[Economic Report of the President (2008)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]

 
CHAPTER 3


The Causes and Consequences
of Export Growth

The rapid growth of U.S. exports has been one of the most important
economic developments of the past few years. In the 3 years from the
end of 2003 to the end of 2006, real exports grew at an annual average
rate of 8.3 percent, more than twice as fast as the overall U.S.
economy. This growth has provided clear benefits to the entrepreneurs,
owners, and workers of firms in export-oriented industries and, more
broadly, to the U.S. economy as a whole. This chapter identifies the
factors that have driven recent export growth and discusses several
longer-term trends that have lifted exports over time. More broadly,
the chapter also addresses the benefits that flow from open trade and
investment policies as well as some related challenges.
The key points of this chapter are:

 The United States is the world's largest exporter, with $1.5
trillion in goods and services exports in 2006. The United
States was the top exporter of services and second-largest
exporter of goods, behind only Germany.

 In recent years, factors that have likely contributed to the
growth in exports include rising foreign income, the
expansion of production in the United States, and changes in
exchange rates. One reflection of that growth is that
exports accounted for more than a third of U.S. economic
growth during 2006 and 2007.

 Over time, falling tariffs and transport and communication
costs have likely lowered the cost of many U.S. goods in
foreign markets, boosting demand for U.S. exports.

 Open trade and investment policies have increased access to
export markets. Increased investment across borders by U.S.
companies acilitates exports.

 Greater export opportunities give U.S. producers incentives
to innovate for a worldwide market. Increased innovation and
the competition that comes from trade liberalization help
raise the living standard of the average U.S. citizen.

 Nearly all economists agree that growth in the volume and
value of exports and imports increases the standard of
living for the average individual, but they also agree that
the gains from trade are not equally distributed and some
individuals bear costs. The Administration has proposed
policies to improve training and support to individuals
affected by trade disruption.

Economists often call attention to the benefits of trade that result
from importing goods and services, benefits that have been well-
documented in previous issues of the Economic Report of the President.
Building on that prior work, this chapter focuses on exporting and the
benefits that arise from exporting goods and services. Some of the
benefits are well known. Others, however, have come to be known more
recently as researchers have combined new data with trade theory to
provide a better understanding of international trade and international
transactions.

The Causes of Recent Export Growth


In 2006, the United States exported nearly $1.5 trillion worth of goods
and services. Nominal exports grew by 13 percent from 2005 to 2006,
while nominal gross domestic product (GDP) grew 6 percent; 2006 was the
third consecutive year in which nominal exports grew faster than the
economy as a whole. Chart 3-1, which displays nominal exports as a share
of nominal GDP, shows that such rapid export growth is impressive, but
also that it is not uncommon for growth in exports to outpace growth in
GDP. Exports have grown faster than the economy for much of the past
20 years. That trend was interrupted by the worldwide economic slowdown
in 2001 and 2002, but resumed in 2003.


From 2003 to 2006, the countries and regions contributing to our export
growth were also relatively dispersed. Chart 3-2 displays the average
annual growth rate of nominal exports to eight different regions. Export
growth was positive in each of these regions, and with the exception of
Japan, exports increased faster than nominal U.S. output. The fastest-
growing markets for U.S. exporters were India and China, where U.S.
exports grew at an average annual rate of nearly 27 and 25 percent,
respectively. These growth rates imply that exports to India more than
doubled and exports to China nearly doubled over this period. Export
growth to Eastern Europe and Africa also exceeded 20 percent per year.
America's export growth has occurred not only in traditional export
sectors, such as machinery, high-technology products, and agricultural
goods. America's services exports have been growing strongly as well,
especially private services such as education, finance, business
services, professional services, and technical services (Box 3-1).
Between 1997 and 2006, the nominal value of private services exports
increased by 70 percent, compared with 51 percent for goods exports.
Private services comprise 77 percent of U.S. private GDP, so expanding
services markets is important to enable continued export growth.


