Friday, February 17, 2006

Is Free Trade Killing Michigan?

Even though this article isn't Michigan-specific, it relates to the current economic situation in Michigan and the reaction that some are having to the decline of the domestic auto industry.

Is free trade killing Detroit? The answer is simply no. This article explains why. To quote a few important lines:

After 2000, as the economy fell into recession, US exports fell. We estimate that more than 3.4 million manufacturing workers were producing goods for export in 2000; by 2003, this number had fallen below 2.7 million. All told, the export slump destroyed 742,000 US manufacturing jobs.

On the import side, though, the picture was very different. It isn't true that manufactured goods flooded into the U.S. after 2000. In fact, growth in manufactured imports was quite sluggish from 2000 to 2003. And as we will explain, this weakness in imports actually boosted manufacturing employment in 2003 by some 428,000 jobs.

Overall, then, trade accounted for a net loss of no more than 314,000 jobs (a reduction of 742,000 because of weak exports and an increase of 428,000 owing to weak imports), representing only 11% of the total manufacturing job loss of 2.85 million. The other 2.54 million jobs disappeared because of the economy's cyclical downturn, which dampened domestic demand for manufactured goods.

The important idea here is that international competition forces domestic industry to improve the product and reduce the price. If domestic companies are shielded from that competition by trade barriers, their products will fall farther and farther behind on the international market, ultimately greatly reducing the number of exports. Blocking trade will hurt us more in the long run.

Detroit will need to compete or die. No amount of protection will prevent that. Free trade raises the standard of living for both trading partners because of the benefits of international division of labor.

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