At a core level, Trump’s USMCA did not fix the intense downward pressure on jobs and wages that has plagued U.S. manufacturing economies in the generation since NAFTA. USMCA made important advances over NAFTA but still failed to deliver on its promise to address systemic labor exploitation in Mexico—perpetuating instead the incentives for a race to the bottom in labor and pollution standards for producing goods that can compete duty free in North American markets.

USMCA actually expanded the back door to U.S. markets for unfairly traded products by allowing an expanded Chinese manufacturing footprint to penetrate the Mexican economy through imports and inbound foreign investment, allowing China to benefit from USMCA’s market access provisions. Essentially, USMCA became a way for Chinese-produced goods to masquerade as goods that should receive the preferential USMCA tariff rates. Additionally, USMCA expanded on NAFTA-granted corporate protections by advancing monopolistic property rights across the continental economy for the world’s largest digital economy and pharmaceutical industry interests. In short, there is no evidence that things have improved for U.S. workers and small businesses or their Mexican and Canadian counterparts under Trump’s trade rules for North America—and there is substantial evidence that things have gotten worse:

• After Trump signed USMCA on July 1, 2020, the U.S. trade deficit with Mexico and Canada widened sharply, increasing to a projected $263 billion in 2025, up from $125 billion in 2020 and $85 billion in 2017.
• The USMCA trade deficit is largely a problem of oil imports from Canada and manufacturing imports from Mexico. Excluding petroleum, the U.S. actually ran a trade surplus of $55 billion with Canada in 2024, or $3 billion more than in 2020. With Mexico, imbalanced trade is about manufacturing, not oil: The non-petroleum trade deficit with Mexico accelerated after USMCA took effect, reaching $156 billion in 2024 (or $55 billion more than in 2020).
• Although Trump’s USMCA sought to revitalize U.S. manufacturing industries, manufacturers across the country shed or furloughed more than 576,000 jobs since he signed the agreement, according to WARN Act notifications filed by employers.
• In the critical automotive industry that Trump claimed to want to reshore, imports of motor vehicles and parts from Mexico nearly doubled following USMCA, rising to $274 billion in 2024, up from $196 billion in 2019. Imports of light-duty vehicles from Mexico increased by 36% while imports of medium- and heavy-duty vehicles increased a whopping 256%.
• Despite novel labor reforms in USMCA—some worth preserving and expanding—the overall wage gap in manufacturing continues to drive corporate decisions to exploit Mexico’s low-wage, low-standard labor environment. At just $2.76 per hour, Mexican workers’ wages today are lower than they were in 2002—a mere 10% of U.S. and 12% of Canadian manufacturing wages. U.S. manufacturers expanded investment in Mexico by $155.4 billion through 2023, including $56 billion in transportation equipment production.
• USMCA left a gaping loophole for Chinese manufacturers to exploit duty-free access to North American markets without offering reciprocal market access for U.S. manufacturers. First to evade Trump’s 2018 tariffs and later to take advantage of the USMCA loophole, Chinese firms expanded their direct investment footprint in Mexico by as much as 288% through 2023 while expanding the export of a range of industrial products to Mexico by 160–900%.

Now USMCA faces a sunset review, requiring all three countries to agree by July 1, 2026, to extend the agreement another 16 years.1 But we don’t need to wait another 10 years to see if President Trump’s USMCA gambit will help workers and the U.S. economy—the data in this report show it has failed working people in all three countries and is in need of dramatic reform and renegotiation. One constituency—leaders from organized labor—has called for the sunset review to identify concrete revisions to address the problems of offshoring and content leakage while raising wages and standards for workers in Mexico (Shuler 2025). While the United States Trade Representative (USTR) is required to report to Congress and the president on its assessment of USMCA, the administration is duty-bound to remedy any flaws it finds in the agreement.

It’s unclear how the president might approach this statutory opportunity to reconfigure a key pillar of U.S. and global trade relations. Trump will be tempted to cast aside the trade agreement based on the rule of law in favor of his new improvisational and perpetual crisis approach to trade negotiations. As we’ve learned from Trump’s track record and thousands of years of trade history, a deal is not always a deal, artful as it may appear. It would seem Trump is not optimizing for general welfare, or even the benefit, generally, of the manufacturing sector he claimed to want to revive during his campaign, but rather to maximize and centralize trade rulemaking authority in the Oval Office.

Trump’s best play to achieve this is to continue delivering credible threats to disrupt the existing trade regime. So long as such threats exist, Trump can keep demanding ad hoc changes to trade policy. This dynamic and the poisonous uncertainty it creates for the economy is precisely why countries negotiate complex trade agreements—committing a shared set of economic rules to the parties’ agreed-upon gains, closer social and economic integration, and a predictable means to resolve conflicts when they inevitably arise. And that is what will be lost if Trump overturns a rules-based agreement and installs his extractive approach to trade relations as the United States’ new norm.

Of course, a rules-based trading system can reduce uncertainty but still contain extreme flaws. This was clearly the case with the pre-Trump status quo in the rules of the game governing globalization, most clearly typified by NAFTA; the rules were clear and binding, but they privileged powerful corporate interests over rank-and-file workers in all three North American economies.

The sunsetting of USMCA means the U.S., Canada, and Mexico now have a chance to put workers and their communities first, instead of representing the big business interests of the status quo. If the Trump administration fails to seize this opportunity and instead simply seeks to centralize its control over all trade policy, this will impose further severe economic disruption and hardship across North American manufacturing industries, cede technological and economic leadership to U.S. competitors, forsake the potential gains from deeper regional economic integration that most other parts of the world have embraced, and squander the recent post-COVID resurgence in U.S. manufacturing investments.

Uncertainty about the future of North American trade rules will cast a dark cloud over investments and jobs that bet on the idea of a regionally integrated North American economy. In 2024, that trade amounted to $1.6 trillion for the United States—nearly one-third of all U.S. trade—but reached far wider through direct supply chain linkages and indirect spending from the incomes earned producing, servicing, and moving goods around North America. Given the credible threat of disruption that President Trump brings to trade relations, one could anticipate that dark cloud to also remain a perpetual feature of U.S. and global macroeconomic expectations.

What’s worse, walking away will not end USMCA’s raw deal. Unless an amendment to the 2020 agreement is reached, the U.S. economy would still be bound by Trump’s failing USMCA for the next 10 years of the sunset. At any time before the end in 2036, a future president would be free to reopen the deal, potentially cementing even worse terms. Since USMCA’s rules will remain in force, it is imperative to win a trade model that creates a true worker-centered approach. Just as NAFTA became a model for subsequent agreements extending the lopsided, corporate-driven trade regime to scores of other U.S. trading partners (Bivens and Hersh 2025), a renegotiated USMCA could similarly be a model for protecting workers and communities from the excesses of trade. Without such changes, Trump’s USMCA will continue doing active economic damage and making it difficult, politically, to cultivate broader diplomatic relations important to the United States.

Hard bargaining on USMCA is the best chance to cement a model that embraces the mutual benefits of trade while protecting workers and their communities at the core of the economy. To do so, the president and his trade negotiators should:

• Articulate the administration’s goals for renegotiating USMCA to Congress and the public. Establishing well-defined objectives will make clear to U.S. trading partners, businesses, workers, and communities just what President Trump is trying to achieve in reframing the economic relationship with the U.S.’ two largest trading partners. At minimum, this means adhering to the public and congressional consultations and disclosures required by statute. Such an approach would help build consensus and political support to press for necessary legislative changes in Congress. If instead Trump pursues the kind of informal, ill-defined, and unenforceable “deals” announced thus far, it will cast a cloud of uncertainty over U.S. international economic relations—and ensuing trade and investment activities—through July 2026 and beyond.
• Strengthen and expand regional value content (RVC) and labor value content (LVC) rules. USMCA established rules for the share of content that must be produced in North America and at a given minimum wage to qualify for preferential market access or otherwise face higher tariff rates. However, these rules only applied to select components in automotive manufacturing industries and the 2023 “rolling-up” decision (USTR 2023) undercut those provisions. The 2026 sunset review should make clear the higher content methodologies pertaining to these calculations, while expanding coverage of RVC rules to other industries such as aerospace, white goods (i.e., large electrical goods like washing machines and refrigerators), semiconductors, electric vehicles (EVs), critical minerals and materials, shipbuilding, and food manufacturing. The review should also reset the LVC minimum wage rate to a meaningful level, index it to inflation, and open a process to enact a coordinated, North American-wide minimum wage regime for targeted manufacturing industries.
• Create binding constraints for content rules and regional trade preferences. Since 2018, Chinese manufacturers in industries receiving widespread state support have taken advantage of USMCA loopholes to evade U.S. trade enforcement measures by rapidly expanding manufacturing footprints in Mexico, among other locales. When Most Favored Nation (MFN) rates in industries like passenger vehicles are a mere 2.5% compared with the USMCA rate of zero, it provides little incentive for manufacturers to adhere to USMCA’s rules for qualifying content. In effect, diverted trade flows from China can gain preferential access to North American markets whereas North American companies do not enjoy the same reciprocal offer to compete fairly in China. To close this gaping leak of content, a revised USMCA must raise the regional content thresholds (“rules or origin” or ROOs) and realign MFN tariff rates so that they provide a credible deterrent to nonconforming USMCA content in USMCA supply chains. Section 232 automotive tariffs are a step in this direction but they must be rationalized with a strategic approach to target key supply chain segments and account for near-term supply constraints. For the North American primary metals industries, a renegotiated USMCA must strengthen the “melted and poured” standard for traded steel and adopt a “smelt and cast” standard for traded aluminum as qualifying content.
• Strengthen the labor Rapid Response Mechanism (RRM). USMCA’s RRM—negotiated by congressional Democrats to strengthen Trump’s initial draft deal—has helped improve wages and working conditions in a number of specific workplaces—covering roughly 60,000 workers. This is no doubt a meaningful outcome, but with more than 10 million manufacturing workers in the Mexican economy, it must be scaled to meaningfully move the needle on worker rights and wages. This should include sectoral enforcement in order to hold employers to collective accountability and to support sectoral bargaining. Because of its too narrow scope, the RRM has neither led to economy-wide improvements for Mexican workers nor eliminated the incentive for U.S. companies to offshore or use the threat of offshoring production to Mexico to undermine wages and working conditions in their U.S. factories. The RRM should apply equally in all three countries and expand the scope of violations to include all rights at work. Congress should restore and expand funding for Labor and State Departments and USAID labor rights experts needed to help monitor and enforce rising standards.
• Establish a rapid response mechanism for pollution. Workers and their communities across all three countries deserve the same protections from industrial- and trade-related air and water pollution. A renegotiated USMCA should include a pollution RRM, in parallel to an expanded and strengthened labor RRM, enforceable across all three countries.
• Eliminate exploitative IPR protections; Big Tech. A renegotiated USMCA must not compromise worker interests by prioritizing the agendas of Big Tech and Big Pharma. This means removing special “digital trade” rights and privileges that currently allow companies to preempt local laws addressing negative externalities from digital service provision and curbing expanded intellectual property rights with TRIPS-plus protections that benefit pharmaceutical companies with tighter monopolies and more limited competition.
• Institutionalize trilateral North American collaboration. Beyond President Trump’s efforts to tame opioid trafficking, the United States needs to collaborate more widely and deeply with the Canadian and Mexican for USMCA to succeed. President Trump must also institutionalize working trilateral relationships to cooperate on Committee on Foreign Investment in the United States-style foreign investment screening, economic security planning, forced labor import ban enforcement, tracing supply chains to enforce ROOs, and agricultural and environmental inspections, among a growing list of other fronts.

