Trade and Globalization
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 $655.9 billion—an increase of $108.2 billion, or 19.8 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.
This post originally appeared in The Huffington Post.
This week, Senator Hatch will reportedly introduce “fast track” (trade promotion authority) legislation in the Senate, to help President Obama complete the proposed Trans-Pacific Partnership (TPP), a trade and investment deal with eleven other countries in Asia and the Americas. “Fast Track” authority would allow the President to submit trade agreements to Congress without giving members of Congress the opportunity to amend the deal. Experience has shown that these trade and investment deals typically result in job losses and downward pressure on the wages of most American workers. The last thing America needs is renewal of fast track and more trade and investment deals rushed through Congress.
The administration has claimed that the TPP will create jobs, but it will not. There are other policies that have attracted bipartisan support, including ending currency manipulation and rebuilding infrastructure that could each create millions of U.S. jobs. President Obama has limited political capital to expend with the Republican-controlled Congress and he must choose his policies wisely.
Trade and Jobs?
For more than twenty years, both Democratic and Republican administrations have claimed that free trade agreements like the U.S. – Korea Free Trade Agreement (KORUS) and the North American Free Trade Agreement (NAFTA) would lead to growing U.S. exports and stimulate creation of goods jobs in the United States. Bill Clinton claimed that NAFTA would create 200,000 jobs in its first two years and a million jobs in five years. President Obama claimed that KORUS would “support 70,000 American jobs” because the agreement would “increase exports of American goods by $10 billion to $11 billion.”
Claims that trade and investment deals would support domestic job creation have proven to be empty promises. 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 American 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 NAFTA and KORUS.
This post was updated at 5:43 pm to reflect additional analysis.
Today, the Washington Post fact checker, Glenn Kessler, claimed that Public Citizen’s analysis of the Korean Free Trade Agreement (KORUS) is based on flawed economics and faulty math. Kessler accepts the White House claim that the employment effect of the KORUS should be based only “on a gain in merchandise exports,” and then claims that “the most appropriate way to look at export flows would be on an annual basis, which shows a net gain of about $2.3 billion. That’s theoretically a gain of 15,000—a far cry from the loss of 85,000 [jobs],” as estimated by Public Citizen. By ignoring imports, Kessler completely ignores one of the most important factors in the effects of trade on employment.
Imports reduce the demand for domestic goods and services. This is a fundamental assumption in introductory (and applied) macroeconomics. By ignoring it, Kessler denies his readers critical information needed to evaluate Public Citizen’s claim.
The Fact Checker approach (and the White House’s KORUS trade and job estimate) is a form of bookkeeping which counts only the credits and ignores the debits. It would earn a failing grade in any basic accounting class. Kessler spends a lot of time talking about things that make job and export calculations difficult (overall economic health, and the state of the business cycle), and yet he glosses over the impact of imports. It’s really important to calculate the jobs impact of both exports and imports, and it’s easy to do.
(Update of a blog post from March 14, 2014).
March 15th was the third anniversary of the U.S.-Korea Free Trade Agreement (KORUS). 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 75,000 jobs between 2011 and 2014.
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 three years after KORUS took effect, U.S. domestic exports to Korea increased by only $0.8 billion, an increase of 1.8 percent, as shown in the figure below. Imports from Korea increased $12.6 billion, an increase of 22.5 percent. As a result, the U.S.trade deficit with Korea increased $11.8 billion between 2011 and 2014, an increase of 80.4 percent, nearly doubling in just three years.
As I’ve noted before, as trade agreements and other legislation (Trade Promotion Authority, or TPA) get debated, you’ll see more and more bad arguments in favor of them. Just yesterday, a study from Third Way claimed that trade agreements signed after 2000 have led to reductions in the U.S. trade deficit. They label these post-2000 trade agreements as “higher standard” trade agreements.
My guess it would be news to lots of policymakers that, say, the Central American Free Trade Agreement (CAFTA) and the Australia-U.S. FTA, signed in the mid-2000s during the George W Bush administration, and the Korea-US and Panama-US agreements, signed in 2012 and 2013 respectively, all qualify as simply indistinguishably “high-standard.” For instance, those who follow issues of labor standards, say, would argue that CAFTA had far less effective labor protections than these later agreements.