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Box 3-1: Trade in Services

Discussions of trade often focus on goods, but trade also involves a
wide variety of services such as banking and finance, insurance,
information management, medical, legal, tourism, and transportation
services. The United States is the world's largest exporter of
services, exporting more than $400 billion worth of services in
2006, almost double the amount exported by the United Kingdom, the
second largest exporter. The United States runs a trade surplus in
services, one indicator that it has a relative advantage over other
countries; in 2006, U.S. services exports exceeded imports by
nearly $80 billion. Still, services are not traded to the same
extent that goods are. Even though private services account for
77 percent of U.S. private GDP, they account for only 28 percent
of U.S. exports.

Services have some features that make them more complicated to
trade than goods. Most important, goods can be produced, stored,
shipped, and consumed at different points in time, but many services
must be produced and used simultaneously. Nevertheless, the same
basic economic principles that apply to trade in goods also apply to
trade in services. The main factors used in the production of many
services are skilled labor and high-tech capital, two resources the
United States has in abundance. As a result, the United States has
an advantage compared to other countries in producing many types
of goods and services that rely heavily on these two resources.

Trade in services has benefited from two relatively recent developments.
First, advances in telecommunications and information technology have
lowered the costs of providing and acquiring services. Thus, while
these technical advances may have resulted in the relocation of some
business, professional, and technical services, the United States
still maintains a sizable trade surplus in these services. In 2006,
exports of business, professional, and technical services grew almost
15 percent, to more than $96 billion, and trade in those services
generated a surplus of $38 billion. Second, the establishment of
facilities abroad by U.S. companies has allowed our business-services
providers more direct contact with their customers in other countries.

However, large barriers to trade in services remain. In order to remove
these barriers, the Administration is pursuing further liberalization of
services trade in the Doha Development Agenda negotiations, multilateral
negotiations by members of the World Trade Organization aimed at
lowering trade barriers worldwide. Recent free-trade agreements have
also included substantial liberalization of the services sectors. One
study estimates the long-run effect of a worldwide move to completely
free trade in services could translate into enormous economic gains for
the United States, boosting real GDP by 4.4 percent. In today's dollars,
GDP would increase by about $580 billion, roughly $1,940 per person.
The large income gains that are estimated to come from liberalizing
services trade reflect the advantage the United States has in producing
services relative to other countries, the large share of the U.S. economy
represented by services, and the world's relatively high barriers to
services trade.

Four factors have contributed to the strong U.S. export performance.
First, our trading partners' income growth has boosted their demand for
U.S. products. Second, increased productive capacity in the United
States has expanded our ability to serve foreign demand. Third, changes
in exchange rates since 2002 made American goods cheaper on world
markets. Finally, the longer-run decline in transportation costs, lower
tariffs, and the removal of other barriers to trade have made it easier
for U.S. products to penetrate export markets. Together, these factors
not only affect exports, but they also influence the current account, a
broader measure of trade and a part of the balance of payments between
the United States and the rest of the world (see Box 3-2).
Foreign Income Growth
Perhaps the most important factor driving the recent increase in exports
has been the growth of income of our main trading partners. As income
increases around the world, demand for U.S. products increases as well.
This relationship is depicted in Chart 3-3, which shows the real growth
of exports and foreign GDP. There are several aspects of this graph that
are noteworthy.
First, foreign GDP growth and U.S. export growth tend to rise or fall
together. As other countries become richer, they demand more goods and
services, including U.S. goods and services. Strong worldwide expansions,
such as those in the late 1980s and the mid-1990s, led to strong U.S.
export growth. Weakness in the world economy, such as that during 1998
and 2001, led to weak export growth or even declines. Recent years have
experienced a period of strong worldwide growth led by fast-growing
emerging markets such as China, relatively strong growth in Europe, and
faster GDP growth in Latin America; this growth has been a key driver
of rapid U.S. export growth.

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Box 3-2: The Current Account Deficit

The current account measures the value of international trade in goods
and services, investment income flows, and unilateral international
transfers. Trade in goods and services is the single largest component
of the current account. In 2006, the trade deficit was $759 billion and
the current account deficit was $811 billion; that is, the trade
deficit accounted for 93 percent of the current account deficit.
Exports have grown much faster than imports, and this helped narrow
the current account deficit in absolute terms and relative to GDP, as
shown in the chart. In the fourth quarter of 2005, the current account
deficit totaled $863 billion at an annualized rate, or 6.8 percent of
GDP. In the third quarter of 2007, the current account deficit fell to
$714 billion at an annualized rate, or 5.1 percent of GDP, as export
growth greatly exceeded import growth.




