Free Markets Make Trade Deficits Disappear

July 8, 2011
It's time for policymakers to boost our exports through free trade agreements.

U.S. policymakers who want to boost prospects for long-term economic growth need look no further than enhancing manufacturers' abilities to export. A free trade agreement (FTA) with India would make a major contribution to that effort.

If manufacturing is the wind at the economy's back right now, then exports of goods have been one of the primary sources of that wind. During 2010, American manufacturers exported $1.3 trillion in products. In particular, transportation equipment, computer and electronics, chemicals, and machinery have been especially popular abroad in that span of time.

During the global recovery, everyone -- Europeans, Asians, Latin Americans and, of course, Canadians -- seems to have had a need for high-quality American products.

This is very good news indeed. As economist Joel Popkin once observed, "Exports earn foreign currency, and foreign-currency earnings support jobs and allow the United States to purchase foreign-made imports."

To that end the International Trade Administration estimates that one in five manufacturing jobs is tied to exports of manufactured products, and for each of those manufacturing jobs there is also 1.3 non-manufacturing jobs tied to manufacture exports.

It is in the best interests of the United States for policymakers to take steps to leverage this multiplier effect -- including finding new opportunities to boost our exports through free trade agreements. According to the National Association of Manufacturers, FTAs account for almost half of our manufactured exports. In fact, over the past few years we have averaged $25 billion in annual trade surpluses with our FTA partners, while averaging over $400 billion in annual trade deficits with the rest of the world. That's because this country's barriers to trade in manufactured goods are far lower than other countries', especially those in critical emerging markets. Our tariffs on manufactured goods, for example, average less than 2%, and 70% of all goods enter this country duty-free. So when we negotiate free trade agreements, it almost always accrues to the benefit of American manufacturers.

Just as important, more than 95% of the world's population lives outside the United States -- and India accounts for 18% of that. In fact, within 15 years India will surpass China as the most populous country on the planet. Hence, the benefits of molding a trade agreement with that vast, diverse, rapidly developing nation are clear.

U.S. exports to India have increased in the past decade. However, China still exports almost twice as much to India as the United States does, and the European Union (EU) exports even more. In fact, last year the United States exported more goods to Belgium and Switzerland (combined population: less than 20 million) than we did to India (population: 1.22 billion). Most telling of all, in 2010 India shipped more manufactured goods to us than we did to them. Something's wrong with this picture.

Recently, the Manufacturers Alliance/MAPI published a paper by trade expert Ernie Preeg that makes a strong case for moving forward with a U.S.-India FTA. While in recent years the politics in Washington haven't been conducive to such trade pacts, Dr. Preeg observes that the climate is changing. But, he says, the window of opportunity is closing. The EU, which already has a sizable share of India's imports, is close to concluding its own trade agreement with that country. India already has approved trade agreements with Singapore, South Korea, Japan and Malaysia, and is in the process of negotiating with Canada, Australia, Thailand and Indonesia.

Considering that such agreements typically improve trade between countries, the United States stands to lose even more business in India should others develop formal trade relations with India while the United States stands on the sidelines. Alternatively, if we initiate the process to formalize trade relations with India, this country can expect more exports and ultimately more jobs -- both in manufacturing and in sectors that service manufacturing -- in the years to come.

Stephen Gold is president and CEO of the Manufacturers Alliance/MAPI.

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