Monday, November 14, 2005

Thank the Chinese for Cheap Shirts and Lower Interest Rates

The chorus of anti-free traders resonates across the U.S. with their tiresome mantra, “Fair trade, not free trade.” The term has been the rallying cry for groups as diverse as French farmers and U.S. steelmakers who seek protection from global competitors. To quote Adam Smith (1776):

"To expect, indeed, that the freedom of trade should ever be entirely restored … is as absurd as to expect that an Oceana or Utopia should ever be established … Not only the prejudices of the publick, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it." The Wealth of Nations, Book IV, Chapter II.

While some individuals and industries are certainly harmed by expansions in international trade, it is clear from my perspective that the gains from free trade far outweigh its costs. For example in the U.S., ccompetitively priced imports have kept consumer prices in-line and long-term interest rates, including mortgage rates low for more than a decade.

Between 1999 and 2005, the average price for a child’s shirt in the U.S. declined by almost ten percent, while inflation expanded at a pace less than 2.8 percent. During this period of time, imports of apparel from China grew by 194 percent with the U.S. apparel industry losing almost 285,000 jobs or almost 53 percent of its U.S. employment. However during this same period of time, apparel production in the U.S. increased by almost 20 percent, indicating that productivity was potentially the most important factor accounting for the job losses. At the same time, wage and salary growth in the apparel industry grew by 52.6 percent, or over 7 percent per year. Thus, imports from China, and brisk productivity growth, while reducing the number of apparel jobs, contributed to rapid increases in wages, and lower apparel prices even as U.S. apparel production rose significantly.

Furthermore, the Chinese have taken the dollars gained from the sale of their products to Americans and invested them in the U.S. bond market. The Chinese currently hold approximately $800 billion in U.S Treasury bonds. This has allowed U.S. consumers to benefit from low interest rates contributing to a robust U.S. housing market. Between 1999 and 2005, the U.S. trade deficit grew by 26.7 percent. During this same period of time, the 30-year mortgage rate declined by 1.1 percent. Thus, China and other trading partners have allowed U.S. residents to over-consume. Absent this lending by our trading partners, the U.S. homebuyer would by paying a much higher interest rate or he/she would continue to be renter In the U.S., anti-globalists claim that free trade has resulted in a reduction in our standard of living; an interesting assertion, but with no basis.


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