Trade and Globalization
The White House is making one last push for passage of the Trans-Pacific Partnership agreement, most likely during the lame duck session of Congress, after the elections but before the end of the year. This is despite the fact that Democratic presidential nominee Hillary Clinton opposes the TPP, as did Bernie Sanders, her rival in the primary, and as do the majority of Democratic members of Congress.
Let’s review the basic facts. Growing imports of goods from low-wage, less-developed countries, which nearly tripled from 2.9 percent of GDP in 1989 to 8.4 percent in 2011 (as shown in Figure A, below), reduced the wages of the typical non-college educated worker in 2011 by “5.5 percent, or by roughly $1,800—for a full-time, full year worker earning the average wage for workers without a four-year college degree,” as shown by my colleague Josh Bivens.
Overall, there are nearly 100 million American workers without a 4-year degree. The wage losses suffered by this group likely amount to a full percentage point of GDP—roughly $180 billion per year. Crucially, trade theory and evidence indicate strongly that growing trade redistributes far more income than it creates. The modesty of net benefits from trade is highlighted by the U.S International Trade Commission report that recently estimated that the TPP would generate cumulative net gains of $57.3 billion over the next 16 years, or less than $4 billion per year.
This post originally appeared in Democracy.
This election will be different, not only because of the stark departure of Donald Trump’s candidacy from any usual political convention, but also because the current economic debate is unlike any in recent memory. This was further elucidated by the plans each candidate laid out in Michigan this week. It is noteworthy, first of all, that both candidates have joined in calling for greater infrastructure spending, have abandoned the traditional approach toward trade and opposed the Trans-Pacific Partnership (TPP), have proposed subsidizing child care expenses, have highlighted wage stagnation, and have each claimed to be able to provide faster economic growth than the other.
It would be pointless, however, to delve into precise policy details without first commenting on the disturbing nature of the Trump candidacy. Among the least of his campaign’s problems is that it fails to elaborate on any of its positions or provide any kind of science or data, that would allow a proper assessment of its proposals. Trump has offered many broad ideas about taxes, but the details are strikingly few. Similarly, Trump’s budget plans just don’t add up: He wants more military spending, more infrastructure spending, and no cuts to Medicare or Social Security, along with huge tax cuts—all while claiming he would still move toward a balanced budget. Of course, most problematic is Trump’s bigotry and misogyny, and the egregious character flaws he displays almost daily: authoritarianism, dishonesty, volatility, and a lack of compassion.
But setting all that aside for the moment…
A version of this article appeared in the Globalist.
U.S. trade policy of the last 20 years, if not dead, is on life- support. The economic case for the series of neoliberal trade deals since the North American Free Trade Agreement has collapsed in the wake of job losses, lower wages and shrinking opportunities for American workers. Voters are hostile, and both candidates for President oppose the latest proposed trade pact—the Trans Pacific Partnership.
But neoliberal trade deals have brought enormous profits to America’s multinational corporate investors. So, big business lobbyists and their champions in the Congress and the Administration are organizing to pass the TPP in the post-election lame duck session—regardless of who wins the election.
With their economic arguments discredited, they are now draping these trade and investment pacts with a mantle of moral superiority. American workers who complain are now told that they should be ashamed of themselves. Why? Because off-shoring their jobs helps workers in other counties who are even poorer.
Paul Krugman tells his New York Times readers that they should support “open world markets…mainly because market access is so important to poor countries.”
Yesterday, presumptive Republican nominee Donald Trump gave a speech on trade, extensively citing EPI’s research which shows that trade deficits as a result of NAFTA and other trade deals, as well as trade with China, have cost U.S. jobs and driven down U.S. wages. It’s true that the way we have undertaken globalization has hurt the vast majority of working people in this country—a view that EPI has been articulating for years, and that we will continue to articulate well after November. However, Trump’s speech makes it seem as if globalization is solely responsible for wage suppression, and that elite Democrats are solely responsible for globalization. Missing from his tale is the role of corporations and their allies have played in pushing this agenda, and the role the party he leads has played in implementing it. After all, NAFTA never would have passed without GOP votes, as two-thirds of the House Democrats opposed it.
Furthermore, Trump has heretofore ignored the many other intentional policies that businesses and the top 1 percent have pushed to suppress wages over the last four decades. Start with excessive unemployment due to Federal Reserve Board policies which were antagonistic to wage growth and friendly to the finance sector and bondholders. Excessive unemployment leads to less wage growth, especially for low- and middle-wage workers. Add in government austerity at the federal and state levels—which has mostly been pushed by GOP governors and legislatures—that has impeded the recovery and stunted wage growth. There’s also the decimation of collective bargaining, which is the single largest reason that middle class wages have faltered. Meanwhile, the minimum wage is now more than 25 percent below its 1968 level, even though productivity since then has more than doubled. Phasing in a $15 minimum wage would lift wages for at least a third of the workforce. The most recent example is the effort to overturn the recent raising of the overtime threshold that would help more than 12 million middle-wage salaried workers obtain overtime protections.
The British vote to leave the European Union is a watershed event—one that marks the end of an era of globalization driven by deregulation and the ceding of power over trade and regulation to international institutions like the EU and the World Trade Organization. While there were many contributing factors, the 52 percent vote in favor of Brexit no doubt in part reflects the fact that globalization has failed to deliver a growing standard of living to most working people over the past thirty years. Outsourcing and growing trade with low-wage countries—including recent additions to the EU such as Poland, Lithuania, and Croatia, as well as China, India and other countries with large low-wage labor forces—have put downward pressure on wages of the working class. As Matt O’Brien notes, the result has been that the “working classes of rich countries—like Brexit voters—have seen little income growth” over this period. The message that leaders in the United Kingdom, Europe, and indeed the United States should take away from Brexit is that the time has come to stop promoting austerity and business-as-usual trade deals like the Trans-Pacific Partnership (and the now dead Transatlantic Trade and Investment Partnership) and to instead get serious about rebuilding manufacturing and an economy that works for working people.