Leaving that aside, Third Way claims that because bilateral trade balances between the United States and the signatory countries improved after the treaties were enacted, that this means these agreements are “working.” This is really facile analysis. To see why, just note that the large majority (about 75%) of the total improvement in bilateral trade deficits following trade treaty enactment that Third Way identifies occurred with a set of countries that signed trade agreements between 2004 and 2006: Singapore, Chile, Australia, El Salvador, Guatemala, Honduras, Nicaragua, Morocco and Bahrain. The real action is the first three, which account for nearly all the improvement in this groups’ bilateral trade balance improvement between treaty enactment and 2014.
What’s the significance of this? Well of course the sum of trade balances with those countries improved between 2004-06 and 2014—the overall U.S. trade deficit fell from over $1 trillion on average in those years to just over $900 billion today.*
There was nothing magic at all about those trade treaties that drove improvement in the nation’s trade balance—what happened between the mid-2000s and today was the Great Recession, which compressed imports and reduced trade deficits. Add to this the improvement in the U.S. oil trade balance (which I don’t think anybody claims has been influenced by trade treaties) and you really don’t need to invoke trade treaties at all to explain improving trade balances between 2004-06 and 2014.
*Update: I’m reporting numbers that used the same deflation choice Third Way used – converting to $2014 using the CPI-U-RS. This isn’t quite the right way to deflate these, but wanted my numbers to be comparable.
What’s Wrong with the TPP? This deal will lead to more job loss and downward pressures on the wages of most working Americans
In a recent op-ed in the Washington Post, three prominent economists, David Autor, David Dorn, and Gordon Hanson make a number of controversial arguments in favor of the proposed Trans-Pacific Partnership (TPP).
Autor, et al, acknowledge that the United States has lost 5 million manufacturing jobs since 2000 due to globalization and automation, but they then make the argument that these jobs are not coming back. There’s no sense closing the barn door after the horse has escaped, as it were. But this line of thought ignores the crucial role played by currency manipulation, which costs jobs by subsidizing foreign exports to the United States while acting like a tax on U.S. exports. Many prominent economists, including Fred Bergsten and Larry Summers, have said that trade deals like the TPP should include restrictions on currency manipulation. As Dean Baker notes, this is particularly important to keep in mind because the TPP is designed to be expandable, and countries such as China (the world’s largest currency manipulator), Korea, and India are candidates for early inclusion in an expanded TPP, if the agreement is completed.
Eliminating currency manipulation could reduce the U.S. trade deficit by up to $500 billion, adding up to 4.9 percent to U.S. GDP and creating up to 5.8 million U.S. jobs, with about 40 percent (2.3 million) of those jobs gained in manufacturing. So, many of those lost manufacturing jobs could in fact be recovered, in part through the inclusion of a currency clause that Autor, et al, fail to consider in their analysis of the TPP. A TPP without a currency clause will make it affirmatively harder to end currency manipulation in the future, and the effect of this on net exports swamps the effect of even large tariff cuts.
The TPP, trade, and job loss
Autor, Dorn, and Hanson go on to claim that because U.S. tariffs are already low, import competition from TPP members would “barely affect” U.S. manufacturers. This is an old claim, often made for previous trade and investment deals, and the actual outcomes have rarely supported these predictions. Under the North American Free Trade Agreement (NAFTA), it was Mexico that made large tariff concessions when U.S. tariffs were already low. Yet U.S. imports from Mexico still grew much faster than exports to that country, eliminating nearly 700,000 U.S. jobs by 2010 through growing trade deficits.
When China came into the WTO in 2001, it clearly had much higher tariffs than the United States, and China made large tariff cuts to gain WTO admission. Yet growing U.S. trade deficits with China through 2013 eliminated 3.2 million U.S. jobs. If tariff cuts are so favorable to U.S. exports, why do these deals usually result in growing U.S. trade deficits and job losses?
Mexico and China both experienced a tremendous increase in foreign direct investment (FDI) and outsourcing in the wake of NAFTA and China’s WTO entry. FDI in Mexico nearly tripled as a share of GDP in the decade after NAFTA, compared with the decade before NAFTA. China, meanwhile, became the third largest recipient of FDI in the world. In both countries, FDI fueled the growth of thousands of new manufacturing plants that generated exports to the United States and other markets.