Second, export growth is much more volatile than foreign GDP growth.
Exports grew much faster than the world economy during the expansions
of the 1980s, the mid-1990s, and the past few years. But export growth
fell below worldwide economic growth during the worldwide slowdowns in
1998 and 2001. This type of volatility occurs because changes and
expected changes in foreign output typically lead to large changes in
investment in those economies; investment is strongly related to demand
for capital goods-plants and equipment used in production-and consumer
durables-goods used over time, such as refrigerators-which U.S.
production helps satisfy. Most U.S. exports of goods are capital goods,
consumer durable goods, and inputs that are used to produce them, and
are therefore very sensitive to changes in foreign GDP. Capital goods
and consumer durables account for 61 percent of nonenergy U.S.
merchandise exports. Industrial supplies, which are often used in the
production of capital goods and durable goods, account for 14 percent
of nonenergy U.S. exports. For example, in 2006, the United States
exported almost $85 billion worth of automobiles, auto parts, tractors,
and trucks; $46 billion worth of electronic circuits; more than $43
billion worth of airplanes and aircraft; and nearly
$21 billion worth of parts and components for office machinery.
Growth in Domestic Production
A second factor that has contributed to the growth in exports is the
expansion of the U.S. economy. As the U.S. economy's productive capacity
expands, its ability to produce goods and services for export likely
expands as well. A key factor in increasing U.S. production, and
therefore U.S. capacity to export, has been the growth of labor
productivity. Gross output produced per hour of work increased in 88
percent of manufacturing industries from 2004 to 2005, the most recent
years for which data are available. Over a longer horizon, output per
worker increased in all but 1 of about 85 manufacturing industries. In
2005, 60 percent of manufacturing industries had labor productivity
increases of at least 4 percent. The gains were especially high in
computer and computer-peripherals manufacturing, apparel and knitting
mills, and agricultural chemicals. The growth in output in these
sectors has helped to satisfy world demand.
Exchange Rates
From January 2002 through December 2007, the dollar has depreciated
23 percent in nominal terms against a weighted average of currencies.
In other words, the cost of buying other currencies has increased by
about 23 percent on average. In real terms-controlling for international
differences in inflation rates-the average real exchange rate has
depreciated by nearly 22 percent; that is, individuals abroad can
exchange goods produced in their country and receive about 22 percent
more U.S. goods now compared to 2002. Changes in the terms of trade
associated with recent exchange rate trends made American goods cheaper
relative to those of some other countries.
Trade Costs and Barriers
Falling transportation costs, improved communications, and the removal
of tariff and nontariff barriers have also supported the growth in
trade. Both exports and imports have benefited.
Over the last half century, there have been dramatic declines in
shipping costs as well as striking improvements in the quality of
shipping among developed economies. The nature of trade for some
emerging economies may now be changing to take advantage of these
improvements. Studies indicate that improvements in infrastructure may
lower the costs of trade a great deal. The ratio of the value of
exports upon arrival to the value when shipped gives a rough measure
of the costs associated with freight and insuring the good while in
transport. For some export markets there have been noticeable declines
in transportation costs, as measured by this ratio. For example, from
2003 to 2006, the average cost of shipping goods to Africa and China
decreased by 14 and 12 percentage points, respectively. From 2003 to
2006, for five of the eight regions identified in Chart 3-2, the cost
of importing goods from the United States has fallen.
In addition to falling transportation costs, communication costs have
declined, facilitating the growth in trade. One example is the growth
of e-commerce. One study finds that, on average, the growth in the
number of Internet hosts in an economy helped increase that economy's
annual export growth from 1997 to 1999. As more of the world's
population has gained access to the Internet, the market for U.S.
goods and services has expanded and exports have likely increased as
well.
Trade liberalization has also been important. Some of the growth of
trade can be attributed to successful multilateral reductions in
trade barriers through the World Trade Organization (WTO) and its
predecessor, the General Agreement on Tariffs and Trade. The United
States continues to work with other nations to advance the Doha
Development Agenda negotiations, as well as to liberalize trade
regionally and bilaterally. When this Administration took office, the
United States had free-trade agreements (FTAs) implemented with only
3 countries, Canada, Mexico, and Israel; a fourth, with Jordan, had
been signed but was not yet approved by Congress. Through 2007, the
Administration has implemented FTAs or completed negotiations with
17 countries. Congress has approved agreements with 14 of these
countries, most recently with Peru, while those with Colombia, Panama,
and South Korea are awaiting Congressional approval.
Do FTAs contribute to export growth? Over the last 20 years, there
has been a virtual explosion in the number of FTAs. Worldwide, there
are now more than 200 regional FTAs in force. For many of these FTAs,
the removal of tariffs and other trade barriers occurs over 5-year
phases and often takes nearly 15 years to have full effect. Recent
research shows that in the short run, the average FTA has increased
trade between bilateral trading partners by 32 percent after 5 years,
73 percent after 10 years, and 114 percent after
15 years. After 15 years, the average FTA appears to have had no
additional effect on trade growth. Therefore, the long-run effect of
the average FTA has been roughly a doubling of trade between the two
trading partners. In the case of recent U.S. FTAs, nearly all of the
tariff cuts and nontariff liberalization occur early in the agreement,
and later stages have more modest phase-outs. As a result, we may
expect to see much of the increases in trade coming in the first 5 to
10 years of the agreement. As is evident from Chart 3-4, U.S. export
growth to recent FTA partners in 2006 from 2005 has, for most
countries, been higher than total U.S. export growth. Overall, the
FTA partners have been major contributors to the growth in exports.
In 2006, the United States exported goods to more than 200 economies.
Exports to our 13 trading partners in the FTAs that had been signed
and implemented through that year accounted for one-third of the growth
of U.S. goods exports between 2005 and 2006.