Such wins in the USMCA sunset negotiations would achieve something meaningful for U.S. workers and manufacturing communities. But fixing USMCA is not only a job for the Trump administration. In addition to these negotiating objectives for the administration, Congress needs to:

• Hold the administration accountable to the law on USMCA. Both USMCA and its U.S. implementing legislation specify a clear timetable for the administration to seek public comments, deliver a report to Congress on findings and recommendations, and articulate negotiating targets. Congress must ensure the administration follows this process specified in law to allow a more open process—relative to the president’s other bilateral deals—and hold the administration accountable to achieving specific outcomes.
• Reauthorize and expand Trade Adjustment Assistance (TAA). The program intended to compensate trade-impacted workers and deliver countercyclical demand stimuli to impacted communities lapsed in 2022 (DOL 2022). In addition to retooling USMCA from an agreement that benefits multinational corporations and expanding Chinese manufacturing, the president should push Congress to reauthorize and expand TAA to protect incomes for displaced workers and the regional economies that rely on them.
• Check executive branch overreach on tariff-making powers, including by passing SJ Res 37,2 to terminate the national emergency that was declared to justify tariffs on imports from Canada under the International Emergency Economic Powers Act (IEEPA). When the executive overreaches, Congress should exercise its responsibility by responding with such a targeted approach to exercising its authority and that leverages its unique role in mediating interest groups.

How did USMCA change—and not change—NAFTA?

President Trump negotiated USMCA from August 16, 2017, to September 30, 2018, and signed the revised agreement on November 30, 2018. His version of USMCA preserved “most of NAFTA’s market opening measures” (Villarreal 2024). Under the new rules, U.S. trade deficits in USMCA worsened sharply. The widening USMCA trade gap belied the widely different experiences with each partner: stable non-petroleum trade surpluses with Canada and rising goods trade deficits with Mexico, fueled in part by a rapid expansion of Chinese manufacturing trade and capital investment in Mexico after Trump’s 2018 tariffs. Despite tighter rules of origin that specify the share of an item that must be produced within North America to qualify for tariff-free access, the rules proved to be rather porous and insufficient to stem the tide of industrial migration to Mexico.

The underlying driver for these trends is the overwhelming incentive—that NAFTA created and USMCA continues—for large corporations to skirt fair wages, labor, and environmental regulations through offshoring and imports when wages in Mexico for comparable work are a mere 10% of U.S. wages and air and water pollution standards go unenforced. How did USMCA change the equation?

Trade deficits worsened under Trump’s USMCA

The United States’ North American trade deficit had been relatively stable over the preceding business cycle expansion starting in 2009 but increased sharply in 2018—coinciding with countervailing tariffs levied on U.S. imports from China and imports of steel and aluminum products more broadly—and increased even more dramatically after 2020 under Trump’s USMCA. We project that trade deficit will widen to $263 billion in 2025, up from $125 billion in 2020 when USMCA started, and $85 billion in 2017 before Trump’s overall first term trade strategy took effect—a more than 200% increase (Figure A). This was not how “fixing” NAFTA was supposed to work.

Figure A

The trade deficit is the difference between how much U.S. businesses sell to another country (exports) and how much U.S. businesses and consumers buy from that country (imports). A deficit with one country may be offset by a trade surplus with another country, or it may be “financed” by capital inflows, most often the purchase of U.S. financial assets by foreign investors. Overall, at the national level, these international payments for goods and finance balance out, so when the United States experiences a goods trade deficit, necessarily there are mirrored surpluses in the sale of financial assets abroad where foreign investors in essence “lend” to the U.S. economy.3

This macroeconomic balance is what determines the overall level of the U.S. trade balance, which is linked mechanically to the U.S. dollar exchange rate that sets the relative competitiveness of U.S. tradable industries and to dollar interest rates. Trade policy measures tailored to particular trading partners (those of both the United States and other countries) may shift around the relative shares of that total trade balance among trading partner countries, but it doesn’t change the overall U.S. balance of trade.4 Under chronic trade deficits that are driven by fundamental macroeconomic imbalances, across-the-board tariffs have very little purchase to enforce more balanced trade: They tend to push down both imports and exports instead (Hersh and Bivens 2025).

The president’s portrayal of trade deficits as a result of unequal exchange gets most of the details wrong. It is true these microeconomic relationships embody all sorts of exploitation, but a trade deficit is not a tribute paid to a trading partner country. It is the result of millions of business transactions, the lion’s share of which occur between companies within a related multinational corporate family. If one wanted to investigate exploitation in North American trading relations, it might make more sense to start with the trading corporations than with, say, Canada.

Figure B

In fact, breaking down the USMCA trade deficit on a country-to-country basis reveals that the U.S. North American deficit is largely a problem of oil imports from Canada and manufacturing imports from Mexico (Figure B). Excluding petroleum, the U.S. actually ran a trade surplus with Canada of $55 billion in 2024, up just $3 billion since 2020. The non-petroleum trade deficit with Mexico accelerated after USMCA took effect, rising by $55 billion to $156 billion in 2024, but it is clear energy is not dominant in U.S.-Mexico trade—manufactures and agricultural products are. This begs the question: Why has the trade deficit with Mexico grown so rapidly under Trump’s USMCA?

USMCA rebooted NAFTA’s drain on manufacturing industries

Although Trump sought to revitalize U.S. manufacturing industries with his fix for NAFTA, manufacturers furloughed or shed more than 576,000 U.S. jobs in the time since he signed the agreement, according to WARN Act notifications filed by employers.5 The surge of imports from Mexico was boosted as North American multinationals reshored or “friendshored” manufacturing to Mexico as part of supply chain reallocation strategies for reducing exposure to Chinese dominance in certain sectors and as Chinese enterprises expanded in Mexico to dodge the impacts of U.S. tariffs.

Underlying all this are wages and working conditions, both of which are much lower in Mexico than they are in the U.S. or Canada; and China’s are even lower still. USMCA gives multinational corporations the best of both worlds: the ability to manufacture for the U.S. market in Mexico, using Chinese-made primary and intermediate components. USMCA creates these race to the bottom incentives for businesses to exploit thanks to its rules of origin. The rules allow non-originating content to be magically transformed into originating content and make its way into North American supply chains with duty-free market access, even when that content is produced under unfair competition and exploitation in third countries. These rules specify the share of local content in a good to qualify for duty-free market access, which is typically 50–60% but as high as 75% for key components of automotive supply chains, including for steel and aluminum content. However, corporations are allowed to “roll-up”—essentially, rounding off—the non-originating content to count as 100% North American originating content.

Suppose a steel spring manufactured in Mexico uses 49.9% Chinese steel wire feedstock and 50.1% local content. When that spring is sold to an auto parts manufacturer, an appliance manufacturer, or whomever, that 49.9% Chinese steel—made without the same commitments to worker, environmental, and consumer safety standards, and without extending similar reciprocal market access to North American producers—becomes 100% North American. The more complicated that a product is—i.e., the more underlying, lower-tier components that are required to make a final good—the more foreign content can masquerade as “Made in North America.” Even under USMCA RVC calculations, substantial non-originating content will enter at 0% duty. Thus, non-originating content qualifying for USMCA ROOs can expand at an exponential rate while still “rolling-up” to count as 100% North American content.

More specific commodities within the automotive industry carry higher content thresholds. In addition to finished vehicles, component steel and aluminum, and specified “core parts,” the rules of origin require production meet a labor value threshold of an average of $16 per hour wage for 40–45% of the vehicle’s content. But the same “rolling-up” loophole that allows non-conforming content into the market applies to these rules as well.

Additionally, the core parts list omits critical new technology goods for electric vehicle related components and autonomous vehicle related components. USMCA Article 3.10 provides a mechanism for the parties to expand the list of core components covered by North American content rules, though this is not a foregone conclusion and, in the meantime, content leakages deter the establishment of North American competition to illegally subsidized and market dominant Chinese technologies. Absent nimble and deeply informed monitoring by executive branch agencies, the faster automotive industry technology evolves, the more vehicle content will become uncovered by USMCA ROOs. To aid in implementation and make this game of ROOs whack-a-mole more manageable, the United States government should work with its Mexican and Canadian counterparts to implement a rigorous content tracing system to ensure that corporations are playing by the rules when it comes to the core parts that help underpin the USMCA bargain.