Conservative austerity policies in Britain over the past two decades, which have slashed government spending and limited government’s ability to deliver public services and support job creation, fueled the anger towards elites that encouraged Brexit. At the same time, the neoconservative, anti-regulatory views of public officials in Brussels—who are disdainful of government intervention in the economy and who consistently pushed for the “liberalization of labor markets” and other key elements of the neoconservative model—left Europe unprepared for the Great Recession. It’s no surprise, then, that there has been a revolt against the EU. When the financial crisis hit in 2008, EU authorities, especially banking officials in Germany and other wealthy countries that have a dominant influence over the European Central Bank, reacted by blaming public officials in Greece, Spain, Portugal and other countries hardest hit by the crisis. The budget cuts they demanded led to further contractions in spending and soaring unemployment which still persists in much of southern Europe, putting further downward pressure on employment in the UK and setting the stage for widespread populist revolts from the left and right that have gained traction across much of Europe.
Yesterday, the U.S. International Trade Commission (ITC) released a long-awaited report on the projected economic impacts of the TPP agreement. The report is remarkable for its frank estimates of the costs of the agreement, and the minimal benefits it identifies. Overall, the ITC projects that by 2027, the TPP will increase U.S. exports to the world by $27.2 billion (1.0 percent, as shown in Table 2.2) and U.S. imports from the world by $48.9 billion (1.1 percent), increasing the U.S. global trade deficit by $21.7 billion. All else equal, this rise in the trade deficit would put downward pressure on U.S. GDP. Nonetheless, the report concludes that over the next 16 years, the agreement will increase U.S. national income by $57.3 billion, 0.23 percent. This GDP gain stems largely from the ITC’s adoption of the standard full-employment assumption in modeling the TPP’s effects. There may have once been a time where such an assumption was warranted, but it seems highly inappropriate to apply to an economy that has been operating beneath full employment for at least 8 years and counting.
Dean Baker notes that even if the too-rosy GDP estimate were correct, it means that, “as a result of the TPP, the country will be as wealthy on January 1, 2032 as it would otherwise be on February 15 2032.” Worse yet, the ITC has a terrible record of forecasting the actual impacts of trade and investment deals, both overall and at the industry level. There is little reason to believe that this study will yield better results than past ITC efforts if the agreement is approved and implemented. In practice, whatever the ITC forecasts, U.S. trade and investment deals been near-inevitably followed by growing trade deficits and downward pressure on the wages of U.S. workers. There is every reason to expect that the TPP agreement will reinforce these trends.
(This blog post is an update to a post from March 30, 2015).
When the U.S.-Korea Free Trade Agreement (KORUS) was passed just over four years ago, President Obama said that the agreement would support 70,000 U.S. jobs. This claim was supported by a White House fact sheet that claimed that the KORUS agreement would “increase exports of American goods by $10 to $11 billion…” and that they would “support 70,000 American jobs from increased goods exports alone.” Things are not turning out as predicted. Far from supporting jobs, growing goods trade deficits with Korea have eliminated more than 95,000 jobs between 2011 and 2015.
Expanding exports alone is not enough to ensure that trade adds jobs to the economy. Increases in U.S. exports tend to create jobs in the United States, but increases in imports lead to job loss—by destroying existing jobs and preventing new job creation—as imports displace goods that otherwise would have been made in the United States by domestic workers. Thus, it is changes in trade balances—the net of exports and imports—that determine the number of jobs created or displaced by trade and investment deals like KORUS.
In the first four years after KORUS took effect, there was absolutely no growth in total U.S. exports to Korea, as shown in the figure below. Imports from Korea increased $15.2 billion, an increase of 26.8 percent. As a result, the U.S. trade deficit with Korea increased $15.1 billion between 2011 and 2015, an increase of 114.6 percent, more than doubling in just four years.
U.S.-Korea trade, 2011–2015 (billions of dollars)
Change, billions of dollars, and percent from 2011-2015
Imports: +$15.2 (26.8%)
Exports: $0 (0.0%)
Trade Bal.: -$15.1 (114.6%)
Source: Author's analysis of U.S. International Trade Commission Trade DataWeb
An interesting story in the New York Times this morning looks at the effect that job losses from trade have had on people’s political views. It’s no surprise that voters on the losing end of globalization are disenchanted with the political mainstream, as the Times puts it. They have every right to be.
But I’m tired of hearing from economists about the failure to support workers dislocated by globalization as a cause of anger and the policy action the elite somehow mistakenly forgot. Ignoring the losers was deliberate. In 1981, our vigorous trade adjustment assistance (TAA) program was one of the first things Reagan attacked, cutting its weekly compensation payments from a 70 percent replacement rate down to 50 percent. Currently, in a dozen states, unemployment insurance—the most basic safety net for workers—is being unraveled by the elites. Only about one unemployed person in four receives unemployment compensation today.
I’m also getting tired of hearing that job losses from trade are the result of the U.S. economy “not adjusting to a shock.” Trade theory tells us that globalization’s impact is much greater on the wages of all non-college grads (who are between two-thirds and three-quarters of the workforce, depending on the year), not just a few dislocated manufacturing workers. The damage is widespread, not concentrated among a few. Trade theory says the result is a permanent, not temporary, lowering of wages of all “unskilled” workers. You can’t adjust a dislocated worker to an equivalent job if good jobs are not being created and wages for the majority are being suppressed. Let’s not pretend.