Exports and Foreign Direct Investment

Many different types of companies engage in international trade. In one
form of international trade, U.S. companies invest abroad and operate
facilities in foreign countries. Cross-border investment to control a
business (with control generally defined as having a 10 percent or
greater ownership stake) is known as foreign direct investment (FDI),
and FDI facilitates exports.
The United States is strongly committed to open investment (Box 3-3),
and the world is more aware of the benefits of open investment today
than it was in the past. For much of the early post-World War II era,
many countries placed heavy restrictions on investment in both
directions. Policies on inbound investment restricted the sectors in
which foreign businesses could invest or the level of ownership they
could take. Some policies barred acquisitions, and others made it
difficult for investors to send profits or capital home.
Spurred in part by the rapid growth of the internationally oriented
East Asian economies, by European integration, and by the stagnation
of many closed economies, countries have reduced barriers to foreign
investment and most now actively seek it. Today, liberalization
continues in both developing and advanced economies. In 1992, the
United Nations Conference on Trade and Development recorded 77 national
regulatory changes around the

Box 3-3: Open Investment and the United States

As a matter of policy, the United States has a longstanding commitment
to welcoming foreign direct investment and securing fair, equitable,
and nondiscriminatory treatment for U.S. investors abroad. On May 10,
2007, the President issued a Statement on Open Economies reaffirming
this commitment, and noted that the Administration is committed to
ensuring that the United States continues to be the most attractive
place in the world to invest.

This policy stems from recognition of the benefits of open investment.
These benefits include the introduction of new technologies, processes,
and management techniques into the economy; increased competition
that lowers prices for consumers and leads to quality improvements;
and the creation of greater international trade and knowledge linkages.
Foreign affiliates in the United States tend to have more need for
higher-skilled labor than many other firms, paying at least 25 percent
greater compensation than private firms that are domestically owned,
thus creating an incentive for U.S. workers to keep building skills and
to compete for these well-paying jobs. U.S. investment abroad can also
strengthen the U.S. economy. It can increase exports, thereby improving
U.S. job opportunities. Increased exports provide incentives for firms
to hire more people into the more productive, higher-wage industries.
Increased trade thereby results in higher average wages for U.S. workers.
In addition, there is evidence that firms that invest abroad also
increase their domestic investment, and that one activity helps the
other.



