Viewpoint -- Free Trade Foes Take Aim at Wrong Target

July 21, 2008
Constraints on domestic energy production, not free trade agreements, are the root cause of the U.S. trade deficit.

Today's competitive political climate, compounded by an economic slowdown, has distilled a toxic cocktail for proponents of free trade. Regrettably, free trade agreements (FTAs), which have been negotiated by administrations of both political parties, are in the crosshairs of those who regard increased commerce as a threat to jobs and economic growth.

The arguments against FTAs carry a political punch because of their simplicity, and on the surface they appear to have some merit. During the current economic expansion, our country entered into FTAs with 10 countries. At the same time, our trade deficit grew from $424 billion in 2002 to $708 billion in 2007, a 67% increase in just five years. If the aim of FTAs is to open foreign markets for U.S. producers and encourage export growth, these trade deficits suggest a failed trade policy.

But this argument fails to distinguish between trade with our FTA partners and trade with the rest of the world. The fact is, FTAs are enabling American manufacturers to more effectively compete in markets abroad. The manufacturing trade deficit with our FTA partners has narrowed from $41 billion in 2002 to less than $27 billion in 2007, and has switched to an outright surplus of half a billion dollars through the first five months of 2008.

It is not our country's trade policies, but energy imports that are the primary cause of the rising trade deficit. Simply put, our country does not produce enough energy to meet the demands of our economy. As a result, the United States has become increasingly dependent on foreign sources of energy.

Since the first quarter of 2002, 93% of the increase in the trade deficit has been in petroleum products. At the beginning of the current economic expansion, less than one-fifth of our country's trade deficit was in petroleum products. By the first quarter of 2008, petroleum products accounted for more than half (55%) of the deficit. If you factor out petroleum, the U.S. trade deficit has narrowed by 44% since the end of 2004 as a share of GDP and now stands at its lowest level since 1999. This improvement has come from a more competitive dollar, solid economic growth abroad and better access to markets through FTAs.

Those who assail our country's trade policies as the cause of our widening trade deficit are taking aim at the wrong target. It is not free trade agreements, but constraints on domestic energy production that are the root cause.

There are two useful steps policymakers can take to help lower the U.S. trade deficit. First, there are currently three negotiated FTAs awaiting action on Capital Hill (Colombia, Korea and Panama). Passing these agreements will lower tariff barriers faced by U.S. manufacturers, expand exports and create good paying jobs for working Americans. Congress should approve these agreements this year.

Second, a comprehensive national energy policy is needed to increase domestic energy exploration and development as well as enhance energy efficiency and conservation. Inaction on these fronts will reduce U.S. export opportunities, increase our country's reliance on foreign sources of energy and widen the trade deficit.

The political season lends itself to sound bites and simplicity, unfortunately targeted too much this year on real contributors to our economic growth -- free trade agreements. In the interest of accuracy and action, candidates and politicians should focus their attention elsewhere. Those who devote themselves to blaming free trade agreements for America's woes should instead dedicate more of their energies to, well, energy.

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