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The Cost of Free Trade

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Any renaissance of American manufacturing must begin by fundamentally reversing our trade policies—both in general and in particular toward China. Over the past two decades, leading U.S. manufacturers, both the venerable (like General Electric) and the new (like ), have offshored millions of jobs—by one recent estimate, 2.9 million—to China to take advantage of the cheap labor, generous state subsidies, and low currency valuation that are linchpins of China’s mercantilist development strategy. Other factors, including increasingly automated production, have also taken a toll on America’s manufacturing workforce, but it’s the mass exodus of American production to China and, more recently, the rise of indigenous, state-subsidized Chinese production that have decimated American industry and reduced the incomes of American workers.

The United States government did not have to stand idly by while the nation’s industrial base was disassembled. It could have preserved and promoted key industries and supply networks by creating favorable credit policies, tax incentives, local content rules, and tariffs to punish currency manipulation from countries like China. For that matter, the U.S. could have created more flexible trade rules when it helped to craft the World Trade Organization.

There was considerable support, particularly within the Democratic Party, for these kinds of policies—yet no such policy was ever put into place, for trade divides the Democrats more than any other issue. The division is peculiar: It splits Democratic presidents into two people, the candidate and the elected official.

In 2008, candidate Barack Obama, campaigning in Ohio, vowed: “I voted against CAFTA [the Central American Free Trade Agreement], never supported NAFTA [the North American Free Trade Agreement], and will not support NAFTA–style trade agreements in the future. While NAFTA gave broad rights to investors, it paid only lip service to the rights of labor and the importance of environmental protection.”

Now the Obama administration has won Congress’s support for trade deals with South Korea, Colombia, and Panama that are difficult to distinguish from CAFTA and NAFTA (though a provision in the Korean deal increases the number of American-assembled cars that can be sold there). In addition, the administration is hosting talks intended to promote a trans-Pacific partnership in trade with a variety of countries on both sides of the Pacific.

By reversing himself on trade, the president is following the example set by Bill Clinton. Clinton, too, sounded like a trade hawk in his 1992 campaign, in which he promised to crack down on unfair Japanese trade practices. By the end of his two terms, however, he was boasting of his record in passing NAFTA and legislation granting permanent normalized trade status to China.

In a January 2000 piece titled “Expanding Trade, Projecting Values: Why I’ll Fight to Make China’s Trade Status Permanent” that was published in The New Democrat, the newsletter of the Democratic Leadership Council, Clinton asserted that establishing normalized trade relations with China would boost American exports there and that increased trade would foster China’s democratization: “We want a prosperous China open to American exports; whose people have access to ideas and information; and that upholds the rule of law at home and plays by global rules of the road on everything from nuclear non–proliferation to human rights to trade. … It will open a growing market to American workers, farmers, and businesses. And more than any other step we can take right now, it will encourage China to choose reform, openness, and integration with the world.”

None of Clinton’s confident predictions have been borne out.

China remains a repressive authoritarian state engaged in dealings with abusive regimes around the world. In the first decade of the 21st century, the proportion of industrial production undertaken by state-controlled companies grew instead of shrinking. The flood of American exports to the China market never materialized. Instead, the flood of Chinese imports swelled. The U.S. trade deficit between 1976 and 2010 added up to more than $7 trillion; of that, more than 70 percent was accumulated after 2000. In 2006, just before the crash that began the Great Recession, the U.S. trade deficit had grown to 6 percent of U.S. gross domestic product (GDP). Between 1998 and 2008, the U.S. merchandise trade deficit with China alone rose 470 percent.

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