world that were favorable to FDI. It recorded a peak of 234 such
changes in both 2002 and 2004, and a still-robust level of 147 in
2006. But the move toward openness has experienced setbacks as well.
In 2006, countries made 37 regulatory changes that were unfavorable
to FDI (20 percent of all changes), the highest rate since 1992.
Some of these unfavorable changes included restrictions in certain
sectors or efforts to nationalize certain sectors, especially natural
resource industries.
Another issue facing open investment is that in some limited
circumstances, the acquisition of a domestic company by a foreign
investor could pose risks to the national security of the host country.
For example, such a problem could arise if an adversary of the host
country wanted to buy a domestic military contractor. The United States
addresses this issue through the interagency Committee on Foreign
Investment in the United States (CFIUS), which considers only genuine
national security concerns, not economic or other interests. The
Foreign Investment and National Security Act of 2007 (FINSA) clarified
and improved the CFIUS process and the Act was passed by Congress with
strong bipartisan support, reaffirming Congressional trust in CFIUS's
role in protecting national security in a manner consistent with the
U.S. commitment to open investment. In passing FINSA, Congress stated
that the new law is meant "to ensure national security while promoting
foreign investment and the creation and maintenance of jobs."
Multinationals and Trade
The United States is both the single leading recipient and leading
source of foreign direct investment in the world. In 2006, total
cumulative FDI in the United States was almost $1.8 trillion, 15 percent
of the world total. That same year, total cumulative FDI from U.S.
companies to the rest of the world was almost $2.4 trillion, or 19
percent of the world total.
To understand FDI and how it creates channels for trade, understanding
some terms is useful. Firms that carry out direct investment abroad and
own companies or branches in more than one country are known as
multinational companies, or multinationals. The company that is the
headquarters of the firm does the investing and is known as the parent.
The parent company is located in the home country. The foreign company
that the parent owns is known as the foreign affiliate and is located
in the host country. The parent might own as much as 100 percent or as
little as 10 percent of the foreign affiliate and still be considered a
direct investor. Affiliates that are more than half-owned by direct
investors are known as majority-owned foreign affiliates. Ownership
chains can be complicated: Sometimes a U.S. parent is owned by foreign
investors, and is therefore also a foreign affiliate.
The vast majority of U.S. trade is carried out by companies that are
part of multinationals. In 2005, the export of goods by U.S. parent
companies, by U.S. affiliates of foreign companies, and by unaffiliated
companies in the United States to U.S.-owned affiliates abroad amounted
to $621 billion, or 69 percent of all U.S. goods exports. Most of these
exports-$416 billion-came from U.S. parent companies not otherwise owned
by foreign companies, but foreign-owned affiliates in the United States
also exported a great deal-$169 billion. A large portion of this
multinational-related trade took place within multinationals, that is,
between parent companies and affiliates. Goods exports from U.S. parent
companies to their foreign affiliates and U.S.-based affiliates to their
foreign parent companies totaled $267 billion, 30 percent of all U.S.
goods exports.
Multinationals are not only goods exporters. They also play an
increasing role in the export of services. Between 1997 and 2006,
services exports from U.S. parent companies to their foreign affiliates
and from U.S. affiliates to their foreign parent companies grew from
$51.8 billion to $103.3 billion, or from 22 percent to 26 percent of all
U.S. private services exports. Together, they accounted for almost
one-third of all the growth in U.S. private services exports. Of the
$103.3 billion, U.S. parent companies sold $73.1 billion worth of
services to their foreign affiliates, 79 percent more in nominal terms
than in 1997. Services exports from U.S.-based affiliates of foreign
companies to their foreign parent companies grew even faster. In 2006,
these affiliates sold $30.2 billion worth of services to their foreign
parent companies, a 175-percent nominal increase from 1997.