It’s been pointed out to me that yesterday’s blog post about a story by NPR’s Chris Arnold targeted too much ire at Arnold himself rather than the phenomenon he was reporting about. I think that’s probably right, and so I apologize to him for that. I was using Arnold’s story as a jumping off point for a discussion of a larger issue, and should have made that more clear. I do think my larger points about the substance of the topic under debate hold. The damage done by trade to American workers is consistently underestimated and is often treated as a surprise when it shouldn’t be—it’s completely the prediction of standard trade theory. To the degree that Arnold’s story helps take this “surprise” excuse off the table for future debates over trade, it’s doing a service.
Some quick notes on why I think all of this is important, however. This is Arnold’s first paragraph:
Economists for decades have agreed that more open international trade is good for the U.S. economy. But recent research finds that while that’s still true, when it comes to China, the downside for American workers has been much more painful than the experts predicted.
I think Arnold reports this exactly right. Experts continue to portray the downside of expanded trade for American workers as having turned out to be unexpectedly large, but they are wrong to be surprised. Downward pressure on a large majority of American workers’ wages is completely predicted by mainstream economic theory. But I should have made clearer where my criticism here was aimed.
Yesterday, NPR’s Chris Arnold wrote the latest in what has become a very long line of “explainer” pieces about economic globalization and the presidential campaigns. Nearly all of these pieces seek to resolve an alleged puzzle: nearly all reputable economists argue that policy efforts to boost trade are good for the U.S. economy, yet many (if not most) American workers strongly oppose trade agreements signed in recent decades.
Arnold puts forward a pretty common solution to this alleged puzzle: “trade’s benefits are diffuse, but the pain is concentrated.” In this view, the only losers from trade are those workers directly displaced by imports. Every other consumer in the economy benefits from lower prices. But because the losers are small and concentrated, they can organize to oppose trade agreements. And while the winners are numerous and widespread, the benefits (e.g., slightly more affordable clothing and DVD players) are hard to notice, so no one organizes to support these agreements.
This is a common way of describing the effects of using policy to expand trade, but on the economics, it is certainly not correct. In textbook trade models, using policy levers (lower tariffs, for example) to boost trade with poorer countries will indeed cause total national income in the United States to rise. But these same textbooks also predict that the resulting expansion of trade will redistribute far more income than it creates. And the direction of this redistribution is upward. So it is perfectly possible to have policy efforts to expand trade lead to higher national income yet leave the majority of workers worse off. Importantly, the losers in these textbook models are not just workers directly displaced by imports—they’re all the workers in the entire economy who resemble the trade-displaced in terms of education and credentials.
This post originally appeared in The Globalist.
The presidential primary campaigns of both political parties have exposed widespread voter anger over U.S. global trade policies. In response, hardly a day has recently gone by without the New York Times, the Washington Post and other defenders of the status quo lecturing their readers on why unregulated foreign trade is good for them. The ultimate conclusion is always the same—that voters should leave complicated issues like this to those intellectually better qualified to deal with them. Trade experts, according to Binyamin Appelbaum of the Times have been “surprised” at the popular discontent over this issue. Their surprise only shows how disconnected the elite and the policy class that supports it is from the way most people actually experience the national economy. The United States has always been a trading nation. But until the 1994 North American Free Trade Agreement, trade policy was primarily an instrument to support domestic economic welfare and development.
A lop-sided deal: Investment vs. jobs
Starting with NAFTA, pushed through not by a Republican president, but by the Bill Clinton in 1994, it became a series of deals in which profit opportunities for American investors were opened up elsewhere in the world in exchange for opening up U.S. labor markets to fierce foreign competition. As Jorge Castañeda, who later became Mexico’s foreign minister, put it, NAFTA was “an agreement for the rich and powerful in the United States, Mexico and Canada, an agreement effectively excluding ordinary people in all three societies.” For 20 years, leaders of both parties have assured Americans that each new NAFTA-style deal would bring more jobs and higher wages for workers, and trade surpluses for their country. It was, they were told, an iron law of economics.
Yesterday, Zack Beauchamp updated a piece he had written a while back that claimed Bernie Sanders’ trade agenda could prove ruinous to the world’s poorest people. I think Beauchamp really overstates this, for a couple of reasons.
First, only an expansive reading of some of Sanders’ rhetorical excesses would lead one to think he would pursue policies that radically restricted the access to U.S. markets currently enjoyed by our poorer trading partners’ exports. It is not an uncommon reaction to criticisms of today’s global trade regime to assume that this market access would clearly be significantly reduced if this status quo were overturned, but that’s far from obvious.
Second, the evidence marshalled on behalf of trade liberalization’s positive benefits for development is entirely about the benefits of unilateral, domestic liberalization. That is, the benefits a country gains from cutting its own tariffs, and not about the ease of access that they have to the U.S. market. This evidence is completely silent on the benefits of access to the U.S. market. Economic theory teaches that the benefits of unilateral liberalization completely dwarf those of market access, and there is not much evidence to suggest that this theory is wrong.
Despite seemingly stable U.S. trade balance, rapidly growing trade deficits in non-oil goods could lead to American job losses
The U.S. Census Bureau reported that the annual U.S. trade deficit in goods and services increased from $508.3 billion to $531.5 billion from 2014 to 2015, an increase of $23.2 billion (4.6 percent). The slow growth of the overall U.S. trade deficit hides massive underlying shifts in the trade deficit in petroleum products (which declined $157.3 billion, or 55.3 percent), compared with the trade deficit in all other goods, which increased from $547.7 billion to $673.1 billion—an increase of $125.4 billion, or 22.9 percent. In other words, the sharp decline in the petroleum trade deficit masked a large increase in the non-oil goods trade deficit, which could result in substantial U.S. job losses in the future.