Besides weaknesses regarding ROOs, the $16 hourly wage rate for the Labor Value Content threshold is too low. Within the United States, $16 an hour is at or near a poverty wage. But because no inflation adjustment was negotiated as part of USMCA—a flaw obvious even in real time—the LVC wage has declined 25% in real terms since USMCA was signed into law. And this wage floor—which is on track to become largely irrelevant before Mexican wages converge on U.S. and Canadian wages—covers less than half of a vehicle’s content, meaning it is not a meaningfully binding wage standard.

Leaky ROOs are a big obstacle to realizing the nearshoring gains of production at a higher standard, but they are not the biggest problem. For the ROOs to bind effectively on business supply chain choices, there needs to be a significant price wedge between conforming to USMCA rules and the higher Most Favored Nation tariff rate paid on nonconforming content. However, more often than not, the higher MFN rate is a mere 2.5%, paling in comparison with the savings from choosing competing nonconforming content—particularly if that is subsidized Chinese inputs. In short, if there is little penalty to pay for not adhering to higher standards, then there is little incentive for corporations to practice higher standards. In fact, recent research from the Federal Reserve finds that compliance with USMCA ROOs in automotive trade has been declining over time as the Big Three and transplant manufacturers have shown preference for using non-North American content (Bowdle and Kamal 2025).

Finally, not only did USMCA leave these loopholes for non-originating content, but the agreement largely relies on these same corporate entities to self-certify their compliance with the ROOs regime. This creates a clear incentive and opportunity for manufacturers to cheat compliance. The less the government monitors and enforces these rules, the more incentive manufactures have to evade USMCA ROOs, although the Trump administration appears to be taking a strict approach to implementing stricter new ROOs on automotive trade.6

Wage and worker power gaps are why USMCA remains a drag on working families

The wage gap in manufacturing continues to drive corporate decisions to exploit low-wage, low-standard labor in Mexico. At just $2.76 per hour, Mexican workers today earn less than in 2002—a mere 10% of U.S. manufacturing wages and 12% of Canadian wages—after adjusting for price differences between countries (see Figure C).

Figure C

Labor provisions in USMCA, in particular the Rapid Response Mechanism, have helped hold the line on labor rights for thousands of workers who were covered in the RRM’s 12 cases so far where worker rights largely were ultimately upheld. But without broadening the scope and scale of enforcement across for the more than 10 million workers across Mexican manufacturing industries (INEGI 2024), continuing the RRM in current form poses more of a mild headwind in the race to the bottom than a forceful deterrent.

Under USMCA, U.S. manufacturers expanded investment in Mexico by $22 billion through 2024 according to Bureau of Economic Analysis data (BEA 2025). This included:

• $10 billion investments in transportation equipment manufacturing facilities (a 61% increase);
• $3 billion in food manufacturing (87% increase);
• $1.9 billion in computer and electronics manufacturing (163% increase);
• nearly $520 million in appliance and electrical equipment manufacturing (30% increase); and
• $225 million in chemicals manufacturing (5% increase).

What’s remarkable is that corporations are moving investments to lower productivity uses as shown in Figure D. Productivity in Mexican manufacturing has been trending down for years relative to that of U.S. manufacturing productivity, in spite of substantial capital investments from U.S. and global firms. In the year before USMCA, Mexican manufacturing workers produced just 32% of what a U.S. manufacturing worker produced per hour. By 2024, they produced just 28%. For comparison, Chinese manufacturing productivity rose from 11% in 2010, to 21% in 2019, and 24% in 2004 relative to U.S productivity levels.

Figure D

Ostensibly, North American multinationals understand the wide and growing productivity differential with Mexican manufacturing workers but prefer to shift toward lower productivity anyway. Though the data indicate such decisions may not make sense for the long-term efficiency of the firm, they may make perfect sense for redistributing the profits of the firm to executives and shareholders by playing off workers against one another’s mutual interests. Businesses in other countries driving the surge in direct foreign investment to Mexico, most notably China, are less concerned with the productivity differential than with securing favorable access to U.S. markets, despite not being a member of the USMCA pact.

While the labor RRM is a significant innovation in USMCA, as noted above, it cannot be expected to compensate for institutional and implementation failures of the Mexican government to uphold worker rights. In fact, the government’s arguments in the recent Atento Servicios RRM case showed it is very much still working to constrain worker rights (USTR 2025b). Similar analyses by Mexican labor law experts find that USMCA is failing to transform Mexico’s fundamentally low-standard labor market institutions (Marroquín Bitar 2024).

Trump left open the backdoor for unfair trade through USMCA rules of origin

The first Trump administration imposed tariffs on a wide range of Chinese technological goods and on steel and aluminum products exhibiting unfair competition—along with the ever-present churn of U.S. anti-dumping and countervailing duty trade enforcement actions. Together, these erected significant new barriers to entry to U.S. markets. Chinese producers responded, in turn, with new business strategies, diversifying into offshore direct investments in lower-tariffed locales, or sometimes relying on transshipment or a handful of other strategies to evade the true applied tariff rate. Initially, Chinese industry diversified into industries close by—Southeast Asia and India—but that quickly expanded to include Mexico.

Chinese firms have practiced this move before. In anticipation of and following U.S. International Trade Commission (ITC) determinations of injury from Certain Passenger Vehicle and Light Truck Tires from China in 2015, Chinese tire manufacturers quickly expanded offshore in countries like Thailand and Vietnam, among others, substituting Chinese production for U.S. markets.7 As a result, tire imports surged from these countries and led to subsequent ITC import injury investigations.8

Figure E

This same story unfolded on a much larger scale post-2018, particularly for Mexico, where Trump’s USMCA made it easy for Chinese industry to gain purchase.9 Figure E shows that Chinese firms expanded their direct investment footprint in Mexico by as much as 288% through 2023, while investment in the United States essentially flatlined. This ballooning outward direct investment position for China since 2018 indicates a rapidly expanding overseas footprint for production organized around Chinese value chains, signaling an influx of content originating from Chinese-owned and Chinese-affiliated firms—often the beneficiaries of robust government subsidization and procurement programs, regulatory and tax forbearance, preferential credit, and other means of competing on noncommercial terms with U.S. domestic firms.10 Dallas Federal Reserve economists are correct to observe that, despite a rapid increase, China still trails U.S. foreign direct investment in Mexico (Kelly 2025). However, unlike the broadly diversified supply chain integration between the U.S., Canada, and Mexico, China’s investments have concentrated in two categories: industries with chronic global surplus capacity (steel, aluminum, glass, etc.) and cutting-edge Chinese industries globalizing on the back of these kinds of industrial policies.

Figure F

Close on the heels of Chinese FDI in Mexico came surging imports of industrial goods from China to Mexico—from raw materials to factory machinery, and component parts to semi-finished goods (Figure F). While China increased all goods exports to Mexico by 127% from 2017 to 2023, Mexican imports of Chinese iron and steel shot up 277%; aluminum products 265%; diesel engines 284%; motor vehicle parts 160%; and various categories of manufacturing equipment from 200–900%.

Table 1

And following the build-up of Chinese and others’ manufacturing capacity in Mexico since the onset of USMCA, U.S. imports of key manufactures from Mexico surged. Table 1 details the trends in automotive trade deficits under USMCA, a critical foundation for North American trade and an industry Trump aims to reshore. Imports of motor vehicles and parts from Mexico nearly doubled following USMCA, rising to a total of $274 billion in 2024, up from $196 billion in 2019—a 40% increase. Imports of parts and light-duty vehicles from Mexico increased by 35% and 36%, respectively, while imports of medium- and heavy-duty vehicles increased a whopping 256%. U.S. exports to USMCA partners expanded in these categories, too, but at a lower level, such that the import growth drove widening of the automotive trade deficit to $153 billion in 2024, up 56%. The vast majority of these and other components in the North American supply chain enter duty free under USMCA’s rules of origin.

Conclusion

North American economic integration remains as critical to U.S. prosperity as the treaties negotiated to govern it are flawed. Millions of people in the United States—particularly workers in trade-exposed industries—understood this deeply as the 2016 election loomed. President Trump seized on this dissatisfaction and moved to renegotiate NAFTA and replace it with USMCA in 2020. But Trump’s USMCA created more problems than it fixed. Today the pressure on manufacturing jobs and deterioration in the trade balance with Mexico are worse than before USMCA and Chinese manufacturers are setting up shop next door to take advantage of the loopholes that Trump left in the rules. The ongoing failures of USMCA necessitate significant reform and renegotiation to truly make a North American economy that puts workers at the center.

Notes

1. U.S. law requires that public comment on USMCA begin no later than October 4, 2025, and that the U.S. Trade Representative report recommendations to Congress no later than January 2, 2026. See Rethink Trade (2024) and U.S.-Mexico-Canada Agreement Article 34.7: Review Term and Extension, https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/34_Final_Provisions.pdf.

2.  S.J. Res. 37, 119th Cong. (2025).

3. “Lending” may include international financial flows from (net) purchases of U.S. stocks and bonds, international bank loans, trade financing, and net repatriated incomes, among others.

4. Trade with individual countries may not balance for a variety of benign reasons, in addition to anticompetitive and unfair trading practices.

5. Analysis of WARN Database (2025). 

6.  Proclamation No. 10908, 90 Fed. Reg. 14705 (March 26, 2025).

7. See for example, “Thailand-made Double Coin Tires Arrive in U.S.,” FleetOwner, March 30, 2018; “Linglong Opens Thailand Plant,” Rubber News, March 6, 2014; “Sentury Tire in Thailand: Establishing a World Class Tire Brand,” China Daily, January 21, 2016.