Manufacturers were willing to invest in Mexico and China because of special protections offered in these deals for investors, including greatly expanded intellectual property rights and special, extra-judicial dispute settlement mechanisms to protect corporate investments (so-called investor-state dispute settlement or ISDS). The TPP threatens to roll back U.S. regulations in areas such as food safety, banking and finance regulations. These changes will be enforced through private actions under the ISDS, as well as changes in government rules.
Finally, Autor, Dorn, and Hanson’s claim that the TPP won’t significantly expand access to the U.S. market (“tariffs are already low”) is hard to reconcile with the desire of other countries to sign the deal. Why would they sign and make the sacrifices required, if not for access to the U.S. market?
It’s also important to acknowledge that terms of the TPP are still secret, and negotiations are incomplete. We are basing our analysis based on what’s happened under past agreements; other seem to be basing their analysis on their own policy preferences.
The authors claim that enhanced intellectual property rights in the TPP will generate substantial benefits for U.S. corporations and U.S. workers in industries such as information and computer services and other industries that derive much of their incomes from copyrights and royalties (including movies and hi-tech firms like Apple and pharmaceutical makers like Pfizer). While high-tech service industries are the glamour names in these discussions, it’s important to keep in mind that U.S. manufacturing firms, which stand to lose out as a result of the TPP, are responsible for more than two-thirds of U.S. business research and development spending (68.9 percent of total business R&D in 2012).
Special protections for investors in the proposed TPP will encourage the growth of outsourcing to TPP countries. In this regard, what’s important to remember is that 12 million jobs remain in U.S. manufacturing. It’s these jobs that are on the line in the next wave of outsourcing. The TPP will open up countries like Vietnam and Malaysia to more U.S. FDI and outsourcing. If China and India are allowed to join the deal in the future, the threat of additional outsourcing will increase exponentially.
The United States already has a large and growing trade deficit with the 11 other countries in the proposed TPP that reached $265.1 billion in 2014. In contrast, the United States had a small trade surplus with Mexico in 1993, before NAFTA took effect. Outsourcing to the TPP countries is a potentially much greater threat than it was under NAFTA with Mexico.
TPP will increase wage inequality
Globalization has already increased wage and income inequality, and here our findings are similar to those of Autor, et al’s, published research (though not mentioned in their column). Our research has identified two channels through which trade and globalization have driven down the wages of working Americans. First, the growth of trade deficits with China (along with other low wage countries) has forced workers out of good-paying jobs with excellent benefits into lower-paying jobs in non-traded (e.g. service) industries. I have estimated that this resulted in direct wage losses of $37 billion for the 2.7 million workers displaced by China trade in 2011 alone.
And second, my colleague Josh Bivens has used standard trade models to estimate that expanded trade has changed the composition of jobs in ways that reduced the annual wages of a full-time American worker without a four-year college degree who earns the median wage 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 into close to a full 1 percent of GDP—roughly $180 billion.
Autor et al’s arguments about the benefits of the TPP add fuel to the income inequality fire. As Dean Baker notes, they argue that the regulatory structures being developed in the agreement would “largely benefit U.S. corporations, since they would get more money for the patents and copyrights,” and would gain new tools to use against foreign governments who threaten those profits.
The corporations that stand to benefit have few, if any, organic ties to the U.S. economy—most have outsourced a large share of production jobs to other countries. The primary beneficiaries will be people from the United States who happen to own stock in these companies. And the greatest benefits will flow to those who own the most stocks, primarily those in the top 1, 5, and 10 percent of the income distribution. So, the TPP and similar agreements will only serve to worsen U.S. income inequality.
What’s more, there are costs to providing greater protections to intellectual property. As Paul Krugman recently noted, protecting intellectual property creates a monopoly for the patent or copyright holder, which makes the world poorer. And as Dean Baker notes, it also diverts resources to the monopolists, reducing demand for everything else made by producers of other products. Questions about the impact of the TPP on income distribution and the distortions imposed by tightening intellectual property rights have motivated Nobel Prize winning economists such as Krugman and Joseph E. Stiglitz to challenge the justification for the TPP.
