliation. These new rules, enforced
by an independent body, will put all nations on an equal playing field in the
global economy.
We have come a long way in promoting free trade worldwide. We have entered into
agreements that will reduce tariffs on most products in all industries. We have
opened new markets for U.S. products. We have established independent systems
to resolve trade disputes between countries, but we still have a long way to
go. Many countries still use unfair trade practices to protect their domestic
industries, and many foreign markets are still closed to U.S. products; therefore,
we must continue to negotiate new trade agreements and expand existing agreements,
such a the GATT and the NAFTA, to other nations.
The President and Congress will take a serious look at accepting Chile into
the NAFTA and China into the WTO. Both will be reasonable steps to promote free
trade in this hemisphere and worldwide. The real question is whether the U.S.
is ready to lead in this endeavor. In the last few years the protectionists'
voices were the loudest, and their message was simple and accepted by many Americans.
When I talk to leaders of foreign nations I find that they fear that the U.S.
has lost its appetite for free trade. They fear that the U.S. will not play
a lead role in expanding free trade around the world. So I look on my role in
the next Congress, as Chairman of the International Trade Subcommittee, as being
a spokesman for free trade. We need to get our message out to the American people,
that free trade is nothing to fear; instead, it is everything to hope for. It
benefits American businesses, workers, and consumers. As I said earlier, the
facts are on our side. We just need to articulate them in a way that will help
the American people appreciate the great opportunities that come their way via
free trade.
Notes 1. Robert Samuelson,
"Junk Journalism 101," Washington Post, 18 Sept. 1996, p. A19.
Dr. Mary Lowe Good, Under Secretary for Technology, U.S. Department of Commerce,
was the lunchtime speaker at the 20th Annual Economic Outlook Conference, University
of Kansas, October 25, 1995. Here are excerpts from her speech.
It is a pleasure for me to be here in the great state of Kansas and to share
with you some of my views about technology and the economy and what directions
Federal and state government policies might take to ensure sustained economic
growth on both a national and regional level.
With the end of the Cold War, economic growth has moved to the forefront of
the national agenda. Economic revitalization is also at the top of state agendas,
as the states work to fill the void left by declines in traditional manufacturing
and agriculture that were once major sources of jobs. As we look to the future,
we must ask ourselves, what will fuel our national and state economies into
the 21st century? I commend the University of Kansas for bringing together annually
the state's economic development, business, educational, and political leaders
to ponder this critically important question.
Of course, the answer to this question seems to have become increasingly complex
over the past decade or so. That is because the tools with which we build modern
economies, and the sources of economic growth--capital, labor, and technology--are
all increasingly globalized.
Investment capital flows around the world daily in search of the greatest returns.
Huge amounts of money can be transferred across national borders with the push
of a button or a click of a mouse. Secretary Reich calls this "electronic capitalism."
Labor is becoming globalized. Half of the one million people working in the
chemical industry in the United States work for foreign companies. U.S. firms
use computer programmers in India and Russia. By day, engineers in India design
computer chips for American firms and, by night, beam those designs back to
the United States by satellite. The Washington Post recently carried a story
about a hospital in Virginia transmitting a doctor's hand-scrawled notes to
a company in India. There, a woman with a college degree transcribed the notes
and electronically returned them to the hospital the same day. It has been projected
that the United States will have more than 80 million information workers at
the turn of the century. And these jobs may become vulnerable to a global pool
of labor.
But it is technology that contributes most to economic growth; even the economists
agree. Leading economists estimate that technical progress has accounted for
as much as one half of economic growth in the United States over the past 50
years. Capital and labor account for the other 50 percent, but technology improves
the productivity of both and, thus, has accounted for 80 percent of total factor
productivity growth in the United States.
At the firm level, the performance of individual companies is strongly linked
to their use of technology. A recent Department of Commerce analysis shows that
the use of advanced manufacturing technologies enhances manufacturing in virtually
every important performance category. Firms that use advance technologies are
more productive and profitable, pay higher wages, offer more secure jobs, and
increase employment more rapidly than firms that do not use advanced technologies.
In fact, in the study, plants that used eight or more advanced technologies
grew 14.4 percent more than plants that used none, and production worker wages
were more than 14 percent higher.
While the role of technology in our economy, and the desire to keep it in the
country, increases, technology---in the form of products, know-how, intellectual
property, people, and companies--is being traded, transferred, hired, bought,
and sold on a global basis. In addition to global trade in technology and know-how,
technology infrastructure is increasingly globalized, as nations around the
world recognize the strong linkage between indigenous technology assets and
economic growth.
Of course, support for research and technology development remains strong in
the advanced industrial nations such as Japan and countries in the European
Union. However, new players are moving into the high-tech arena. The locus of
world economic growth is shifting dramatically to places such as Argentina,
Brazil, and Mexico in the West, and Indonesia, South Korea, and China in the
East. Growth rates in these countries are expected to be phenomenal and they
are soaring now: Argentina 7.4 percent, Indonesia 7.3 percent, Malaysia 8.8
percent, South Korea 8.4 percent, Singapore 10.2 percent, and China 11.5 percent.
These countries view their participation in world markets for high-tech products
as a matter of national pride and their ticket to a rising standard of living.
And, many have set their sights on joining the ranks of the world's technological
leaders.
Many of these countries have policies, some quite explicit, designed to acquire
technology from the advanced industrial nations; for example, by demanding transfers
of technology in exchange for market access, by hosting visiting experts, and
by establishing investment laws and guidelines that encourage technology inflows.
