No, Post-NAFTA Trade Agreements Are Not Why the US Trade Deficit Improved After the Mid-2000s

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.