8. U.S. International Trade Commission, “Passenger Vehicle and Light Truck Tires from Korea, Taiwan, Thailand, and Vietnam,” Investigation Nos. 701-TA-647 and 731-TA-1517-1520, Publication 5212, July 2021. See also Hersh (2024).

9. See also Meltzer and Barron Esper (2025) on China’s circumvention of the U.S. tariff regime through USMCA partners.

10. For a recent survey, see Fang, Li, and Lu (2025).

References

Arain, Omer. 2025. “WARN Layoff Data” [Google sheet], WARN Database. Accessed July 6, 2025.

Bivens, Josh, and Adam S. Hersh. 2025. The U.S. Approach to Globalization Has Gone from Bad to Worse Under Trump. Economic Policy Institute, May 29, 2025.

Canis, Bill, Vivian C. Jones, and M. Angeles Villarreal. 2017. NAFTA and Motor Vehicle Trade. Congressional Research Service R44907, July 18, 2017.

Department of Labor (DOL). 2022. “Statement by Secretary Walsh on Termination of Trade Adjustment Assistance for Workers Program” (news release). July 1, 2022.

Fang, Hanming, Ming Li, and Guangli Lu. 2025. “Decoding China’s Industrial Policies.” National Bureau of Economic Research Working Paper no. 33814, May 2025.

Hersh, Adam. 2024. “Testimony Prepared for the U.S. International Trade Commission Report on the USMCA Automotive Rules of Origin.” Economic Policy Institute, October 16, 2024.

Instituto Nacional de Estadística y Geografía (INEGI). 2024. “Indicadores de Ocupación Y Empleo” (news release). April 26, 2024.

Kelly, Brendan. 2025. “China Expands Mexico Investment but Notably Lags U.S., Other G7 Economies.” Dallas Federal Reserve, September 26, 2025.

Marroquín Bitar, Diego. 2024. “Is USMCA Good for Mexican Labor? A Preliminary Analysis of USMCA and Labor Market Outcomes in Mexico.” Brooklyn Journal of International Law 49, no. 2: 542–555.

Meltzer, Joshua P., and Maricarmen Barron Esper. 2025. “Is China Circumventing US Tariffs via Mexico and Canada?” Brookings Institution, September 23, 2025.

Rethink Trade. 2024. U.S. Domestic Process Starts Mid-2025 for U.S.-Mexico-Canada Agreement 2026 Mandatory Six-Year Review.

Shuler, Liz. 2025. “Unfinished Business: Centering Workers’ Rights and Fair Competition in the USMCA Joint Review.” Brookings Institution, March 5, 2025.

U.S. Bureau of Economic Analysis (BEA). 2025. “U.S. Direct Investment Abroad, U.S. Direct Investment Position Abroad on a Historical-Cost Basis, By Country and Industry.” Accessed February 26, 2025.

U.S. House of Representatives, Ways and Means Committee. 2019. “Improvements to the USMCA Secured by Democrats in the ‘December 10 Agreement.’” December 13, 2019.

U.S. International Trade Commission (USITC). 2025. “DataWeb U.S. Trade and Tariff Data.” Accessed February 19, 2025.

U.S. Trade Representative (USTR). 2023. The Arbitral Panel Established Pursuant to Article 31 of the Agreement Among the United States, Mexico, Canada Which Entered into Force on July 1, 2020 (USA-MEX-CDA-2022-31-01): Final Report. January 1, 2023.

U.S. Trade Representative (USTR). 2025a. “United States-Mexico-Canada Agreement.” Accessed February 25, 2025.

U.S. Trade Representative (USTR). 2025b. Rapid Response Labor Panel on the Atento Servicios Case (MEX-USA-2024-31A-01). July 4, 2025.

Villarreal, M. Angeles. 2020. USMCA: Amendment and Key Changes. Congressional Research Service IF11391, January 30, 2020.

Villarreal, M. Angeles. 2024. NAFTA Renegotiation and the Proposed United States-Mexico-Canada Agreement (USMCA). Congressional Research Service R44981, February 26, 2019.

Wagner, Meg, and Brian Ries. 2018. “Trump Gives Remarks on US-Mexico-Canada Deal.” CNN Online, October 1, 2018.

Mr. Justin Hoffmann
Deputy Assistant U.S. Trade Representative
for Market Access and Industrial
Competitiveness
Office of the USTR
600 17th Street NW
Washington, DC 20508

Dear Mr. Hoffman and members of the Interagency Committee on Trade in Automotive Goods:

Thank you for the opportunity to submit comment on the operation of the US-Mexico-Canada Agreement with respect to automotive goods. My name is Adam S. Hersh and I am Senior Economist at the Economic Policy Institute (EPI), a Washington, DC, 501(c)3 nonprofit organization created in 1986 to include the needs of low- and middle-income workers in economic policy discussions. This comment represents my own opinions and does not necessarily reflect those of EPI or its board.

Synopsis

The challenge for the U.S. and North American automotive industries remains the same today under USMCA as it did under NAFTA and before: surging automotive imports from low-wage, low-standard producers made possible by a regulatory environment favoring corporations and capital owners over workers and communities, wherever that may be in the global economy.

Today, this central problem is evolving, even since the formulation of USMCA: intensifying import competition for parts, finished vehicles, and, increasingly, automotive IT services (operational software and personal user data) from Chinese and other foreign firms receiving unparalleled state subsidies.

In particular, Chinese-owned and Chinese-affiliated firms have been repositioning their global footprint to launder the origins of their production chains through countries with more favorable tariff treatment in U.S. markets in response to U.S. trade enforcement measures like the 2018 Sections 232 and 301 tariffs and an ever-growing rap sheet of antidumping and countervailing duty actions. This includes Mexico, with a platform into North American automotive (and other manufactures) supply chains, as well as across South and Southeast Asia, from where U.S. automotive imports are also now surging. We have seen the same pattern before in other critical manufacturing industries like steel and aluminum, and other industries with subsidy-driven chronic global surplus capacity.1 

Despite its advances over NAFTA, USMCA is ill-fit to address this challenge to the U.S. and North American automotive industries and to enable them to sustain good jobs given the right policy environment. To be sure, USTR must ensure the robust implementation of USMCA’s terms and that U.S. trade policy is working in lock-step with other organs of the administration – including with macroeconomic policies impacting the competitive value of the U.S. dollar – to achieve U.S. industrial policy goals in transportation equipment and manufacturing more broadly.

Background

NAFTA was a raw deal for working people in the United States, Canada, and Mexico alike. Drafted with little transparency or concern for non-commercial interests – and without the participation of relevant stakeholders – what resulted was not a “free” trade agreement, but a “managed” trade agreement, where trade was managed in the interests of the most influential business lobby groups. NAFTA rewrote the rules for the North American economy, driving Mexican farmers from their land and homes en masse into low-wage, low-standard urban manufacturing life with subsidized U.S. and Canadian agricultural exports and a Wall Street-led Mexican peso crisis in 1995.2

The opportunity to offshore production to Mexico at depressed wages and employment exposed industries and those receiving displaced workers. Initial inflows of investment into Mexican maquiladoras lost favor to Chinese export manufacturing platforms, where wages and standards were lower, once China entered a glide path to WTO membership. But the culmination of these effects on U.S. workers, families, and communities over the decades since NAFTA helped fuel the waves of opioid addiction, suicide, and other deaths of despair now pervasive across the country, as well as a sharp lurch to the right in nationalist political sentiment in the communities most impacted by trade shocks.3

USMCA made some incremental, albeit significant, improvements over the NAFTA, including by strengthening the regional automotive industry and enforcing stronger labor rights broadly across the North American economies. This includes Mexico’s commitment to sustain and monitor the implementation of reforms and the Rapid Response Mechanism, which aims to snuff out labor violations when they arise. But most importantly, USMCA introduced stronger automotive rules of origin (ROOs) that set high regional value content thresholds (RVC), first-ever minimum labor value content rules (LVC), and regional content requirements for steel and aluminum automotive inputs – industries critical to U.S. national and economic security. These gains were painstakingly negotiated to improve upon the original USMCA draft first signed by President Trump in 2018 – and more painstaking work is needed to implement the terms robustly. Still, the USMCA falls far short of what would be needed to make our closest and most important trading relationships truly worker-centered.4

Surging imports imperil U.S. automotive industries

Following trends in other industries, including steel and aluminum products, production chains oriented around Chinese-owned and -affiliated firms are penetrating North American automotive supply chains with rapidly expanding manufacturing platforms in Mexico and a range of foreign countries whose auto parts exports to the U.S. are surging – like Thailand, India, Vietnam, Malaysia, Indonesia, and the Philippines (see Table 1). Combined parts imports from these countries amount to 46% of total U.S. parts imports. It must also be noted that the U.S. State Department repeatedly reports systematic violations of labor and human rights in these countries, including forced and child labor, and that most have not ratified core ILO conventions on forced labor or freedom of association and the right to organize.

The changing pattern of U.S. automotive imports does not reflect trade diversion away from Chinese imports following the 2018 Secs. 232 and 301 tariffs so much as a recalibration of Chinese production chains to evade these and other U.S. trade enforcement measures. China’s ballooning outward direct investment positions since 2018 indicate a rapidly expanding overseas footprint for production chains centered around Chinese-owned and -affiliated firms; its FDI position increased by 126% in Mexico, 40% in Thailand, 246% in India, 119% in Vietnam, 97% in Malaysia, 73% in Indonesia, and 12% in the Philippines. In sum, Chinese direct investment in these countries grew by 79% or more than $42 billion in just four years (Table 1).

