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: