Transatlantic Free Trade Agreement: Job Claims Are Pure Baloney

The Senate Finance Committee held hearings this week on the proposed Transatlantic Trade and Investment Partnership (TTIP). The committee chair, Sen. Max Baucus, claimed that the TTIP could boost U.S. exports to the EU by a third, adding “more than one hundred billion dollars annually to U.S. GDP,” and that it “could support hundreds of thousands of new jobs in the United States.” The statement is remarkable for its sheer audacity in the face of massive evidence of the failure of similar deals to deliver promised benefits. U.S. trade with Mexico after the North American Free Trade Agreement (NAFTA) has cost the United States nearly 700,000 jobs through 2010. U.S. trade with China has certainly failed to deliver on the promised benefits of growing exports. Since that country entered the World Trade Organization (WTO) in 2001, the U.S. has lost 2.7 million jobs through 2011 due to growing trade deficits with China. And the Korea-U.S. Free Trade Agreement (KORUS) has also resulted in growing trade deficits with that country and the loss of more than 40,000 U.S. jobs. Most of the trade-related job losses are concentrated in manufacturing, and growing trade deficits are responsible for a large share of the decline in U.S. manufacturing employment over the past fifteen years.

Using estimates of changes in two-way trade between the U.S. and the EU under the agreement reveals that TTIP is projected to result in a growing U.S. trade deficit with the EU and the loss of at least 71,000 additional U.S. jobs. Senator Baucus, citing advice from Benjamin Franklin, advises the U.S. to “jump quickly at opportunities.” When it comes to evaluating trade deals, Congress and the public would be better served by the common law principle of ‘Caveat Emptor,’ or, let the buyer beware. Congress has a duty to perform their due diligence in evaluating proposed trade and investment agreements before jumping at the next “great deal.” In particular, members should note that Sen. Baucus’s claims that the TTIP “could support hundreds of thousands of new jobs” are pure baloney.

Claims that the TTIP will generate hundreds of billions of dollars per year in increased GDP in the United States and the European Union are based on a study, cited by the EU, from the London-based Centre for Economic Policy Research (EU Centre), which claims that U.S. GDP would be increased by up to $130 billion per year (€95 billion) by 2027, and that US exports to the EU would rise by up to $218 billion per year (€159).

The EU Centre report is based on a CGE model that is based on business surveys and a number of simplifying assumptions about the structure of the economy through 2027. Bivens (2007) reviews a number of earlier CGE-based studies that are similar to the EU Centre report and finds that they have often been used to massively overestimate the gains from trade and that the benefits of trade liberalization have often been grossly exaggerated. One of the most widely quoted studies, by Bradford, Grieco and Hufbauer (BGH), claimed that U.S. incomes were $1 trillion higher, or $9,000 per household due to increased trade liberalization between 1945 and 2004. Bivens notes that one of the highest-quality studies reviewed by BGH was applied incorrectly by the authors. That study actually showed that trade liberalization from 1982 to the present, a period that included the creation of NAFTA, the WTO and China’s entry into the WTO, added only $9 per household, not $9,000. BGH also low-ball the cost of trade liberalization by omitting its primary component—slower wage-growth for all U.S. workers who resemble (in terms of skills, education and credentials) those workers directly displaced by imports.

In his paper “The gains from trade: How big and who gets them,” Bivens shows that the BGH findings are at odds with the results of modern trade theory. BGH claim that the group losing from expanded trade is concentrated and that the scale of losses is small. This claim is literally the opposite of what mainstream trade theory predicts for an economy like the United States. This theory makes the case that trade (particularly trade between the rich U.S. economy and the poorer members of the global economy) is win-win at the country level but predicts quite plainly that such rich/poor trade is not win-win for productive factors (e.g., labor and capital) within countries.

Further, standard theory predicts that for the United States, the pattern of wins and losses from rich/poor trade will result in a less equal distribution of income. Most relevantly, this theory predicts that losers outnumber winners, even if winnings are greater than losses. Hence, for the United States modern trade theory predicts that the gains from rich/poor trade are more concentrated than the losses. This is why trade has contributed to an increase in income inequality in the United States. Bivens has recently shown that growing trade with less-developed countries lowered wages 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 college degree.

But what about those job gains?

Sen. Baucus’s remarks about jobs and the TTIP are typical of administration claims about the benefits of free trade agreements. He notes the U.S. exports are projected to increase “by more than a third,” “which could support hundreds of thousands of jobs.” But trade is a two way street. FTAs typically expand both exports and imports between partner countries. Exports support domestic jobs, but imports displace jobs that would be located in the United States. But when most U.S. officials talk about the benefits they refuse to discuss imports or their effects on employment. Talking about trade deals and only discussing the growth of exports and their implications for employment is like keeping score in a baseball game and only counting runs scored by the home team—it might make your team sound good, but it won’t tell you if they’ve won the game.

Fortunately, the EU Centre (p3) estimated the effects of the TTIP on exports of both the United States and the EU. In their “ambitious” scenario (most frequently cited by U.S. and EU officials), U.S. exports to the European Union increase by $218 billion (at current exchange rates) in 2027, but EU exports to the United State increase by $256 billion. As a result, the U.S. trade deficit with the EU would increase by $38 billion.

The U.S. Department of Commerce regularly publishes reports on “Jobs Supported by Exports.” These “job multipliers,” which measure the total number of jobs supported by U.S goods and services exports, tend to fall each year due to productivity growth and changing trade patterns. Using job multipliers for the past four years (2009-2012), and projecting the trend rate of productivity growth until 2027 yields a project multiplier of 1,847 jobs per billion dollars of exports. Assuming (conservatively) that imports and exports have similar job multipliers yields 403,000 jobs supported by increased exports to the EU and 474,000 U.S. jobs displaced by increased imports from the EU. As a result, growing trade deficits with the EU are projected to result in the net loss of 71,000 U.S. jobs.

This estimate is conservative, for at least two reasons. First, U.S. imports are usually more labor intensive than U.S exports. For example, in U.S. goods trade with China, exports in 2011 supported an average 7,300 jobs per billion (in 2005 dollars) while imports supported 11,091 per billion (derived from Scott 2012, Table 1). Second, foreign direct investment (FDI) by U.S. multinationals investing abroad, and by foreign multinationals investing in the United States, is responsible for the vast majority of the U.S. goods trade deficit. When foreign multinational companies (MNCs) set up factories in the United States, they tend to import parts from their home country. New foreign plants also often displace domestic plants that would source parts from U.S. suppliers. Thus, for example, in 2010, all U.S. affiliates of foreign MNCs had imports of $518 billion but exports of only $229 billion, for a next foreign MNC trade deficit of $289 billion (44.8% of the total U.S. trade deficit in 2010). Similarly, U.S. MNCs had a trade deficit of $195 billion (30.2% of the total U.S. trade deficit in 2010). So FDI is lose-lose for U.S. trade, jobs and the domestic economy.

While Sen. Baucus and other U.S. officials have stressed the attractiveness of the European Union as a market for U.S. agricultural and other products, the EU is also home to a large number of low wage countries such as Bulgaria, Croatia, the Czech Republic, Estonia, Lithuania, Poland, Romania, Slovakia, and Slovenia. Turkey and Serbia, among others, are active candidates for EU membership. The TTIP will make many of these countries extremely attractive candidates for outsourcing. As I showed in my paper “No Jobs from Trade Pacts,” the rapid growth of FDI and outsourcing after FTAs take effect explains why these deals have often resulted in rapidly growing trade deficits and job losses, far in excess of those predicted in official projections, or by advocates for these agreements.

The TTIP is specifically designed to increase the two-way flows of FDI between the United State and the European Union. FDI has had corrosive effect on U.S. trade and economic development, and Congress would therefore be well advised to proceed with great caution and perform careful due diligence on all aspects of the administration’s proposals for the TTIP. FTAs and other trade deals have cost millions of U.S. jobs, most in the manufacturing sector. Congress should be very wary about approving new trade and investment deals like the TTIP. Caveat emptor, indeed.