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America Needs Both Free and Fair Trade

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America Needs Both Free and Fair Trade

July 19, 2017

The first round of North American Free Trade Agreement (NAFTA) renegotiations will begin on August 16th. NAFTA has been widely criticized as a killer of jobs and the bane of the U.S. manufacturing sector. But trade agreements have numerous advantages for the economy—if both sides play by the rules. 

Free trade allows individuals and nations to use their comparative advantage to maximize their value added to society. It creates a competitive marketplace of goods and ideas in which the best and most efficient products and innovations survive and grow. It increases competition, which forces firms to produce as efficiently as possible.

Free trade now leads to the United States importing manufactured goods from other countries, which gives consumers fatter wallets, because they can buy goods at lower prices than if they were produced in America.  Unfortunately, many U.S. trading partners are guilty of stealing our intellectual property (IP) which is unfair to American innovators.

A report released in April by the U.S. Trade Representative (USTR) explains how IP theft distorts markets and cheats American innovators.  Several nations such as China, Indonesia, and India are guilty of exorbitant numbers of counterfeit pharmaceuticals, both hard and digital copies of art and media, and other goods that are then shipped around the globe.

For example, Apple's IP is actively being threatened by Chinese counterfeiting of Apple branding.  More than 30 stores with a bright, bitten apple icon line the streets of the busy shopping districts of Shenzhen, China.  Only six of these stores are authorized by Apple—the remainder are fraudulent.

The imitation stores are selling fake Apple products under the guise of a reputable brand.  Unlike when you deliberately choose Walmart’s Fruit Spins over classic Fruit Loops, many of these sham stores and products could pass as the real thing to consumers.  These counterfeits pose serious threats to Apple’s reputation and robs the company of valuable income.

Countries such as Chile, Ukraine, and Pakistan remain on USTR’s watch list year after year, yet little is done about it.  The U.S. government repeatedly “urges” and “encourages” these countries to cease these illegal practices and respect IP.  One tricky obstacle the USTR recognizes is "the lack of adequate authority for customs officials to seize and destroy counterfeit and pirated goods at the border.”  Despite recognition of these issues, USTR has had trouble improving accountability.

Manhattan Institute senior fellow Diana Furchtgott-Roth has proposed some ways to increase accountability, including putting caps on the commercial activity of other countries in the United States.  America could sanction trade of goods that are likely our intellectual property.  Dialogues could be opened with foreign leaders regarding such indiscretions.  Watch list nations could be audited to check the quality of IP protection measures taken.

The United States needs to take a more aggressive stance towards IP rights violations. However, this does not imply that protectionism is necessary or helpful.

In June, Matthew Slaughter attempted to put to rest the argument that globalization causes domestic economic distress.  He cited data from the Bureau of Economic Analysis from 2004 to 2014 which shows that total employment at foreign affiliates of American multinational companies grew by several million, and employment at their American parent companies reflected the same positive growth.

The logic: large firms need workers with different skills and expertise. International jobs tend to be complements to, not substitutes for, domestic counterparts. Furthermore, globalization of customer bases tends to help the overall company grow, resulting in more U.S. hiring.

Between 2004 and 2014, according to Slaughter, value-added and capital investment grew faster among American parent companies than the average for the U.S. private sector, which implies that having a multinational base creates a competitive advantage.

For example, multinational manufacturing firms such as 3M have an advantage over domestically confined companies.  Multinationals have the unique ability to allow their American employees to use their knowledge to focus on tasks requiring higher skill or facilitate more meaningful work, while less stimulating jobs are delegated to workers in countries whose comparative advantage is cheaper labor.

As NAFTA is renegotiated, the fair trade versus free trade argument needs to stop.  Trade must be both fair and free in order to achieve economic efficiency and permit growth via multinational collaboration. 

Haley Skinner is a contributor to Economics21.

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