The administration has chosen to conduct a high-stakes campaign for fast-track authority to conclude negotiation of the TPP and a similar agreement with the European Union (the Transatlantic Trade and Investment Partnership). While fast-track requires congressional approval of negotiating objectives, it creates a process for consideration of final agreements that denies members of Congress the right to revise or amend any part of those agreements.
Alternatively, the president could decide to take steps to end currency manipulation by China and more than 20 other countries, mostly in Asia. There are a number of steps that could be taken, such as the inclusion of currency manipulation clause in the TPP. The president and federal agencies already possess the tools needed to end currency manipulation outside of the TPP. The Treasury and Federal Reserve Board of Governors have the authority needed to offset purchases of foreign assets by foreign governments by engaging in countervailing currency intervention. By taking these steps, the U.S. government could make efforts by foreign governments to manipulate their currencies costly and/or ineffective.
Ending currency manipulation could create up to 5.8 million U.S. jobs, and up to 2.3 million jobs in manufacturing alone. Manufacturing is not dead. Manufacturing job loss is not a “fait accompli,” in the words of Autor, et al. Creating millions of jobs in the United States, and especially good jobs in manufacturing, would raise U.S. wages and begin to reverse the rise in U.S. income inequality that has had a strangle hold on the economy for the past 30 years.
The president can continue the fight for fast-track and the TPP, raising corporate profits while putting good manufacturing jobs and wages at risk. Or he can take action to create jobs and reduce inequality. He can’t do both.
Business Roundtable Study Fails the Laugh Test: The U.S. Trade Deficit has Cost Millions of U.S. Jobs
The United States had a goods and services trade deficit of approximately $463.5 billion in 2013, which cost millions of U.S. jobs. Contrary to the well agreed-upon fact that trade deficits lead to job loss, the Business Roundtable (BRT) has sponsored a study which claims to show that U.S. goods and services trade (both imports and exports) supported nearly 40 million U.S. jobs in 2013. They achieve these results with a highly distorted model which looks at what would happen if all U.S. exports and imports of goods and services were eliminated “by imposing prohibitive duties against” U.S. goods and service trade.
The silliness of this approach is obvious. The BRT study arrives at its conclusions by assessing how many people would be out of work if the vast majority of workers involved in producing or using traded goods just stopped working. But that’s not how the economy works in the real world. If one assumes away 30 percent of the U.S. economy, one of course assumes away about 30 percent of the jobs. It’s irrelevant to the policy question of whether our trade should be balanced, and it falsely assumes that imports have the same positive employment impacts as exports, when, in fact, imports tend to reduce domestic employment by reducing domestic production.
Using a simple and straightforward macroeconomic model described here, I estimate that the U.S. trade deficit resulted in a net loss of 5.3 million U.S. jobs in 2013. Claims that U.S. trade deficits supported millions of U.S. jobs cannot be justified with any reasonable set of macroeconomic models or assumptions.
The BRT study also claims that two massive, proposed trade and investment deals (the Trans-Pacific Partnership or TPP, and the Transatlantic Trade and Investment Partnership or TTIP) would benefit the U.S. economy. It supports the claim by imagining what would happen if all trade with these countries were eliminated—a proposal no one has made. Any serious debate must focus on how the deals will affect trade at the margin, whether they will do more to stimulate exports or imports, and whether they will increase or decrease U.S. trade deficits. Most other major trade investment deals, including those with Mexico, Korea, and China, have resulted in growing trade deficits and job losses, so the burden of proof is on those who support these deals to show that they will have different outcomes. The study sheds no light on these questions because its assumptions are fatally flawed.
The fact is, the United States had a goods and services trade deficit of approximately $135 billion in 2013 with the European Union and members of the proposed Trans-Pacific Partnership. This trade deficit made up 29.2 percent of the total U.S. trade deficit in 2013, and was responsible for approximately 1.5 million of the total of 5.3 million U.S. jobs displaced by the U.S. trade deficit in 2013.
In December I showed that growing trans-Pacific trade deficits would set the stage for growing trade-related job displacement. New data released this month show that the U.S. trade deficit with the countries in the proposed Trans-Pacific Partnership (TPP) increased to an unexpectedly large $265.1 billion in 2014, as shown in the updated graph, below. This increase is further proof that U.S. workers don’t need another job-killing trade deal, which would undoubtedly grow the trade deficit even more.