Table 1

At the same time, producers of manufacturing machinery and equipment from China to these emerging automotive production hubs also expanded rapidly since 2017: 134% to Mexico, 92% to Thailand, 79% to India, 149% to Vietnam, 159% to Malaysia, 119% to the Philippines, and exponentially to Indonesia (Table 1). Publicly available data does not allow direct and systematic monitoring of foreign automotive industry direct investments, but a spate of media reports on Chinese outward investment in automotive industries corroborate the available international macroeconomic data.5

Problems with USMCA rules of origin

Although some reports suggest that most North American vehicles are expected to meet RVC thresholds, even under USMCA ROOs, substantial non-North American content will creep into North American supply chains and qualify for duty-free entry to U.S. markets.6 The “rolling up” methodology used to calculate regional content shares allow the share of non-North American-originating content to increase exponentially as components are added and transformed through the production chain and to be counted as 100% USMCA-originating. The more complicated an intermediate auto part is – i.e., the more underlying, lower-tier components are required to make an intermediate part – the more foreign content can masquerade as “Made in North America.” Even under USMCA RVC calculations, substantial extra-North American content will enter at 0% duty.

The leakage problem undercuts U.S. and North American workers by pitting them against non-USMCA producers without a commitment to the same worker, environmental, and consumer safety standards and without extending reciprocal market access to similar U.S.-based producers. What’s more, the subterranean content can qualify for U.S. taxpayer subsidies under the 2022 Inflation Reduction Act (IRA) policies – through Section 30D consumer tax credits for content that rolls up into USMCA-conforming content, or through Section 45W commercial tax credits for non-conforming cars through the “lease loophole.” A bigger issue, though, for U.S. automotive industries is that a 2.5% price wedge between USMCA-conforming and non-conforming passenger vehicles and parts is simply not big enough to entice foreign producers benefitting from government support at home to go along with the USMCA rules, or to deter their rapid expansion into Mexican manufacturing platforms in an expanding range of parts, technology components, and finished vehicles.

In contrast, it is clear that import duties and other U.S. trade enforcement measures remain important tools in bolstering U.S. automotive industries amid surging unfair foreign competition. In contrast to rapidly declining U.S. production of passenger cars and SUVs and content covered by 2.5% most-favored nation (MFN) tariffs projected by market analysts like S&P Global Mobility, U.S. production of light duty trucks covered by a 25% MFN tariffs are expected to nearly double over the next decade (and hit President Biden’s zero-emission vehicle target in the U.S. before passenger cars). These trade policy measures must work to complement other facets of U.S. industrial policies targeting investments and high quality jobs in electric vehicles and the green transition made possible by the 2021 Infrastructure Investment and Jobs Act (IIJA) and the IRA.

What’s more, USMCA was negotiated before the U.S. government adopted bold policies to expand electric vehicle (EV) production and utilization. As a result, EV powertrain components received inadequate treatment in the scheduling of core and super-core parts for determining RVC calculations. USTR should address this oversight in the upcoming scheduled review with USMCA partners to ensure that investments in EV technologies and manufacturing capacity made possible by the IIJA and IRA receive the full complementary support of U.S. trade policy.

Recommendations

There is much work to be done to fully implement and maintain, let alone expand upon, automotive trade measures in USMCA. But USMCA will not make or break the U.S. automotive industry or determine whether it can continue supporting the good quality jobs and a domestic manufacturing base that will be needed to tackle our unfolding global climate crisis. Realizing this promise requires U.S. policymaking to operate on all levels towards this common goal. This means that we need policies that create a level playing field for trade against low-standard, government-subsidized competitors alongside policies to invest in the technology and workforce that will keep U.S. producers at the cutting edge, and macroeconomic policies that ensure stable, growing demand for producers.

We cannot meet a challenge that we do not fully understand. That is why I urge the administration to take immediate steps, in partnership with Mexican and Canadian partners and relevant representative stakeholder organizations, to conduct a study of the extent of penetration of subsidized content in North American automotive supply chains. This study should take a census of relevant firms and their beneficial owners, map their positions within automotive supply chains and modes of government support, and identify systems for ongoing monitoring and reporting.

I am encouraged by Treasury Secretary Yellen’s recent MOU to open discussions with Mexico on bringing CFIUS-like reviews to Mexico’s inward direct investment regime.7 Given increasing IT content in vehicles and connectivity to personal user data, such a comprehensive approach to North American supply chains is warranted. But there is much terrain to navigate before such an idea could become operational. In the meantime, the administration should take unilateral actions to evaluate select investments in conjunction with USMCA RCV and LCV content certifications.

1. Adam S. Hersh, Prehearing brief submitted to the U.S. International Trade Commission Investigation No. 332-591, June 7, 2022; Adam S. Hersh and Robert E. Scott, Why Global Steel Surpluses Warrant U.S. Section 232 Import Measures, Economic Policy Institute, March 24, 2021; Adam S. Hersh and Robert E. Scott, Aluminum Producing and Consuming Industries Have Thrived Under U.S. Section 232 Import Measures, Economic Policy Institute, May 25, 2021.

2. See, e.g.: Emmanuel Alvarado, “Poverty and Inequality in Mexico after NAFTA: Challenges, Setbacks and Implications,” Estudios Fronterizos 9, no. 17: 73–105, 2008; Robert Blecker, “The Mexican and U.S. Economies After Twenty Years of NAFTA,” International Journal of Political Economy 43, no. 2: 5–26, 2014; Mark Wesibrot, Lara Merling, Vitor Mello, Stephan Lefebvre, and Joseph Sammut, “Did NAFTA help Mexico? An update after 23 years,” Mexican Law Review11 no.1, 2018; Jeff Faux, Global Class War, New York: Wiley, 2006.

3. Jeff Faux, “NAFTA, Twenty Years After: A Disaster,” Working Economics Blog (EPI), January 3, 2014. Shushanik Hakobyan and John McLaren, “Looking for Local Labor Market Effects of NAFTA,” Review of Economics and Statistics 98, no.4: 728–741, 2016.; Anne Case and Angus Deaton, Deaths of Despair and the Future of Capitalism, Princeton: Princeton University Press, 2020; Jiwon Choi, Ilyana Kuziemko, Ebonya L. Washington, and Gavin Wright, “Local Economic and Political Effects of Trade Deals: Evidence from NAFTA,” National Bureau of Economic Research Working Paper no. 29525, November 2021.

4. In 2017, EPI economists outlined 6 points for NAFTA reforms: Robert E. Scott, Josh Bivens, and Samantha Sanders, Renegotiating NAFTA: What Should the Priorities Be, Economic Policy Institute Policy, December 7, 2017.

5. Bloomberg News, “Chinese EV Makers Pour Money Into Thailand to Secure Foothold in Its ‘Trailblazing’ Car-manufacturing Industry,” South China Morning Post, June 26, 2023; Isabella Cota, “Growth of China’s Automotive Sector in Mexico Worries the US,” El País, November 13, 2023; Max De Haldevang,“Chinese Manufacturers Get Around US Tariffs With Some Help From Mexico,” Bloomberg, September 13, 2023; Peter S. Goodman, “Why Chinese Companies Are Investing Billions in Mexico,” New York Times, February 3, 2023; Ralph Jennings, Beata Mo, Lo Hoi-ying, and Mia Nulimaimaiti,“Shunned by US, China Investors Use Mexico to Keep Grip on North American Market,” South China Morning Post, June 12, 2023; MND Staff, “Chinese Investment in Manufacturing on the Rise in Mexico,” Mexico News Daily, September 16, 2022; MND Staff, “Chinese Auto Parts Company to Invest US $200M in Coahuila plant,” Mexico News Daily, August 21, 2023; Reuters, “China to Set Up Auto Research Institute in Thailand as EVs Gain Traction,” December 8, 2023; Reuters, “Chinese Automaker BYD to Make EVs in Vietnam,” May 8, 2023; Reuters, “Chinese Firms to Invest Nearly $1 Bln in Northern Mexico -State Officials,” October 25, 2023; Reuters, “Indonesia Relaxes Tax Rules on EV Imports to Attract Investment,” December 13, 2023; Reuters, “JSW, China’s SAIC Form New India Venture for Green Mobility,” November 30, 2023; Reuters, “Malaysia PM Says China’s Geely to Invest $10 Bln in Domestic Auto Hub -Report,” July 18, 2023; Reuters, “Philippines Says China’s Yadea to Invest $1 Billion in E-motorcycle Plant,” June 15, 2023; SAIC Motor, “SAIC Motor Expands Its Global Footprint” (press release), May 11, 2023; Tang Shihua, “China’s Tenglong to Build USD20 Million Malaysia Car Parts Plant for Foreign Clients,” YiCai Global, May 15, 2023; Amy Stillman, “Chinese Car Companies Cracked North America by Going to Mexico,” Bloomberg, November 28, 2023; The Economist, “An Influx of Chinese Cars is Terrifying the West,” January 11, 2024.

6. Legacy models that do not will soon be phased out as the industry transitions toward zero-emission vehicles. See: Michael Schultz, Kristin Dziczek, Yen Chen, and Bernard Swiecki, U.S. Consumer & Economic Impacts of U.S. Automotive Trade Policies, Center for Automotive Research, February 2019.

7. U.S. Department of the Treasury, “Secretary of the Treasury Janet L. Yellen and Mexico’s Secretary of Finance and Public Credit Rogelio Ramírez de la O Announce Intent to Establish Bilateral Working Group on Foreign Investment Review” (news release), December 7, 2023.

Can NAFTA 2.0 do any better?

The U.S. International Trade Commission’s (ITC) new report on the economic impact of the U.S.—Mexico–Canada Trade Agreement, released last week, projects that the revised NAFTA (USMCA) will have tiny impacts on the economy. The ITC estimates the deal will increase GDP by 0.35% when it is fully implemented (six years after it takes effect), or roughly 10 weeks of growth. Similarly, it projects that 175,000 jobs will be added in the domestic economy, a 0.1 percent increase in total employment (based on CBO projections for the economy in 2025), or roughly as many jobs as the economy adds in a normal month, over the next six years. And it claims real wages will rise about one-quarter of a percentage point (0.27 percent), roughly 4 percent of what workers are expected to gain, in real terms, over the next six years, if promised gains in output and employment are realized.