Most U.S. goods trade consists of manufactured products. In 2015, manufacturing constituted 86.9 percent of total U.S. goods trade, and 94.3 percent of total trade in non-oil goods. Because manufacturing is such a large employer, rapidly growing trade deficits in non-oil goods are a threat to future employment in this sector. The growing trade deficit in manufactured products rose to 3.8 percent of GDP, only 0.7 percent (7 tenths) of a percentage point below the maximum reached in 2005. The manufacturing trade deficit also reached a record high of $681 billion in 2015, well in excess of the previous peak $619.7 in 2007. Rapidly growing manufacturing trade deficits were responsible for most, if not all, of the 4.8 million U.S. manufacturing jobs lost between December 2000 and December 2015, and there’s every reason to believe that these job losses will continue if the non-oil trade deficits keeps growing.
This analysis is primarily concerned with shifts in goods trade. The U.S. balance of trade in services declined slightly in 2015, falling from a trade surplus of $233.1 billion in 2014 to $227.4 billion in 2015. Trade in goods continues to dominate overall trade flows for the United States—trade in services totaled only 24.1 percent of total U.S. goods and services trade in 2015.
By closing loopholes in the Buy American Act, the 21st Century Buy American Act will increase demand for U.S. manufactured goods and create at least 60,000 to 100,000 U.S. jobs. The Buy American Act requires “substantially all” direct purchases by the federal government (of more than $3,000) “be attributable to American-made components.” However, there are a number of exclusions or loopholes in the Buy American Act. The single largest is an exception for “goods that are to be used outside of the country,” and the 21st Century Buy American Act includes provisions to close it. In addition, current regulations interpreting the Buy American Act state that “at least 50 percent of the cost must be attributable to American content,” which can reduce net demand for American made content.
Between 2010 and 2015, the “goods used outside of the country exception” was used to purchase $42.3 billion in goods that were manufactured outside of the United States, an average of $8.5 billion per year.1 The 21st Century Buy American Act would require most or all of those goods to be U.S. made, increasing demand for U.S. manufactured goods by up to $8.5 billion per year.2 Although labor markets have improved in the United States since the recession, there remains substantial slack and 2.6 million jobs were still needed to catch up with growth in the potential labor force in September 2015. I assume, based on recent research by my colleague Josh Bivens (Table 5) that wages earned by new manufacturing workers will support a macroeconomic multiplier of 1.6 in the domestic economy over the next year.3 I also assume, based on total GDP and employment levels in 2014 that a 1 percent increase in GDP adds 1.3 million jobs to the economy. Thus, the $8.5 billion increase in spending on domestic manufactured goods (with 100 percent domestic content) would increase GDP by $13.6 billion (0.08 percent), creating up to 100,000 new jobs in the domestic economy.
This week, President Obama announced the completion of negotiations on the proposed Trans-Pacific Partnership (TPP). The TPP, which is likely to drive down middle-class wages and increase offshoring and job loss, has been widely criticized by leading members of Congress from both parties. Hillary Clinton, Bernie Saunders, and other presidential candidates have announced their opposition to the deal.
Meanwhile, U.S. jobs and the recovery are threatened by a growing trade deficit in manufactured products, which is on pace to reach $633.9 billion in 2015, as shown in Figure A, below. This deficit exceeds the previous peak of $558.5 billion in 2006 (not shown) by more than $75 billion. The increase in the manufacturing trade deficit in 2015 alone will amount to 0.5 percent of projected GDP, and will likely reduced projected growth by even more as manufacturing wages and profits are reduced.
U.S. manufacturing trade deficit, 2007–2015* (billions of dollars)
|Year||U.S. manufacturing trade deficit (billions of dollars)|
* Estimated, based on year-to-date trade data through August 2015
Source: Author's analysis of U.S. International Trade Commission Trade DataWeb
The growth of the manufacturing trade deficit is starting to have an impact on manufacturing employment, which has lost 27,300 jobs since July 2015, as shown in Figure B, below. Growing exports support U.S. jobs, but increases in imports cost jobs, so even if overall exports are growing, trade deficits hurt U.S. employment—especially in manufacturing, because most traded goods are manufactured products. Although the United States had regained more than 800,000 manufacturing jobs since 2010, the low point of the manufacturing collapse after the great recession, overall manufacturing employment is still 1.4 million jobs lower than it was in December 2007.
On Tuesday, China announced the largest one-day devaluation of its currency in more than two decades. Make no mistake—although authorities claimed this policy was a shift toward more market-driven movements, the value of the currency is tightly controlled by China’s central bank. By choosing to devalue its currency, Chinese officials are trying to solve their domestic economic problems—including a massive property bubble, a collapsing stock market, and a slowing domestic economy—by exporting unemployment to the rest of the world. The United States, which is the largest single market for China’s exports, will be hardest hit by the devaluation of the yuan. Manufacturing, which was already reeling from the 20 percent rise in the value of the dollar against major currencies in the last 19 months, can expect to see even faster growth in imports from China.
The devaluation of the yuan (also known as the renminbi) will subsidize Chinese exports, and act like a tax on U.S. exports to China, and to every country where we compete with China, which is already the largest exporter in the world. It will provide rocket fuel for their exports, transmitting unemployment from China directly to the United States and other major consumers of imports from China. Already in 2015, the U.S. manufacturing trade deficit has increased 22 percent, which will continue to hold back the recovery in U.S. manufacturing, which has experienced no real growth in output since 2007.
The Chinese devaluation highlights the importance of including restrictions on currency manipulation in trade and investment deals like the proposed Trans-Pacific Partnership (TPP), which includes a number of well-known currency manipulators. Millions of jobs are at stake if a clause to prohibit currency manipulation is not included in the core of this “twenty-first century trade agreement.” This devaluation by China, which is not a member of the TPP, will raise pressure on other known currency manipulators that are in the agreement—such as Japan, Malaysia, and Singapore—to devalue their currencies, which could more than offset any benefits obtained under the terms of the TPP.