In addition, new developments are likely to increase opposition to the deal being crafted behind closed doors by negotiators from the United States and 11 other countries. In a remarkable op-ed in the Washington Post, Senator Elizabeth Warren identifies a key way in which the proposed TPP is a dangerous and unnecessary corporate giveaway. The TPP would create special tribunals, or dispute resolution panels, that would allow corporations and foreign investors (but not public interest groups or unions) to challenge U.S. laws “without ever setting foot in a U.S. court.” These deals give corporations special rights to force countries to roll back critical regulations. Right now, for example, Philip Morris is using the process to try force Uruguay to halt new anti-smoking regulations that are designed to improve public health. As Warren concludes, if these dispute panels are included in the final TPP, the only winners will be giant, multinational corporations.
The TPP would also do nothing to combat currency manipulation, which is a major driver of U.S. trade deficits with TPP countries including Japan, Malaysia, and Singapore. Ending currency manipulation could reduce U.S. trade deficits and increase GDP—creating between 2.3 to 5.8 million jobs—but U.S. Trade Representative Froman has said that it has not been discussed in TPP negotiations.
It’s increasingly clear that the TPP, like past trade and investment deals, would be a bad deal for U.S. workers. The president should not try to push this deal through, and Congress should not approve it.
The 69th Economic Report of the President (ERP), released this week, has much to recommend it—especially its focus on policies needed to rebuild middle-class economics, including raising the federal minimum wage and increasing job-creating investments in infrastructure, science, and technology. However, the report runs off the road when it turns to trade. The official summary of the report features a chart on trade which claims that “export intensive industries report 17 percent higher average wages than non-export intensive industries.” As I pointed out in a recent blog post on trade and wages, this frequently repeated claim is less than half the story. Wages in import-competing industries (not shown in the ERP chart) are also much higher than in non-traded industries, and also substantially higher than the jobs supported by exports. Worse yet, growing trade deficits have eliminated many more good jobs in import competing industries than are supported by exports. So, on balance, U.S. trade has eliminated many more good jobs than are supported in exporting industries. For middle-class working Americans, trade and globalization has indeed caused a race to the bottom in jobs and wages.
As I’ve written before, a good illustration is provided by U.S. trade with China, which was responsible for nearly half (46.5 percent) of our $736.8 billion goods trade deficit in 2014. Jobs in industries exporting to China did pay well in 2009–2011 (the last years for which we have complete wage data)—an average of $872.89 per week, or 10.3 percent more than workers making non-traded goods and services (who earned only $791.14 per week), as shown in the figure below. However, workers in import-competing industries were paid even better—an average of $1,021.66 per week, or 29.1 percent more than workers in non-traded industries.
Average weekly wages* in different industries affected by U.S. trade with China
|Average weekly wages*|
* Average wages by education group are from a 3-year pooled sample of workers by industry from 2009–2011.
Source: Author's analysis of Current Population Survey Outgoing Rotation Group microdata
Examined in isolation, jobs in industries supported by exports look good (at least when they are compared to jobs in non-traded industries). But those jobs come at a huge price to workers displaced by imports, and to all workers forced to compete with the growing surge of imports from low-wage countries.
Trade is a hot topic on Capitol Hill this year. President Obama has asked members of Congress for “fast track” trade promotion authority in order to finalize proposed trade deals with Asia and Europe that set the stage for growing, trade-related job displacement. One of the president’s core, frequently repeated arguments for these trade and investment deals is that “our businesses export more than ever, and exporters tend to pay their workers higher wages.” But that’s less than half the story. 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. Sadly, when it comes to trade and wages, trade is driving down the average wages of American workers because the United States runs large trade deficits with the world as a whole, including many countries in Asia and Europe—the regions targeted in current trade negotiations.
A case in point is provided by U.S. trade with China, which was responsible for nearly half (46.5 percent) of our $736.8 billion goods trade deficit in 2014. Jobs in industries exporting to China did pay well in 2009-2011 (the last years for which we have complete wage data)—an average of $872.89 per week, or 10.3 percent more than workers making non-traded goods and services (who earned only $791.14 per week), as shown in the figure below. However, workers in import-competing industries were paid even better—an average of $1,021.66 per week, or 29.1 percent more than workers in non-traded industries.