But there are strong reasons to doubt that these gains will be achieved. The ITC results show that the deal will yield remarkably small gains, and those gains rest on questionable assumptions about how the deal will help workers and the economy. Perhaps the most problematic finding in the ITC study (p. 25) was that labor provisions in the USMCA “would increase Mexico union wages by 17.2 percent, assuming that these provisions are enforced.” Given that unionization rates in the durable goods sectors of Mexican manufacturing are reported to be 20.2 percent (Table F.4), these would be massive impacts, indeed. Yet Mexican workers will not benefit unless there are mechanisms to ensure that labor rights enforcement does improve, but those provisions do not yet exist in the agreement.

Thus, it is not surprising to find that the AFL-CIO, other labor unions, and many members of Congress are demanding that “swift [and] certain enforcement tools” are included in the deal before it is submitted to Congress. These concerns also apply to segments of the agreement that pertain to the environment, access to medicines. Furthermore, the assumption that Mexican union wages will increase 17.2 percent seems especially heroic, within the 6-year adjustment period in the ITC model (p 23.), in light of the struggles that will be required to unionize such a large share of the labor force.

The ITC’s economic impact projections are built on a series of heroic assumptions that are built into its “computable general equilibrium (CGE) model.” The ITC model assumes the economy is always at full employment; that trade deals do not cause trade imbalances, job losses, growing income inequality, or downward pressure on the wages of most workers, and environmental damages;, and that the more expensive drugs, movies and software don’t otherwise harm consumers or the economy.

In particular, the ITC study assumes that the overall U.S. trade balance is unchanged by the deal (despite its significant changes in the rules of governing, trade, labor and the environment). Peter Dorman pointed out the problems with CGE models nearly two decades ago, as have many others, and yet the ITC staff, and other economists keep using them anyway.

ITC studies of the impacts of trade and investment deals have a particularly poor track record of projecting the actual pattern of trade following recent trade deals. In addition to being wrong about the overall size and direction of trade flows, the ITC also failed to “correctly identify the winning and losing industries in trade with Mexico and Korea.” The ITC claimed (Table 2.2) the US-Korea KORUS deal would improve that trade balance, but the trade deficit increased, costing more than 95,000 American jobs. And the most infamous, 1999, ITC estimate (Tbl. ES-4) was that China’s entry into the WTO would increase the bilateral trade deficit by about $2 billion after the deal is fully implemented. At last count, that deficit is up $272 billion, costing 3.4 million U.S. jobs.

The ITC’s claims about supposed (net) benefits of the NAFTA-2 (USMCA) deal stand in contrast to those of several other studies. Researchers from the International Monetary Fund recently used their own CGE model to estimate the economic impacts of the trade deal. They found that the USMCA, alone, would result in slight increases in welfare for Mexico and Canada and a small net welfare loss of $794 million for the United States.

Some of the most important, and controversial, changes to the NAFTA agreement, embodied in the USMCA, involve new rules of origin (ROO) that raise the level of regional content for motor vehicles, parts and some other products (including steel and aluminum in vehicles) which must be achieved in order to qualify for special, duty-free treatment under the agreement. New standards were also developed for labor value content (LVC) that require certain minimum shares (40 to 45 percent) of cars and trucks must be produced with labor earning at least US$16 per hour. [1]

The ITC report estimates that the USMCA’s ROO and LVC requirements would increase net employment in U.S. auto and parts production by more than 28,000 jobs, and that U.S. investment will increase by “$683 million per year to meet new demand for U.S. produced engines and transmissions. (ITC report 19).” But these findings are certainly controversial.

In their recent IMF working paper, Burfisher, Lambert and Matheson, found that the USMCA agreement (alone) would result in a small ($275 million) increase in the U.S. trade deficit, and that the negative sectoral impacts would be more significant. In particular, they found the agreement would reduce output of motor vehicles and parts in all three countries by an average of 0.8 percent ($7.6 billion), and by 0.2 percent in the United States alone. Higher vehicle costs (due in part to tariffs) will reduce vehicle demand, and some auto and parts production is likely to shift to lower wage locations such as China, Vietnam or Malaysia. This finding stands in contrast to the ITC assumption that the USMCA will increase motor vehicle production in the United States..

It is time for a new approach to analyzing trade deals. The CGE models are built to analyze the impacts of reducing tariffs on trade. But deals such as the USMCA are about much more than trade in goods and increased efficiency in the economy. They are trade and investment deals, and their most important, negative effect on U.S. workers is that they make it attractive for multinational companies to offshore production to low wage countries such as Mexico. The CGE models make gross, simplifying assumptions about how non-trade issues affect workers and the economy, and yet provide an unearned degree of perceived rigor about these effects, when, in fact, they are assuming answers rather than carefully exploring their impacts.

The USMCA nibbles at the edges of the USITC trade model, and the basic approach to negotiating trade deals, but doesn’t appear to change its basic tenets.. The USMCA will continue to encourage firms to offshore production. The locations may change, from Mexico and Canada to China, Vietnam or Malaysia, but the results will remain the same.

These negotiations, and the models used to assess their impacts, aren’t getting the job done for working Americans. It’s time to go back to the drawing board, for all of us.

[1] ROOs for textiles and apparel were also tightened, and some other trade restrictions involving agricultural trade (dairy, eggs, poultry, cotton, peanuts & related products) between the U.S. and Canada, and some trade in small packages were relaxed.

In anticipation of the renegotiations, numerous recommendations for improving and enforcing labor standards were submitted—all of which are instrumental in removing corporate incentives to transfer work to Mexico. Specific recommendations for improving the labor template of current U.S. agreements included these five general suggestions:

1. Incorporate explicit references to labor standards and interpretation of those standards through various cases and reports reflecting specific rules adopted by the UN’s International Labour Organization (ILO), including those concerning the freedom of association, collective bargaining, discrimination, forced labor, child labor, and workplace safety and health.
2. Remove the footnote explicitly limiting the terms of the chapter to the ILO Declaration on Fundamental Principles and Rights at Work.
3. Eliminate the requirement that labor violations under the agreement must be in a manner affecting trade or investment between the parties.
4. Eliminate the requirement that labor violations must be sustained or recurring.
5. Verify that labor standards in the agreement are being honored and enforced by the signatories prior to the agreement going into effect.

Unfortunately, none of these essential changes were made to NAFTA 2.0. As noted by the AFL-CIO’s recent Executive Council Statement, “[T]he NAFTA renegotiation requires strong labor rights provisions and strong enforcement provisions that as of today are not yet in the agreement.” Without incorporating the recommendations mentioned above, NAFTA 2.0’s labor standards and enforcement remain weak and Mexico’s workers will still struggle to enjoy fundamental human rights. As a result, wage suppression will continue to provide incentives to for corporations to outsource work to Mexico.

Despite much discussion over modest improvements to the labor chapter, complaints must still overcome obstacles posed by four significant questions regarding NAFTA 2.0’s labor obligations:

Are signatories obligated to honor labor rights or principles?

Under NAFTA 2.0 as currently drafted, any signatory could argue that if it meets the principles of labor rights, as opposed to the rights themselves, it satisfies its obligations under the agreement. This is why recommendations include that the signatories’ obligations must be explicitly linked to specific ILO’s rules along with ILO’s cases and reports, which furnish precise interpretations of these rights.

Not only was this recommendation rejected, but negotiators also retained a footnote first incorporated in the Peru Trade Agreement that makes it even easier for signatories to argue that they are only obligated to meet certain principles, as opposed to the rights themselves. NAFTA 2.0 retains this flaw, making it even more difficult for parties to argue that ILO Conventions and accompanying cases and reports can at least give guidance to interpreting the principle-based obligations.

As stated in the Labor Advisory Committee for Trade Policy and Trade Negotiations (“LAC”) Report on NAFTA 2.0:

Instead of referring to the ILO’s core conventions, the Parties chose to include language [in footnote 3 of NAFTA 2.0] that serves to obfuscate, rather than clarify, the rights and principles in the ILO Declaration. We have offered numerous ideas about this matter including simply eliminating the footnote, all of which have been rejected to date.

Few companies would be satisfied with such vague obligations when it comes to matters of special relevance to their interests. This is why they have demanded, and in many instances succeeded in, including specific language in the agreement addressing their concerns. Can you imagine the comments from businesses if NAFTA 2.0 only obligated Mexico to honor the principles of protecting intellectual property rights? Why should labor provisions, which are directly related to Mexico’s suppressed labor rights and resulting low labor costs, be viewed any differently?

NAFTA 2.0’s Article 23.9 reinforces the LAC’s concerns over the lack of commitment to honor specific rights. While it addresses discrimination for a number of things including sexual orientation and gender identity, when it references the signatories obligations, it adopts the wording, “that it considers appropriate” undermining any enforceability. Furthermore, footnote 13 declares that “existing [U.S.] federal agency policies regarding the hiring of federal workers are sufficient to fulfill the obligations of this Article”—raising additional questions over interpretation and enforcement.

Are sectors of workers excluded from NAFTA 2.0’s labor obligations?

Even if a labor violation is deemed to violate the principles referenced in the labor chapter, in order to proceed, the violations must be “in a manner affecting trade or investment between the parties.” This provision makes it clear that large sectors of employment may not be covered by the agreement’s labor obligations. This means that thousands of teachers, government workers, fire fighters, police, medical workers, and others could arguably left out of NAFTA 2.0.

