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Trade Deficit Reduces Innovation - New Study

December 07, 2016

By Michael Stumo

The globalist free traders just had another big hole blown in their rickety ideological ship. An important new study found that our massive imports have drastically reduced US innovation at US firms, as well as profits and employment.

Those of us that follow these issues know that the economists and pundits that just say stuff about trade, without evidence, claim that more "free trade" causes prosperity, growth and innovation. They have a theory that says those things. They criticize others for claiming otherwise saying "its just Econ 101, everybody knows that."

Well now we know different.

Economists at the National Bureau of Economic Research, hardly a nest of fringe economists, released a December report called "Foreign Competition and Domestic Innovation: Evidence from U.S. Patents". The authors are David Autor, David Dorn, Gordon Hanson, Pian Shu and Gary Pisano.

They studied patent heavy sectors of the economy, including computers, electronics, chemicals and pharmaceuticals. The question was whether exposure to growing import surges from China and elsewhere increased or decrease their innovation. The answer was substantial a decrease of innovation.

The "free trade is good and win-win" crowd rely on echo chamber rhetoric to justify their beliefs. The Heritage Foundation, for example, says:

Free trade policies have created a level of competition in today's open market that engenders continual innovation and leads to better products, better-paying jobs, new markets, and increased savings and investment.

Um, they are wrong.

Jason Furman of the White House Council of Economic Advisors said, in a 2015 speech:

I believe... an underappreciated contribution of expanded trade [is] increasing innovation and thus economic growth.

He's wrong too.  Memo to Furman: Beliefs are not facts.

Last and perhaps least, the Cato Institute repeatedly says "Foreign Imports are Good for Americans". They say, with misleadingly persuasive words, "Free trade allows us to benefit from the division of labor, specialization, comparative advantage, and economies of scale." It turns out that the Cato assertion is pure ideology that does not survive study.

The NBER research found that the destructive impact of our pro-import trade policy goes beyond innovation reduction, which is crucial to future economic prosperity.  As it turns out, the import surges have "negative impacts on a range of firm outcomes, including global sales, profit growth, global employment and global R&D spending."

In case you did not get that, the US status as the importer of last resort causes reduced employment, profits, sales and R&D spending. Not just in the affected firms' US operations, which is what we care about most, but globally.

This is why balanced trade is so crucial. Don't let the Econ 101 crowd try to frame the issue as trade vs anti-trade. The important thing is balance, especially a strategic balance so the US grows its supply chains to produce innovative products in firms that pay good wages to millions of people.  That is the international competition we must win.

The old trade view has failed.  Even the globalists are recognizing some failures, though they still oppose changing course.  Hopefully President-elect Trump, the GOP and Democrats will not be afraid to break some plates to craft a bold new trade strategy that works for the US.


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