Fast-track trade legislation is the first step in the process of greasing the skids for the proposed Trans-Pacific Partnership (TPP), and any other trade deal proposed by this president or any other for the next six years. Last month, the 13 democrats listed in the table below voted to end debate on fast track (Trade Promotion Authority, or TPA), allowing a final vote to take place. There are strong arguments against the TPP, which will increase inequality and hurt the middle class.
* The low-impact scenario assumes ending currency manipulation would reduce the trade deficit by $200 billion; the high-impact scenario assumes a $500 billion reduction in the trade deficit. The table shows the hypothetical change in 2015 three years after implementation.
Trade and jobs gained and lost in selected states
Net U.S. jobs displaced due to goods trade with China, 2001–2013
Net U.S. jobs created by eliminating currency manipulation
State employment (in 2011)
Jobs lost as a share of employment
Jobs gained as a share of employment
Jobs gained as a share of employment
Total jobs at risk in these states**
* The low-impact scenario assumes ending currency manipulation would reduce the trade deficit by $200 billion; the high-impact scenario assumes a $500 billion reduction in the trade deficit. The table shows the hypothetical change in 2015 three years after implementation.
These 13 democrats come from 10 states that lost 996,200 jobs due to growing trade deficits with China between 2001 and 2013, nearly one-third of the 3.2 million jobs eliminated by China trade in the United States in that period. States like Oregon, California, and Colorado were among the hardest hit states in the country. But they are also home or host to Nike (Oregon), Lockheed-Martin (Colorado), and Apple, Google, Intel and other Goliaths of Silicon Valley (California). New Hampshire serve as a bedroom community for many electronics industry workers in nearby Massachusetts, and has lost hundreds of thousands of jobs in recent decades in textiles, shoemaking and small machine making.Read more
In a jointly authored statement, former EPI board members and U.S. Labor Secretaries F. Ray Marshall and Robert Reich called on Congress to reject Trade Promotion Authority and the Trans-Pacific Partnership because that deal will “harm America’s working people.” Despite this statement, the House today approved a truncated version of Fast Track (TPA) that excludes funding for Trade Adjustment Assistance for displaced workers. But passing TPA without TAA is a risky gamble because many Democrats have demanded that the two move simultaneously.
In their letter to Congress, Marshall and Reich conclude that “Trade can work for working Americans, but only when Americans can effectively know about what is in a trade deal, and only when a trade deal is effectively designed to create more good jobs in America. This Fast Track mechanism toward the Trans Pacific Partnership is a bad deal for America.”
Stung by the sudden derailment in the House of Representatives of their rush to pass the Trans-Pacific Partnership (TPP), the Washington establishment has wasted no time in warning us of the terrifying menace of a rising China, should the trade deal not be put back on track next week.
Echoing previous remarks by the president, House Speaker John Boehner warned “we’re allowing and inviting China to go right on setting the rules of the world economy.” Pro-TPP Democratic Congressman Jim Hines (D-Conn.) said that Friday’s vote, “told the world that we prefer that China set the rules and values that govern trade in the Pacific.”
These remarks are both fatuous and revealing of how weak the case for the TPP is, even among its own promoters.
As a matter of obvious fact, the rules of the world economy within which the Chinese have been taking the United States to the economic cleaners were not set in China. They were set in Washington, DC by our own American policymakers and fixers who in one way or another were, and still are, are in the pay of multinational corporate investors.
Under Ronald Reagan, the two Bushes, Bill Clinton and now Barack Obama the United States government designed and imposed the global model of “free trade” which promoted the shift of investment from the United States to parts of the world where labor is cheap, the environment is unprotected, and the public interest is even more up for sale than it is here.
The House is expected to vote this week on fast track authority to negotiate two massive trade deals, including the proposed Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (T-TIP). The Wall Street Journal noted on Sunday that “the decade’s old argument that major trade agreements boost both exports and jobs at home is losing its political punch, even in some of the country’s most export-heavy Congressional Districts.” One reason is that counting exports is less than half the story. While it’s true that exports support domestic jobs, imports reduce demand for domestic output and cost jobs.
As I’ve written before, trade is a two-way street, and talking about exports without considering imports is like keeping score in a baseball game by counting only the runs scored by the home team. It might make you feel good, but it won’t tell you who’s winning the game. The Journal story included a table showing the ten congressional districts with the biggest gains in exports since 2006. The authors expressed surprise that only three of the ten members representing these districts have announced support for fast track (trade promotion authority, or TPA).
Looking at jobs supported and displaced by trade in these districts provides a very different picture, which helps explain why supporters of fast track are having trouble rounding up votes in the House. In a recent study, I estimated the number of jobs supported and displaced by China trade between 2001 and 2013. We used the results of this study to examine the impacts of China trade on jobs by congressional district between 2006 and 2013—the period covered in the Wall Street Journal story. The results for the top ten districts identified by the Journal are shown in the following table.
When Canada joined the Trans-Pacific Partnership talks in 2012 it did so somewhat reluctantly and, like Mexico, with strings attached. One of them was that Canadian negotiators could not reopen any closed text. So, in this sense, it’s been a bit of a raw deal for the Obama administration’s NAFTA partners from the beginning. Canada’s bigger business lobbies called it a defensive move, to “secure” NAFTA supply chains rather than offering any meaningful market access elsewhere. The Canadian public have almost no idea what’s going on. But as TPP countries appear to be close to the end game, people here are starting to ask the obvious questions: what’s in it for us, and what will we have to give up to get it. The answers are equally obvious if you look past the hype: not much, and quite a lot.