As discussions surrounding the proposed Trans-Pacific Partnership (TPP) heat up, there has been a new push to include provisions within the agreement to keep countries from managing the value of their currency for competitive gain vis-à-vis their trading partners. This push got an unexpected (by me, anyhow) boost recently when former U.S. Treasury Secretary and former Obama administration National Economic Council Director Larry Summers called for it (see page 22 in the link).
This currency management is a key cause of persistent U.S. trade deficits, and it is widespread. Given that our trade deficit drags on demand growth, and given that generating sufficient demand to reach full employment is likely to be a key economic problem in coming years, this is an important issue to address. Further, given that U.S. tariffs are extremely low, it’s hard to think of any other issue besides currency management that could possibly matter more for trade flows, so excluding it from the TPP seems odd. And yet many TPP proponents are extremely reluctant to include binding tools to stop currency management in the treaty. There have been many arguments for why the United States can’t or shouldn’t stop currency management, but the latest rationale is pretty novel: the claim is that including a currency chapter in the TPP would let other countries use the provisions of the treaty to stop the Federal Reserve from engaging in expansionary monetary policy. If such a provision had been in effect during the Great Recession, this argument continues, it would have kept the Fed from engaging in the quantitative easing (QE) that it undertook to blunt the recession and spur recovery.
Tying the Fed’s hands like this would indeed be a bad thing, but there’s no reason at all to think one couldn’t define currency management in way that did not constrain the Fed or any other central bank wanting to undertake similar maneuvers.
It’s widely expected that in tonight’s State of the Union address President Obama will call for actions to boost wages for low- and moderate-wage Americans, and also for moving forward on two trade agreements—the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TTIP).
These two calls are deeply contradictory. To put it plainly, if policymakers—including the President—are really serious about boosting wage growth for low and moderate-wage Americans, then the push to fast-track TPP and TTIP makes no sense.
The steady integration of the United States and generally much-poorer global economy over the past generation is a non-trivial reason why wages for the vast majority of American workers have become de-linked from overall economic growth. This is not a novel economic theory—the most staid textbook models argue precisely that for a country like the United States, expanded trade should be expected to (yes) lift overall national incomes, but should redistribute so much from labor to capital owners, so that wages actually fall. So, it can boost national income even while leaving the incomes of most people in the nation lower than otherwise.
The intuition on how is pretty easy. Take the most caricatured example of how expanded trade works: the United States produces and exports more capital-intensive goods (say airplanes) and imports more labor-intensive goods (say apparel). By focusing on what we’re relatively better at producing (capital-intensive airplanes)and trading this extra output for what our trading partners are relatively better at producing (labor-intensive apparel), we can see national incomes rise in both countries. This specialization in the United States requires shifting resources (i.e., workers and capital) out of apparel production and into airplane production. But each $1 in apparel production lost requires more labor and less capital than the $1 in airplane production gained—causing an excess supply of labor and an excess demand for capital. Capital’s return rises while labor’s wage falls.
The United States failed to achieve a doubling of exports between 2009 and 2014, as promised in President Obama’s National Export Initiative (NEI). It wasn’t even close. Total U.S. goods and services exports increased by less than 50 percent ($766 billion, or 48.4 percent) between 2009 and 2014 (estimated), as shown in the figure below. Meanwhile, imports increased by an even larger $883.8 billion, and as a result, the U.S. trade deficit increased by $117.0 billion.
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. Between 2009 and 2014 the growth in imports more than offset the increase in exports, resulting in a growing trade deficit, as shown in the figure. Growing trade deficits have eliminated millions of jobs in the United States, and put downward pressure on employment in manufacturing, which competes directly with most imported products. For example, growing trade deficits with China alone have displaced 3.2 million U.S. jobs between 2001 (when China entered the WTO) and 2013, with 1.3 million of those jobs lost since 2009 alone.
U.S. exports, imports, and trade balance change, 2009 –2014
Sources: EPI's analysis of U.S. Census Bureau, U.S. International Trade in Goods and Services