Why America’s Partners Take Heart From Trade Deals

Congratulations to Congress on passing the three free trade agreements with Korea, Colombia and Panama last week. Not because they’re going to necessarily directly help U.K. companies, but because each of those FTAs are a long awaited confirmation to America’s trading partners that she is committed to free trade.

Open markets and removing barriers to trade are vital parts of economic growth. Trade means more choice, innovation and competition. It means lower prices for goods and services for consumers, manufacturers and processors. No-one can dispute that the U.S. is the world’s largest trader, or that it has the world’s most open market. But the three FTAs were ratified against a worrisome background — the Senate’s China currency bill, and the “Buy America” provisions in the draft American Jobs Act. It’s a confusing signal. It’d be naïve to pretend that the business environment in China isn’t challenging. Or that manufacturing hasn’t suffered in developed countries during the economic crisis. But protectionism begets protectionism, and the ideas being debated in Congress aren’t the right solution.

The U.K. is no stranger to a trade deficit. Ours is the second largest deficit in goods, after the U.S. And sadly the Government inherited the largest budget deficit in the G20. So we can speak with both authority and empathy.

The path we’ve chosen though relies on prosperity through open markets and thrift. We’re aiming to reduce our budget deficit to 1.5% by 2015, in part by growing our economy though increased exports and more investment, both domestically and from abroad. Given that 27% of the U.K.’s GDP comes from exports, and one in four U.K. jobs depends on business overseas, this outward looking approach should come as no great surprise.

Our plan for growth also relies on enhancing the U.K.’s competitiveness. We are reducing corporate tax to 23% by 2014, the lowest in the G20. We are investing in skills and in infrastructure, reducing the regulatory burden on companies, increasing lending to small businesses and streamlining our immigration system to attract entrepreneurs and business visas. I led a group of key Republican and Democrat House staffers to London this week to meet with people from both Government and business and hear more about the U.K. approach.

This is also why we’ve been long-standing supporters of the WTO Doha trade round and the free trade agreements that the EU has been negotiating with our trading partners. These agreements have already begun sewing benefits: the EU-Korea FTA implemented in July increased EU exports by over 17% in the first two months it had been in effect. Trade is an easy — and deficit-friendly — form of stimulus.

The US is in a good position to take full advantage of the three FTAs when the President signs them this Friday. Despite the rhetoric, the U.S. has the most productive manufacturing sector in the world — 45% higher than China’s in 2009. True, the number of manufacturing jobs has gone down. But that is in part because efficiency has gone up, paralleled by higher wages. Manufacturing workers in the U.S. also enjoy higher average compensation than their non-manufacturing counterparts: in 2009, the difference was more than $10,000. Foreign investors certainly recognize the value of the U.S. manufacturing sector. According to more figures from the Bureau of Economic Analysis, almost 40% of U.S. jobs created by foreign investment were in manufacturing, compared to manufacturing’s share of just over 10% of all jobs in the U.S. today.

Restrictions on government procurement are also misguided. Taxpayers benefit when government procurement is transparent, fair and competitive. Protection from competition costs families more in tax dollars. The U.K.’s experience with “Buy British” in the 1970s is an illustration of such restrictions’ ill effects. New laws required only British cars be purchased for government use. After the provisions were repealed, British car manufacturers struggled to return to competition in the global market. While intended as a boost for the British auto industry, Buy British did more harm than good in the long term.

We aren’t out of the economic doldrums just yet. Getting there will require continued transatlantic cooperation, as well as expansion into new markets in Asia and Latin America. Free trade, and holding back from protectionism, will be the engine that drives our economies forward.

This blog originally appeared in the Wall Street Journal 21 October 2011.