The Benefits of Trade and Expanding
Export Markets

Promoting free trade is a top priority of this Administration. Trade
liberalization, whether it involves multilateral agreements that lower
barriers among all the world's countries, or bilateral agreements that
permit deeper integration such as by harmonizing laws or institutions,
provides a host of economic benefits: lower prices and expanded consumer
choice, a larger market for U.S. exports, increased domestic
productivity, and closer ties to people and nations around the world.
Economists often emphasize the gains from trade from importing goods
and services that are relatively more difficult for the domestic
economy to produce, but there are also benefits to be gained through
exporting.
International trade involves transactions between individuals or firms
that reside in different countries. As in any voluntary transaction,
the participants in international trade expect to benefit because they
value what they receive in the exchange more than what they give. The
gains in each individual transaction then aggregate into gains for the
economy as a whole. The United States benefits from exporting because
it allows us to trade goods that are abundant in national production
for goods that are relatively more costly to produce domestically.
Another benefit of policies that encourage free trade and expand
markets is that trade encourages specialization and the division of
labor. Specialization provides near-term benefits because economies
have different endowments of resources and their workforces possess
different skills and talents. For example, the United States has a
relatively large population of highly skilled workers, but very little
tropical land. As a result, the United States exports business and
financial services to the world and imports coffee from a variety of
tropical countries, such as Colombia.
Specialization raises the living standard for the average citizen
because it allows people to consume more goods and services. Exporting
allows an economy to use its relatively abundant resources to produce
goods and services and export them to economies where the resources
required to produce such goods and services are relatively scarce.
Because goods are shipped to markets where they are relatively scarce,
the United States receives a higher price for these goods than if they
were produced and sold only in domestic markets. This increased income
allows U.S. citizens to buy more goods and services, including goods
and services that are produced in other countries. One study finds that
the two major trade agreements of the 1990s-the Uruguay Round of the
World Trade Organization and the North American Free Trade Agreement-
contribute between $1,300 and $2,000 in annual benefits for the average
American family of four.
Some specialization takes the form of interindustry specialization-one
country specializes in some goods; another country in others. However,
a large proportion of trade involves similar goods within an industry.
Such intra-industry trade can occur for several reasons. One of the
primary reasons for intra-industry trade is that each producer tailors
a product to a specific target audience. In doing so, their output is
consumed by a fraction of the total market for that product. Therefore,
intra-industry trade typically leads to more varieties; that is,
different countries produce goods within the same industry, but they
may produce a product with different features or a different style.
One recent study that investigates the growth of new varieties from
all types of products imported by the United States from 1972 to 2001
finds that new varieties have increased threefold. The welfare gain
from this increase in varieties is roughly equal to $900 per person.
The innovation, introduction of new varieties, and expanded competition
that come from broadening trade also promote world economic development.
As resources are shifted from unproductive sectors to more productive
sectors as a result of innovation in an economy such as that of the
United States, it becomes more difficult for the country to produce
all the goods, new and old. The new goods typically use skilled labor
more intensively than the older goods. The production of these new
goods in the United States increases the demand for skilled workers
and the wages paid to those workers. The increase in the wage paid to
skilled workers benefits the United States, not only because it raises
the incomes of our workers, but also because it increases the
incentives for individuals to acquire more skills. Human capital
accumulation is one of the engines that drives economic growth. When
the United States begins devoting more resources to producing the new,
more profitable goods, it will likely discontinue producing older,
less skill-intensive goods, and these goods will need to be produced
abroad. Although these older goods were less skill-intensive in the
United States, they typically are more skill-intensive in the economy
that begins to produce them. This creates greater rewards for skilled
workers, which encourages human capital accumulation and promotes
growth as well for both trading partners. These benefits are not
necessarily equally distributed, as will be discussed in the next
section.
Specialization, the division of labor, innovation of products for world
markets, and the upgrading of skill that is brought about by trade all
create gains in the economy. Are these gains from trade measurable? In
fact, research does show that across countries, relative to their
income, countries that trade more tend to have higher per capita
incomes than those that trade less, and that more trade is a cause of
this higher income.