To begin with, Canada already has free trade deals in place with four of the larger TPP countries (Peru, Chile, the United States, and Mexico), and tariffs on trade with the others—representing 3 percent of imports and 5 percent of exports—are very low. Canada has a trade deficit with these non-FTA countries of $5 to $8 billion annually, and 80 percent of Canada’s top exports to these countries are raw or semi-processed goods (e.g., beef, coal, lumber), while 85 percent of imports are of higher value-added goods (e.g., autos, machinery, computer and electrical components). This Canadian trade deficit will likely widen if the TPP is ratified, as the United States found two years into its FTA with South Korea.
Tariff removal through the TPP is therefore likely to worsen the erosion of the Canadian manufacturing sector and jobs that has been taking place since NAFTA—a result, in part, of the limits free trade deals place on performance requirements and production-sharing arrangements. NAFTA-driven restructuring did not even have the promised effect of raising Canadian productivity levels, which languish at 70 percent of U.S. levels twenty years into the agreement. Instead, Canada has experienced greater corporate concentration, a significant decline in investment in new production, and rising inequality.
In short, there is little trade expansion upside for Canada in this negotiation. And yet the Canadian public will eventually be asked to make considerable public policy concessions to see the TPP through. As many U.S. commentators have argued, the trade impacts of TPP are far less important than the serious concerns it raises about excessive intellectual property rights, regulatory harmonization, and the perpetuation of a controversial investor-state dispute settlement (ISDS) regime that has been extremely damaging to democratic governance globally, not to mention quite humiliating for Canada.
The issue of currency management by U.S. trading partners that increases U.S. trade deficits has become a front-burner issue in debates over the proposed Trans-Pacific Partnership (TPP). The discussion about whether or not trade deficits can really affect U.S. employment, however, occasionally gets very muddled. Here’s a quick attempt to un-muddle a couple different issues.
Trade deficits and overall employment
Trade deficits occurring when the U.S. economy is stuck below full employment and at the zero lower bound (ZLB) on short-term interest rates are a drag on economic growth and overall employment, period. And this describes the U.S. economy today, so a reduction in the trade deficit in the next couple of years spurred by a reversal of trading partners’ currency management would boost growth and jobs.
The logic is simple—exports boost demand for U.S. output while imports reduce demand for U.S. output. When net exports (exports minus imports) fall, then aggregate demand is reduced. Trade deficits are the mirror image of capital inflows into the U.S. economy, and there are times when these capital inflows can reduce domestic interest rates and boost economic activity, providing an offset to the demand-drag caused by trade flows. Today is not one of those times—further downward pressure on already rock-bottom interest rates (particularly since most of these inflows go into U.S. Treasuries) do very little to boost domestic investment to counteract the demand drag from trade flows.
The New York Times’ Binyamin Appelbaum wrote an excellent piece yesterday on the costs and benefits of globalization. But because I’ve thought a lot about this topic, I have some hobby-horse issues concerning how economists characterize how large the gains from trade are and how its gains and losses are distributed. Put simply, the overall net benefits of trade are much smaller than commonly advertised, but the regressive redistribution trade causes is considerable.
First, on the gains from trade policy (i.e., how much we should expect national income to rise if we sign trade agreements), Appelbaum refers to a piece from the Peterson Institute of International Economics claiming that trade liberalization added 7.3 percent of GDP to American incomes by 2005—about $9000-10,000 per American household. This is just not true. It’s a wildly inflated number that should not be in the policy debate (and if you need much smarter and better-credentialed people making the some point—here’s Dani Rodrik). This number is an effort to bully people into going along with today’s trade agreements by making them think the stakes are utterly enormous. In fact, even if it was correct (again, it’s not) this study would be irrelevant to today’s trade policy debates because the sum total of economic gains from all post-1982 trade agreements (this includes NAFTA, the completion of the General Agreement on Tariffs and Trade, the formation of the WTO, and the permanent normal trading relations with China) is estimated to be just $9 per household, meaning that 99.9 percent of the gains from trade estimated in the study happened before 1982. So even if trade liberalization really did spur mammoth gains at some point in the (distant) past, the effects were over by the early 1980s.
Second, on the distribution of gains and losses from trade, it is striking to me that so many economists who favor signing every trade agreement that comes down the pike can still feign surprise that expanded trade seems to be bad for most workers’ wages. Put simply, it is completely predicted in textbook trade economics that wages for most workers will fall and inequality will rise when the United States trades more with poorer trading partners. Yes, expanded trade is predicted to lead to higher overall national income, but it is also predicted to redistribute enough income within the United that it can (and is likely to) make most workers worse-off. This should not be a surprise to anyone familiar with the topic.
As Jeff Faux notes, we seem to have reached the part of the debate over the TPP when facts and evidence have largely given way to table-pounding. But given that this is still a live debate and that silly arguments continue to proliferate, here are a couple of clarifications that might be helpful to the debate:
First, a vote for the TPP is a vote to reduce the wages of most American workers and increase inequality. Yes, policies that boost U.S. imports (like the TPP) raise total national income in the United States, but they also redistribute so much more income within the United States that most workers are made worse off. And to be clear about this, the losses are not just the workers directly displaced by trade. Instead, it’s the wages of all workers in the economy who compete with the trade-displaced workers for other jobs—about 100 million workers in all. The way to think of it is that landscapers and waitresses don’t lose their jobs to trade, but their wages suffer from having to compete with laid-off apparel workers looking for work elsewhere.
Now, it’s true that the TPP would reduce wages for most Americans and increase inequality just a little bit. But that’s the direction. And it’s also true that expanded trade can potentially benefit everybody if the winners compensate the losers, but that would require complementary compensatory policies, and ones on a scale much, much larger than the Trade Adjustment Assistance (TAA) often throws in with trade agreements.