As explained by the LAC:

[The provision] therefore risks leaving loopholes for wage suppression, particularly by public sector employers that refuse to accord fundamental labor rights to their employees. Mexico has denied workplace rights and freedoms to its teachers, which not only suppresses the wages, benefits, and conditions of those teachers, but also applies downward pressure on wages, benefits, and conditions of similarly skilled working people in Mexico’s private sector, many of whom produce goods or provide services that compete with goods and services of U.S. workers… The failure of one significant set of workers to be able to enjoy their rights can undermine the proper functioning of a market, suppressing demand, both for the goods produced in that country and for the goods produced by other trading partners.

Would murder of a trade union activist constitute a violation of NAFTA 2.0?

Even if a labor violation meets the burden of showing that there has been a violation and meets the burden of affecting investment or trade, the violation still must meet the sustained or recurring burden.

Single egregious acts can and do crush workers’ desires to exercise their fundamental human rights to form unions and engage in meaningful collective bargaining. The murder of a union activist sends a powerful message to all other workers that they face the same fate, should they wish to form a union. Language in Footnotes 8 and 11 even represents a step backward by emphasizing that “an isolated instance or case” is not covered, removing any possible ambiguity. The new standard sets a very high bar requiring that not only do the actions (or inactions) have to occur “periodically and repeatedly,” but the “occurrences” must be “related or the same in nature.”

What good are labor standards if they are not effectively enforced?

Even if NAFTA 2.0 adopted stronger standards, violations of the labor chapter’s provisions must be effectively enforced. To date, an effective enforcement mechanism in the proposed agreement is lacking. Although several recommendations have been made, none have been adopted.

Without a strong and swift enforcement mechanism, none of the labor obligations—even strengthened labor obligations—in the agreement will be effective. One of the faults of NAFTA is that it does not provide enforcement for obligations like the freedom to form a union. Subsequent labor agreements also fail to provide for effective enforcement. Workers know that without a true commitment to enforcement, through proper funding, accessible and equitable procedures, education on what basic human rights are (like the freedom to form a union and engage in meaningful collective bargaining), as well as other essential items, enforcement will not be effective.

As noted by the LAC:

NAFTA 2018’s dispute settlement and enforcement provisions are neither “effective” nor “equitable,”… by failing to include additional provisions to ensure that the labor rules are adequately and promptly monitored, remedied, and sanctioned if not remedied, the dispute settlement provisions will be neither effective nor equitable as regards labor. A quarter century of experience has proved that labor rules must receive special attention to ensure swift and certain enforcement. Workers simply do not have the power and influence that global companies seeking to vindicate their trade rights have.

Without question, NAFTA 2.0’s labor provision contains some improvements. Language regarding the right to strike, recognition of violence against workers and efforts to improve Mexico’s labor laws with respect to protection contracts are welcome. Nonetheless, as stated, NAFTA 2.0 maintains the fundamental flaws carried over from past trade agreements. Until the recommendations mentioned above are adopted, NAFTA 2.0 will continue to fall short in significantly improving labor standards and, wage suppression for Mexico’s workers will continue.

While any attempt to secure a transformative deal on a new NAFTA will certainly face formidable obstacles, it is nonetheless important to lay out a progressive roadmap for the ongoing talks. Instead of allowing multinational corporations to dominate the agenda, we should instead address the root causes of our ballooning trade deficits, such as currency manipulation and misalignments. We also need to use these high-level talks to end the systematic and egregious repression of workers’ rights that disempowers workers and exacerbates inequality in all three North American countries.

NAFTA renegotiation efforts aiming to put workers first would pursue the priorities listed below. These priorities can be used to judge whether or not the NAFTA renegotiation is being done for multinational corporations or for workers in all three countries.

1. Put labor standards with strong enforcement tools into NAFTA.

NAFTA must include specific provisions protecting workers’ rights and wages, including the right to form unions and bargain collectively, and establish an enforcement body that can penalize those who infringe on those rights, including threats to free and independent labor organizations. NAFTA could mandate that all signatories respect the labor standards identified as fundamental worker rights by the International Labour Organization (ILO). Canada even recently requested ending right-to-work (RTW) laws in U.S. states as part of NAFTA renegotiations because they suppress American wages and threaten Canadian jobs—a potentially game-changing provision to include.

2. Eliminate investor–state dispute settlement (ISDS) provisions.

ISDS provisions create special legal privileges for foreign investors, notably the right to sue host governments in private arbitration tribunals (“corporate courts,” as the AFL-CIO calls them) for failing to meet certain standards that cause the investor economic harm. In practice this means that investors can challenge any law or policy change they claim will cut profits. For example, ISDS provisions have been used by American companies to attack basic, sensible labor and environmental safeguards. ISDS provisions have a chilling effect on regulatory safeguards, infringe on our trading partners’ democratic rights to manage their own domestic economies, and encourage American firms to locate abroad and leave American workers behind, harming jobs and wages in the United States.

3. Revise intellectual property (IP) provisions that inflate prices in areas such as health care.

The current IP provisions in NAFTA have extended private monopolies that generate massive profits for drug, software, entertainment, and other industries. In particular, the high cost of prescription drugs is becoming prohibitive for many working families. NAFTA renegotiations should move toward innovation systems that support technological progress but also reduce costs for families in all three countries, while ensuring fair compensation for artists, writers, and innovators.

4. Revise rules of origin provisions.

Rules of origin, which are the criteria used to define where a product was made, are a critical component of trade agreements because they determine which products can benefit from tariff concessions. Rules of origin should be renegotiated to maximize the benefit to workers, farmers, and firms, and to ensure that NAFTA is not turned into a back door through which products from nonsignatory countries flood the North American market.

5. Eliminate procurement requirements that undermine “Buy American” policies.

If policymakers really want to support the “Buy American” principle, the procurement requirements in Chapter 10 of NAFTA should go. Because they require that foreign bidders have equal access to U.S. government contracts, the current procurement provisions have resulted in the loss of U.S. jobs.

6. Include enforceable currency rules that include penalties for violations.

A NAFTA that helps workers would include enforceable currency rules. Currency manipulation and misalignment are the least understood yet most important causes of manufacturing job loss. Both make U.S.-made products less competitive and increase our trade deficits.

While neither Canada nor Mexico currently engages in active currency manipulation or misalignment, including currency rules with enforcement in a major trade agreement would create a standard that should be incorporated into all present and future trade and investment agreements. For example, this is a major issue to consider in reforms of the U.S.–Korea Free Trade Agreement.

References

AFL-CIO. 2017. A NAFTA That Works Must Empower Working People, Not Corporations. June 12.

Bivens, Josh. 2017a. Adding Insult to Injury: How Bad Policy Decisions Have Amplified Globalization’s Costs for American Workers. Economic Policy Institute, July 11.

Bivens, Josh. 2017b. “A NAFTA Renegotiation Game-Changer, until the Trump Administration Squanders It.” Working Economics (Economic Policy Institute blog), September 7.

Brotherton-Bunch, Elizabeth. 2017. “The Procurement System Puts U.S. Companies at a Disadvantage. Buy America Can Help.” Manufacture This (Alliance for American Manufacturing blog), March 15.

Economic Policy Institute. Various years. Currency Policies. Collection of publications available at epi.org/research/currency-policies.

International Labour Organization. 2010 (1998). ILO Declaration on Fundamental Principles and Rights at Work and Its Follow-Up. Second edition with Annex revised 2010. First published 1998.

Scott, Robert E. 2011. Heading South: U.S.–Mexico Trade and Job Displacement after NAFTA. Economic Policy Institute, May 3.

Scott, Robert E. 2015. Unfair Trade Deals Lower the Wages of U.S. Workers. Economic Policy Institute, March 13.

Scott, Robert E. 2016. Currency Manipulation and Manufacturing Job Loss: Why Negotiating “Great Trade Deals” Is Not the Answer. Economic Policy Institute, July 21.

Scott, Robert E. 2017a. “Comments Regarding Causes of Significant Trade Deficit for 2016.” Testimony before the U.S. Department of Commerce, May 18.

Scott, Robert E. 2017b. Growth in U.S.–China Trade Deficit between 2001 and 2015 Cost 3.4 Million Jobs: Here’s How to Rebalance Trade and Rebuild American Manufacturing. Economic Policy Institute, January 31.

Scott, Robert E. 2017c. “Renegotiating NAFTA Is Putting Lipstick on a Pig.” Working Economics (Economic Policy Institute blog), August 21.

Stiglitz, Joseph E., Dean Baker, and Arjun Jayadev. 2017. “Intellectual Property for the Twenty-First-Century Economy.” Project Syndicate, October 17.

Tucker, Todd. 2015. “The TPP Has a Provision Many Will Love to Hate: ISDS. What Is It, and Why Does It Matter?” Washington Post, October 6.

U.S. Government Accountability Office. 2017. Government Procurement: United States Reported Opening More Opportunities to Foreign Firms Than Other Countries, but Better Data Are Needed. Published February 9. Publicly released March 13.

]]> https://www.epi.org/blog/a-nafta-renegotiation-game-changer-until-the-trump-administration-squanders-it/ Thu, 07 Sep 2017 19:14:13 +0000 http://www.epi.org/?post_type=blog&p=134146 Since the beginning of his presidential campaign, Donald Trump has railed against the North American Free Trade Agreement (NAFTA) as being a bad deal for working Americans. He promised that if he was elected, he would renegotiate NAFTA and secure a “much better deal for all Americans.”

So it’s not surprising that earlier this week, the leader of a prosperous country engaged in NAFTA renegotiations demanded changes to increase workers’ leverage, provide a bulwark against downward wage pressure, and prevent his country’s manufacturing sector from being undercut by weak labor standards. But was this leader Donald Trump? Nope. It was Justin Trudeau of Canada.

Even more striking, the reported change that Trudeau’s government has requested to stem downward pressure on Canadian wages is one that beefs up American labor standards. Yes, the low-wage, low-standard country that Trudeau’s government is correctly concerned about as they renegotiate NAFTA is the United States.