In addition, these countries are emphasizing the development of indigenous technological
capabilities--increasing R & D investments, establishing research institutes
and key technology programs, forming government-industry partnerships, boosting
technical manpower development programs, and planning for manufacturing modernization
and information superhighways.
We can already see significant results from economic reforms as emerging industrial
nations drive for global markets. For example, the number of poor in East Asia
is estimated to have fallen from 400 million in 1970, to 180 million in 1990.
China has lifted an estimated 175 million people out of poverty; Indonesia started
the 1970s with more than half its people in poverty, but by 1990 the number
had dropped to 15 percent; and South Korea and Malaysia ended the 1980s with
fewer than 5 percent of their people in poverty.
Internationalization, market orientation, the development of financial markets,
and the pursuit of technology have all contributed to the economic growth and
wealth creation that lifted the boats in these nations. These countries promise
to both expand and crowd world markets--creating new global opportunities, but
also new global challenges.
There is another aspect of globalization that is germane to our discussions
today. At one time, it was not too difficult to identify an American manufacturing
company. Even the very largest of them operated with a domestic orientation.
This was, perhaps, an era best summed up in the phrase "What's good for GM,
is good for America." But things have changed. Today major manufacturers are
global multinationals and they behave that way--manufacturing worldwide, investing
and locating production facilities where they find the best resources and returns,
and pursuing global technology strategies.
I raise this issue because of manufacturing's role in wealth creation, as the
source of global exports, as the core of our technology industry, and as the
linchpin in the process by which our R&D investments are transformed into economic
returns. For all of these reasons, manufacturing matters much to the United
States and, thus, we must create an environment that attracts these global producers
and fosters domestic manufacturing capabilities.
Now given technology's role in the economy, and given the globalization of capital,
labor, and technology, what can government do to attract the engines of growth
to our shores, and to help domestically-based businesses grow and compete?
This is not just a question for the Federal government; states are in this global
game too. Take South Carolina, for example. The state has one of the nation's
best technical education systems, and a good business climate. And while the
state has lost 40,000 jobs to global competition in the textile industry, the
state has gained 110,000 jobs from foreign direct investment in high value-added
manufacturing. Overall, the state is benefitting from the globalization of the
economy by building assets that attract businesses and help them grow.
Assets that help us achieve our economic objectives include a strong science
and technology base, a modern infrastructure, a skilled workforce, and a healthy
business climate. An effective technology-based economic growth strategy must
encompass a broad and balanced approach that invests in and cultivates these
competitive assets. And, clearly, both national and state-level policies play
a key role. I'd like to talk about these policies, the "division of labor" so
to speak between the Federal government and state-level institutions, and areas
that are ripe for partnership between the two.
First, and foremost, government must create a business environment that attracts
and retains capital, fosters innovation, and enables private sector competitiveness.
Capital and regulatory issues are key here, and the Federal government plays
a very large role. I think this is one area of policy where Republicans and
Democrats can increasingly find common ground.
However, state laws and regulations also play a role in shaping the business
climate. So keep in mind what a recent report from the Georgetown Center for
Strategic and International Studies said "...deficit reduction, tax and regulatory
reform--key conditions in creating an investment-friendly environment--will
almost certainly free up private capital for investment in innovation. In a
global economy, however, there are few guarantees that the capital will be invested
in the United States--and plenty of incentives to invest elsewhere."
At one time, Kansas may have been competing against neighboring states or those
on the coast for business investments. Even if Kansas lost the competition,
it was likely that the investment stayed somewhere in the country. Today, however,
Kansas is in a global competition for these engines of growth, so states, too,
must work to create fertile ground to attract capital and keep it enriching
our economy.
Second, we must maintain our world-class science and technology infrastructure.
And both the federal government and state-level institutions play a role here.
The Federal government's strengths lie in the support of basic research, mission-driven
R&D, and addressing major national technology issues. The Federal government
also plays a role in the development of precompetitive emerging and enabling
technologies with large economic potential. These are the mid-term technology
projects that carry with them a level of risk and cost that exceeds what the
private sector appears able or willing to assume. The Federal government is
encouraging the private sector to pursue these technologies: through cost-shared
technology development programs such as the Advanced Technology Program, and
through public-private partnerships, such as the Partnership for a New Generation
of Vehicles aimed at developing technologies for the three-times fuel efficient
car. Programs such as these help replenish our pools of new technology from
which we must draw in the future to remain competitive.
In technology, states have particular strengths as well. States have the capacity
and proximity for close involvement with entrepreneurs and young companies,
small and medium-sized manufacturers, regional industrial coalitions, and local
boards and councils that nurture entrepreneurship and technological leadership
at the grass roots. And states are increasingly looking to technology and technology-based
economic development strategies to strengthen their economies and job bases.
All told, states are now spending $385 million on cooperative technology programs.
These state-level programs play an important role in our nation's system of
innovation. And, at a time of tightening R&D budgets in the public, private,
and university sectors, it is ever more important to integrate the key pieces
of our national innovation system. This includes strengthening the linkages
and building new connections between Federal and state-level technology initiatives.
We have seen some very positive steps in this direction with the establishment
of some important linkages. States have strongly supported and played active
roles in programs such as the Technology Reinvestment Project. Some states have
also played key bridge-building roles, for example, between companies and Federal
laboratories, and small companies and the Small Business Innovation Research
Program.
Nevertheless, we believe that further strengthening the Federal-state technology
connection will better integrate our national innovation infrastructure and
allow all levels of government to achieve more than would be possible acting
alone.
To this end, the President's Science Advisor asked former Governors Celeste
and Thornburg, working with other industry and public interest groups, to recommend
ways of improving the state-federal science and technology relationship. Last
fall, they issued their final report with recommendations in four areas: