Senator Charles Grassley of Iowa opened a hearing on the U.S.-Panama free trade agreement on Thursday with remarks supportive of the agreement and free trade in general.
First of all, let me begin by stating that I support the trade agreement with Panama. With a population density of 109 people per square mile – very close to the population density of the U.S. at 85 people per square mile – Panama presents no threat to our economy whatsoever. However, it’s not clear to me why we want to modify the terms of our existing trade arrangements with Panama, since the U.S. already enjoys a significant trade surplus with Panama – $2.3 billion in 2006, including a trade surplus in manufactured goods. But it’s Grassley’s defense of trade liberalization in general and his support of free trade with South Korea – making no distinction between the extreme population density found there versus the low population density of countries like Panama and Colombia – that concerns me.
I support the timely implementation of this trade agreement, which is long overdue. Its implementation has been sidetracked by various issues. But now that the Finance Committee is taking the first step to advance a positive agenda of trade liberalization under a new Administration, I want to take a moment to address the critics who would rather we not implement any of our pending trade agreements with Panama, Colombia, and South Korea.
Grassley begins with a defense of trade in general:
The chief argument I’ve heard is that given the magnitude of our global trade deficit, the last thing we should do is implement new trade agreements. I’ve even heard that argument from some of my colleagues in the Senate. The problem is, that argument is based on a false premise. It suggests that trade agreements translate into trade deficits. I dispute that.
I agree. There’s nothing wrong with trade in general or any specific trade agreement that’s structured properly.
He defends trade with Central America, excluding Mexico from the data for obvious reasons, and then addresses trade with Mexico separately:
Before NAFTA, over 51 percent of imports from Mexico entered the United States duty-free, and the average tariff on the remaining imports was about 4.2 percent, for an overall average tariff rate of just over 2 percent.
Thank you, Grassley, for illustrating how powerful tariffs can be in maintaining a balance of trade! Looking at Grassley’s own data from the opposite perspective, 49% of Mexico’s exports were subject to tariffs prior to NAFTA, and half of those were 4.2% or higher – some significantly higher. Will American companies shift their manufacturing across the border to gain a 4% or a 10% price advantage? Most of the companies I know would move their operations to hell for that kind of profit improvement. We eliminated the tariffs and, as many predicted, we went from a trade surplus with Mexico to a huge trade deficit, much of which is due to manufactured goods and not just oil.
Grassley goes on:
In this time of economic downturn and uncertainty, we can ill afford to base our trade policies on false premises. Trade is more complicated than that, and the benefits of expanding trade are too important—for both us and our trading partners.
Indeed trade is complicated and cannot be based on false premises. And there are just as many false premises out there about free trade as there are about protectionism. They are two extreme ends of the spectrum of trade policies and each in varying degrees has its place. Let’s understand what makes free trade successful in some instances and an abysmal failure in others. Everyone involved in crafting trade policy needs to understand the dominant role of population density in driving trade imbalances and why unfettered free trade becomes such a dangerous trade policy when applied to badly overpopulated nations.
“We can ill afford to base our trade policy on false premises.” I hope that Grassley remembers those words when he turns his attention to the free trade agreement with South Korea. And perhaps its time to review all of our trade agreements to determine if corrections need to made for false premises upon which those agreements were based.