And while TPP proponents low-ball the wage-suppressing effect of TPP, they often exaggerate the overall benefits for national income. But the source of both gains and losses from trade are the same: domestic reshuffling of production that sees importable sectors shrink and export sectors expand. So how big are the TPP’s estimated income benefits? Not very big—it’s estimated to increase U.S. GDP by about 0.4 percent cumulatively over the next 12 years, according to a paper by Petri and Plummer (2012) for the Peterson Institute for International Economics (PIIE). Yesterday, the normally-sharp Adam Posen (President of PIIE) put these benefits in an interview at a few tenths of a percent of GDP each year. That’s clearly wrong, even by his own shop’s estimates (roughly ten times higher than what the Petri and Plummer (2012) paper shows). Posen claimed on Twitter that this 0.4-percent-over-12-years estimate was “a lower bound” that “doesn’t show dynamic gains from productivity growth thru competition”. But that’s not right—the Petri and Plummer (2012) PIIE estimate is actually a significant increase relative to an earlier estimate by the same authors, and they justify the newer higher estimate exactly by saying they’re now incorporating estimates of productivity gains stemming from more-competitive firms gaining market share after TPP’s passage.*
Barack Obama’s petulant criticism last Friday of Democrats who do not support his proposed Trans-Pacific Partnership reminds me of the old tongue-in-cheek advice to young lawyers: “If the facts are on your side, pound the facts. If the law is on your side, pound the law. If neither is on your side, pound the other lawyer.”
The facts are definitely not on the president’s side. For two decades the trade deals negotiated by the last three presidents have lowered U.S. wages, lost jobs and generated a chronic trade deficit that requires our country to borrow more money every year in order to pay for imports. The president’s main argument that exports have risen, without mentioning that imports have risen much faster, is now transparently deceitful to anyone who can add and subtract.
Neither is the law in his corner. As did his predecessors, Bill Clinton and George Bush, he assures Americans that this deal will be different because, you see, it will protect workers. But the secret draft, which had to be revealed to Americans by Wikileaks, shows that once again a trade agreement will be used to enhance the power of multinational corporate investors over people who have to work for a living. As AFL-CIO President Richard Trumka pointed out recently, the Office of the U.S. Trade Representative, which is charged with negotiating and enforcing the deal, does not even believe that murder and other brutal acts committed against labor union activists violate the “worker-protection” clauses to trade agreements.
So, like a lawyer trained to defend the indefensible, Obama is desperately pounding the opposition. They are “just wrong,” he says, without showing us why. He accuses them of “making stuff up”—that is, that they are liars. He whines that they are “whupping on me.” He charges, nonsensically, that they “want to pull up the drawbridge and isolate themselves.”
Recent debates over the Trans-Pacific Partnership (TPP) have highlighted the failure of the treaty to include a provision to stop countries from actively weakening the value of their own currency in order to run trade surpluses.
The way this currency management works is that countries (most notably China, though there are many others as well) buy assets denominated in dollars—mostly U.S. Treasuries. This boosts the demand for dollars in global markets and weakens demand for the Chinese renminbi. This in turn increases the value of the dollar, which makes U.S. exports expensive in global markets and makes foreign imports cheaper to U.S. consumers. The result is that exports are suppressed while imports grow and the U.S. trade deficit widens.
Opponents of including a currency provision in the TPP have made a number of bad arguments, and one of them is that currency management was once a problem, but isn’t anymore. They often point to recent appreciation of the Chinese currency as evidence that the problem of currency management is behind us. But this is incorrect—the evidence that currency management is still a problem is simply that foreign purchases of dollar-denominated assets remained strong in 2014. There is zero doubt that absent this continued intervention, the U.S. dollar would weaken. Further, the nearly $1 trillion in purchases of dollar denominated assets that has characterized each year since 2008 has led to a large stock of dollar assets held by foreign investors and governments, and this large stock (over and above the annual flow of dollar purchases) also keeps the value of the dollar stronger than it would otherwise be.
Further, two pieces of recent evidence suggest strongly that excess dollar strength could be becoming a real drag on recovery. In the first quarter numbers on gross domestic product, the rising trade deficit knocked 1.3 percentage points off the economy’s annualized growth rate. Then trade data for March came in showing a very large rise in the deficit. Finally, today’s jobs report shows that growth of employment in manufacturing has stagnated in the last quarter (rising at an average monthly rate of less than 2,000 jobs), after rising at an average monthly rate of 18,000 in 2014.
The White House Council of Economic Advisers (CEA) released a report last Friday touting the benefits of international trade for the American economy. The paper provides an interesting review of research on a range of trade’s economic effects, yet the report is largely irrelevant to current trade policy debates. Worse, when its findings are related to current trade policy debates, they are often reported in ways that could mislead readers.
The weaknesses of the report generally fall into one of three areas.
First, the overwhelming focus of the report touts the benefits of trade flows qua trade flows, and often even compares outcomes relative to a hypothetical scenario where trade barriers were raised so high that the U.S. economy became completely autarkic. Academics might find this interesting, but nobody in today’s economic debate argues for increasing U.S. trade barriers, let alone to historically never-seen levels. The CEA acknowledges this explicitly by noting that barriers to foreign imports coming into the U.S. economy are already extremely low and unlikely to be reduced significantly by treaties like the Trans-Pacific Partnership (TPP). Several times, the report alludes to potential benefits of the TPP and other treaties in pulling down barriers to U.S. exports abroad, but fails to mention what is by far the most important barrier to U.S. export success—several major trading partners (including some proposed TPP partners) managing the value of their own currencies for competitive gain vis-à-vis the United States.
