Nothing to Fear from Free Trade

October 25 2007 by Chief Executive


LEADERS IN THE DEMOCRATIC PARTY, and even some Republicans, are taking a dark view of the country’s historic support of market-opening trade policy. Even though her husband lobbied hard for NAFTA and fast-track authority when he was in the White House, Sen.

Hillary Clinton voted against fast track in 2002. In 2006, she voted against the Central American Free Trade Agreement, a pact with far fewer consequences than NAFTA. Both Clinton and Sen. Barack Obama are co-sponsors of a Senate bill that would penalize unfair currency manipulation, a measure clearly aimed at China for undervaluing the renminbi. And the two senators are widely criticized with in their party for not being protectionist enough!

This is strange considering that Americans are wealthier than they were 14 years ago, with unemployment under 5 per cent. Previously, NAFTA unemployment was 7 percent. In addition, today more Americans own their own homes. Since the end of World War II, presidents from both parties have steadfastly supported lowering trade barriers, sharing a belief in trade’s central role in promoting rising standards of living and greater prosperity for everyone. As a result, the U.S. ranks among the most robust economies in the world. According to the Peterson Institute for International Economics, U.S. annual in comes are $1 trillion higher, or $9,000 per household, due to trade liberalization since 1945.

By the end of 2007, China will likely be the U.S.‘s second largest trading partner, with total trade between the two countries having jumped from $116 billion in 2000 to almost $343 billion in 2006. That’s an average growth rate of 20 percent a year. This has yielded a higher standard of living for both countries. Retaliatory measures against China are tantamount to punishing ourselves with higher taxes raising the costs of goods we need. Furthermore, it will invite China to impose its own tariffs resulting in a futile trade war. Anyone remember Smoot-Hawley? Keep in mind that at $1 trillion in goods and services last year, the U.S., not China, is the world’s largest exporter.

We are witnessing a period of rapid transformation in the global marketplace. To be competitive, an economy needs to be open and flexible. And its leaders need to see our openness as a source of strength and agility-not something to abandon. 

NEWLY MANDATED SEC DISCLOSURE RULES said to help investors understand executive pay by making it “transparent” have left regulators scratching their heads. SEC Chairman Chris Cox said that investors “should not need a machete and a pith helmet to go hunting for what the CEO makes.” His point is valid but only up to a point. Companies ought to explain to shareholders-in plain English-their performance philosophy and provide enough analysis to explain how the boss gets rewarded and how such a scheme creates value. If certain incentives or benchmarks when revealed give away strategic information, ways can be found to explain without having to drop one’s kimono in public.

The trouble starts when one asks, what is material? This begins a slippery slope where every activist and agitator with an agenda starts demanding more and more all in the name of “transparency.” Is it material to a shareholder to know whether a CEO’s golf club membership is paid by the company? What about perks that are withdrawn and substituted for additional compensation (which then gets grossed up for tax purposes)? The real winner in such cases isn’t the investor but the IRS. Should transparency mandates include personal information like a CEO’s EKG or body weight? Executive pay shouldn’t be a mystery, but neither should transparency mandates be a road map for mischief.