Trade and Labor Markets

The United States has long been committed to free trade and continues
to pursue policies and agreements to promote trade liberalization. The
consensus among economists is that, in the aggregate, the economic
benefits of trade liberalization greatly outweigh its costs. At an
individual level, however, those benefits and costs may not be evenly
distributed. Some people may particularly benefit-for example, workers
who get higher-paying jobs when exporters expand their production-while
others bear costs-for example, workers who are displaced because of
import competition.
It is important to consider the distributional implications of trade
liberalization and, in particular, the impact on workers who may be
displaced by import competition. However, it is also important to
emphasize that trade liberalization has little, if any, effect on
overall employment. In particular, increases in imports are not
associated with a higher unemployment rate or lower workforce
participation. Chart 3-5 shows the ratio of imports to GDP since 1960,
along with the unemployment rate. If trade were a major factor
affecting the economy's ability to maintain full employment, these
measures would tend to move in tandem. The increase in imports as a
percentage of GDP over the past several decades has not led to any
noticeable trend in the unemployment rate. Over the past decade, the
U.S. economy has experienced historically low unemployment, while
imports have grown considerably. Indeed, in recent years, imports as
a share of GDP have increased, but this has not resulted in any
significant trend in the overall unemployment rate.
Along with trade and trade policies, other factors, such as changes
in consumer tastes, domestic competition, and productivity increases,
contribute to the churning of the labor market. These other factors
can have effects that are similar to those of import competition on
the labor market, often on similar individuals and sectors. For
example, the United States has seen a vast increase in domestic
manufacturing output while the manufacturing workforce has been
declining. Import competition in manufacturing industries has played
less of a role in the decline of manufacturing employment than has
the rapid increase in labor productivity.
The cost for workers in import-competing industries is that increased
imports-due to changes in the world economy or policy efforts to
liberalize trade-may cause some to lose their jobs or receive lower
wages. Among manufacturing industries, the U.S. industries that appear
to be most affected




by import competition are electrical machinery,
apparel, motor vehicles, and non-electrical machinery. Similar to
workers displaced from manufacturing more generally, workers displaced
from import-competing manufacturing industries tend to have lower
earnings upon reemployment. These adverse effects are more a function
of such factors as education, skills, and age, rather than something
intrinsic to the increase of imports due to trade liberalization. In
this way, such trade-induced effects are similar to labor market
effects induced by technological change.
While trade liberalization may lead to job loss in some import-
competing sectors, it also creates jobs in the industries that produce
the goods and services the United States exports and in industries that
use imported inputs, and the benefits to the economy resulting from
trade liberalization are far greater than the costs. Increased trade
does, however, adversely affect some workers. The President recognizes
that these workers need help with retraining and reemployment and has
called for a reauthorization and reform of the Trade Adjustment
Assistance (TAA) program to meet the needs of these displaced workers.
The Administration is committed to supporting effective and improved
trade-adjustment assistance to workers who are displaced due to import
competition.
Despite the overall benefits of trade, there are some who propose
suspending our efforts to liberalize trade and even increasing trade
barriers as a remedy for the adverse effect of trade on some workers.
Increased protectionism, however, has proven itself ineffective as a
means to address these concerns. In fact, the cost of protectionism
often greatly outweighs the benefits. One study reports that, at the
time of the analysis, on average, each job saved in 21 sectors
protected by such trade restrictions as high tariffs, import quotas,
and other measures cost consumers $170,000 per year in higher prices
and reduced purchasing.
Increased protectionism can also have unintended negative effects on
domestic industries that use goods produced by protected industries
as inputs to their own production. The majority of U.S. imports are
intermediate goods; trade restrictions raise the price of these goods
and directly harm other domestic industries. By increasing the cost
of inputs, protection of one industry can have adverse effects on
employment of other industries. Protectionism can also cause companies
that use the protected inputs to move jobs and production out of the
United States.

Conclusion

Over the last few years there has been a dramatic increase in U.S.
exports. This growth is in large part due to increases in foreign
demand, increased domestic production, changes in the terms of trade,
and reductions in the cost of international transactions. The U.S.
economy has benefited substantially from increased trade and, in
particular, from the rapid growth of its exports. Exporting firms
are typically fast growing and pay higher wages. Thus, increased
exports translate into positive benefits for workers in export-
oriented industries.
Being more engaged in global trade provides other benefits as well.
Trade helps keep prices low and allows for a wider variety of goods
and services. Several studies have revealed that there are sizable
costs to limiting trade, and benefits to expanding trade. The
Administration has worked to lower trade barriers and open markets
for U.S. producers through multilateral, regional, and bilateral
negotiations. At the global level, the Administration is aggressively
pursuing a successful conclusion to the World Trade Organization's
Doha Development Agenda, which has the potential to lower trade
barriers around the world and help millions of people escape poverty.
The Administration is also seeking to advance broad trade agreements
in the Americas and the Asia-Pacific region and bilateral free-trade
agreements. Bilateral free-trade agreements have been especially
progressive in terms of opening markets for services trade, an area
in which the United States has a distinct advantage relative to other
countries.