Second, the report spends very little time on the most important non-currency issue regarding trade policy: the distribution of gains and losses. When the report does cite research on distribution, it is woefully incomplete, looking only at how the benefits from trade are distributed while ignoring the costs. The research on the comprehensive costs and benefits of this issue is pretty clear: trade with labor abundant trading partners, like many of those in the proposed TPP, tends to lower wages for the majority of U.S. workers and provide gains only to the upper end of the income distribution.
In 1993, it seemed obvious to me that NAFTA was about one main thing: providing a huge new (and much cheaper) labor force to U.S. manufacturers by making it safe for them to build factories in Mexico without fear of expropriation or profit-limiting regulation. But the Clinton administration claimed it would open a new market to U.S. business, and U.S. Trade Representative Mickey Kantor, President Clinton, and even Labor Secretary Bob Reich argued that it would create jobs for American workers and even increase job creation in the U.S. auto and steel industries. They said NAFTA would benefit Mexican workers and help create a bigger Mexican middle class, while deterring migrant workers from crossing the border to seek jobs in the United States with better wages. They also argued an alternative theory: that NAFTA would help keep U.S. manufacturers from moving to Southeast Asia, and that it was better to keep that off-shored work in our hemisphere and along our border.
What actually happened?
- The trade balance with Mexico went from positive to very negative, resulting in the loss of more than 600,000 jobs in the United States.
- Mexico’s corn farmers were overwhelmed by a flood of cheaper U.S. corn and almost 2 million agricultural workers were displaced. Most of them migrated illegally to the United States and remain here as exploited, undocumented workers.
- Wages fell for Mexican industrial workers, to the point that autoworkers in Mexico now make less than Chinese autoworkers. Some Japanese carmakers start paying Mexican workers at 90 to 150 pesos per day, or $6 to $10.
- U.S. auto companies shifted investment to Mexico to exploit its much cheaper labor. AP reports that “Mexican auto production more than doubled in the past 10 years. The consulting firm IHS Automotive expects it to rise another 50 percent to just under 5 million by 2022. U.S. production is expected to increase only 3 percent, to 12.2 million vehicles, in the next 7 years.” Since NAFTA’s enactment, employment in the U.S. motor vehicle and parts industry has declined by more than 200,000 jobs.
More recent claims about the expected benefits of free trade agreement with Korea have proven hollow, too. Instead of creating 70,000 jobs, the net effect has been a higher trade deficit and the loss of 60,000 jobs. Worse, the harshest impact of that deal won’t be felt for several more years, when protective tariffs on pickup trucks are eliminated, making Korean imports 25 percent cheaper than they are today. U.S. auto workers will be hard hit.
And then there’s Permanent Normal Trade Relations with China and China’s admission to the WTO, which led to an explosion of imports and the loss of more than 3 million jobs, mostly in manufacturing and mostly in occupations that paid more than the jobs created in exports industries.
One bad experience after another: that’s why so many are so opposed to fast track and more NAFTA-style free trade deals.
Last week, the president claimed that critics who say that the Trans-Pacific Partnership (TPP) “is bad for working families… don’t know what they are talking about.”
But the truth is, there is an emerging consensus that globalization has put downward pressure on the wages of most working Americans, and has redistributed income from the bottom to the top. My colleague Josh Bivens has shown that expanded trade with low-wage countries has reduced the annual wages of a typical worker by $1,800 per year. Given that there are roughly 100 million non-college-educated workers in the U.S. economy, the scale of wage losses suffered by this group likely translates to roughly $180 billion. Trade and investment deals such as the Korea-U.S. Free Trade Agreement (completed by President Obama), and the agreement to bring China into the World Trade Organization in 2001 (negotiated by President Clinton), have contributed these lost wages. It’s not surprising that one commentator concluded that “the Trans-Pacific Partnership trade deal is an abomination,” precisely because of its impacts on “low-skilled manufacturing workers and income inequality.”
President Obama has been vociferously defending the Trans-Pacific Partnership (TPP) recently. He insists that it will be good for the American middle class and that TPP’s critics arguing otherwise are wrong. But in this case he’s wrong and the TPP critics are right: there is no indication at all that the TPP will be good for the American middle class.
I tried to take this on in very wonky terms in this long-ish report here, and in this post I’ll try to boil it down a bit.
The basic argument for why the TPP is likely to be a bad deal for the middle class is pretty simple. For one, even a genuine “free trade agreement” that was passed with no other complementary policies would actually not be good for the American middle class, even if it did generate gains to total national income. For another, the TPP (like nearly all trade agreements the U.S. signs) is not a “free trade agreement”—instead it’s a treaty that will specify just who will be protected from international competition and who will not. And the strongest and most comprehensive protections offered are by far those for U.S. corporate interests. Finally, there are international economic agreements that the United States could be negotiating to help the American middle class. They would look nothing like the TPP.
Even genuine “free trade” would likely be hard on the American middle class
Most (not all, but most) of the countries that would be included in the TPP are poorer and more labor-abundant than the United States. Standard trade theory has a clear prediction of what happens when the United States expands trade with such countries: total national income rises in both countries but so much income is redistributed upwards within the United States that most workers are made worse off. This is sometimes called “the curse of Stolper-Samuelson”, after the theory that first predicted it. And there is plenty of evidence to suggest that it’s not just a theory, but a pretty good explanation for (part of) the dismal performance of wages for most American workers in recent decades and the rise in inequality. And the scale of the wage-losses are much, much larger than commonly realized—it’s not just those workers who lose their jobs to imports. Instead, the majority of American workers (those without a 4-year college degree) see wage declines as a result of reduced trading costs. The intuition is simply that while waitresses and landscapers might not lose their jobs to imports, their wages are hurt by having to compete with trade-displaced apparel and steel workers.