The requested change is ambitious: Trudeau’s government wants an end to so-called “right to work” (RTW) laws in American states. This would clearly be good for American workers. In a nutshell, “right to work” laws have nothing to do with helping people find work—instead they simply ban contracts requiring that workers benefiting from labor union representation pay their fair share for this representation. This ban makes it extraordinarily difficult for workers to join together and form unions in RTW states. As a result, these states have substantially fewer union members and less collective bargaining. The economic evidence shows that RTW laws do not boost employment or economic growth, but do suppress wages.

Why does Canada care about laws in American states that suppress American wages? Most generally, in a global (or even regional) labor market, if your neighbors’ wages are being pulled down, you can be sure that yours will be soon. More specifically, Canada has a large automotive production sector, and auto producers often choose between the United States, Canada, and Mexico in regards to where to open new facilities. In recent years many of these facilities have been opened in RTW states in the American south. From the perspective of a profit-maximizing company looking to keep labor costs as low as possible, the wage suppression resulting from RTW laws may provide an inducement to open new factories in RTW U.S. states rather than Canada.

So Canada has a legitimate stake in requesting this change, and indeed just the request itself is extraordinarily useful. Besides being both ambitious and good for both Canadian and American workers, the Canadian request is clarifying about two vital issues: (1) the historical use of trade agreements to further rig the rules of the economy against workers (in all countries), and (2) Donald Trump’s commitment (or lack thereof) to un-rigging those rules.

Some casual observers of these policy debates might think that it’s odd that any country would ask for a change in a trading partner’s domestic labor law during negotiations about international trade. But NAFTA already does require each country to undertake a host of changes to domestic policies, in ways that tilt in the direction of increasing protection for corporations’ profits. For example, NAFTA extends more-stringent protection of intellectual property claims of software and pharmaceutical firms to all three countries. And NAFTA provides a private forum to entertain and adjudicate claims from private corporations that they should be compensated for government policy changes that harm their profits. So at the same time that NAFTA exposes workers in all three countries to fierce competition with each other in a common labor market, it provides greater protection for the incomes of owners and managers of multinational corporations. All in all, the rules of trade treaties are some of the most blatant rule-rigging that exists in economic policy.

The recent Canadian request is quite radical in that it takes as given that trade treaties are used all the time to leverage big changes in country’s domestic policies, but then demands that these changes actually benefit workers rather than corporate owners and managers.

And it’s a potential game-changer for the NAFTA renegotiation process. If the U.S. agreed to it, lives for tens of millions of American workers would get materially better. Will the Trump administration crow about the better deal they struck and accept this proposed change?

I’ll bet my house that they won’t. Despite their repeated claims to care about the plight of working-class Americans, some of the only substantial policy changes that the Trump administration has achieved so far have been a systematic attack on policies or regulations that give these workers any economic leverage or protection.

In short, Prime Minister Trudeau has called President Trump’s bluff. Trump has claimed he hates NAFTA because it’s bad for American workers. He has been handed a chance to effect a change in it that would actually benefit the entire American working-class. He will pass on this chance and this should tell us a lot about him and who he really cares about.

Over its first 20 years, growing trade deficits with Mexico and Canada from the North American Free Trade Agreement (NAFTA) eliminated 850,000 U.S. jobs, most of them in manufacturing. (American workers suffered far more after China entered the World Trade Organization in 2001, including 3.4 million jobs lost through 2015 alone, due to growing trade deficits with that country.) And trade deficits and job losses are just the tip of the iceberg of the devastation wreaked by bad trade deals, which have also driven down the wages of all 100 million American workers without a college degree, who have suffered losses of just under $2,000 per year for each median wage, full-time worker. Roughly $200 billion per year is being taken from the pockets of working people and middle class families, because the super-rich and huge corporations have been able to game the system at their expense.

NAFTA has created the economic equivalent of a 14-lane freeway to Mexico, paving the way for the outsourcing of jobs and factories to Mexico. In the past twenty years, the U.S. has lost more than 87,000 factories (manufacturing establishments), wiping out nearly one-third of U.S. manufacturing production capacity. Tweaking NAFTA around the edges is not going to change those dynamics. As EPI founder Jeff Faux recently explained, NAFTA created “radical new rules for trade…that shifted the benefits of expanding trade to investors and the costs to workers.” The system that created this deal to benefit rich executives and multinational companies is still in place and, if anything, tilts even further in their interest in an administration led by former Goldman Sachs executives Gary Cohn (Trump’s chief economic advisor) and Treasury Secretary Steve Mnuchin.

Trade and investment deals like NAFTA provide U.S. corporations with privileged access to the labor markets of poor countries like Mexico and China, with special rules providing extended intellectual property rights—opening markets to private investors in service activities ranging from banking and telecommunications to water and public education, enforced by investor-state dispute resolution panels that operate entirely outside of national court systems.

U.S. Trade Representative Robert E. Lighthizer has put forth negotiating objectives that are designed to expand benefits of trade for foreign investors, strengthen intellectual property rights, and update NAFTA rules to facilitate digital trade in goods and services, small business access, and government procurement. Far from the administration’s stated goal of bringing jobs back to the United States, these moves will, if anything, make it easier for companies to send jobs abroad. The administration also seeks to incorporate labor and environmental standards in the core of the agreement. But NAFTA is and will remain an agreement designed to encourage firms to outsource production to Mexico, and to shift income from wages to profits.

Improving labor and environmental standards in Mexico is not likely to shrink the gap between wages in the United States and Mexico to any appreciable extent, nor will it eliminate the U.S. trade deficit with Mexico or Canada. According to The Conference Board, hourly manufacturing compensation costs in the United States exceeded those in Mexico by more than 6-to-1 in 1997, and by roughly the same margin in 2015—there has been no significant change in the wage gap in the NAFTA era. Even if wages in Mexico were doubled through implementation of more effective labor standards (and assuming U.S. wages were unchanged), there would still be a wage gap of more than 3-to-1—providing huge incentives for firms to maintain and increase outsourcing of U.S. manufacturing to Mexico. The only public policy that could support balanced trade with Mexico is a European-style, European Community expansion policy mix (employed when Greece, Spain, and Portugal entered the EC in the 1980s) which provided greatly increased development funds designed to bring about a fundamental increase in wages and incomes in those countries prior to their joining the EC (which subsequently became the European Union). The United States can and should invest heavily in economic development in Mexico, which would be good for workers in both countries, but that is a development policy proposal designed to narrow incentives to offshore production to Mexico while raising demand in Mexico for exports of U.S. consumer goods. Trade policy alone cannot achieve these goals.

For these reasons, the costs of renegotiating NAFTA are likely to exceed its benefits. If patents and copyrights are more tightly enforced, for example, then the profits of big-pharma, software giants, and Hollywood will rise, but this will leave workers in Mexico poorer and will likely result in a decline in U.S. exports of manufactured goods to Mexico. So, even if the trade balance with NAFTA improves, these policies will likely harm U.S. manufacturing, costing more jobs and putting more pressure on workers’ wages.

On the other hand, NAFTA has fundamentally changed the structure of the North American economy. Multinational companies have built complex, integrated supply chains in sectors like automotive production. Parts often cross borders between the United States, Mexico, and Canada multiple times before a final product rolls off the assembly line. President Trump threatened to tear up the agreement in April, but was convinced by his own cabinet members that ending NAFTA would be too costly to the economy. Hence, negotiators are more likely to end up “tweaking a few provisions and … chapters” of the agreement, precisely what Lighthizer said “he is not interested in” doing [emphasis added].

What should be done on trade?

The most pressing trade problem facing the United States today is currency misalignment and dollar overvaluation. Rather than renegotiating NAFTA, the United States should implement policies that are designed to rebalance trade with China, the EU, Japan and other currency manipulators, which have the largest global trade surpluses in the world, as shown in the figure below. It is important to note that both Mexico and Canada have global trade deficits, and are not contributing to global trade imbalances. Currency misalignment is a measure of how much the dollar must adjust in order to rebalance U.S. trade. The best estimates are that the value of the dollar must fall at least 25 to 30 percent. This must include a substantial revaluation in the value of the currencies of leading surplus countries of 28.6 percent to 47.5 percent (based on Bergsten, C. Fred (2016), Tables 14.4 and 14.5, adjusted for recent dollar appreciation).

Figure A

There are several broad, powerful tools that could be used to realign the U.S. dollar and rebalance global trade including Countervailing Currency Intervention (CCI), where the United States purchases foreign assets to offset any foreign government purchases of U.S. assets, and Market Access Charges (MAC), which would tax inflows of foreign capital that bid up the value of the U.S. dollar.

The threat of large tariff increases can also be used to encourage countries to participate in major currency realignments. The United States has engaged in two major currency realignments within the past fifty years, and in both cases, realignment was achieved when large tariffs were threatened or actually imposed (temporarily). In August 1971, President Nixon abandoned the gold standard and imposed a 10 percent across the board import surcharge. His administration subsequently convinced major trade partners to revalue their currencies and remove trade barriers, and the import surcharge was removed four months later.

In 1985, in response to a major surge in imports and widespread manufacturing job losses, the House of Representatives on two occasions passed a bill that would have imposed a 25 percent surcharge on imports from countries such as Japan, Brazil, Korea, and Taiwan that maintained large trade surpluses with the United States. The Gephardt-Rostenkowski “Trade Emergency and Export Promotion Act” (H.R. 3035) passed the House twice in late summer and fall of 1985. On September 22, 1985, Treasury Secretary James Baker announced that the United States had reached a “Plaza Accord” with other members of the G-5 finance ministers, which resulted in a 29 percent decline in the value of the U.S. dollar between 1985 and 1991.

Congress and the president should strongly consider adopting (or threatening to adopt) large, across the board tariffs on countries with large global trade surpluses in order to persuade them to engage in a coordinated effort to reduce the value of dollar by revaluing their currencies, in order to rebalance global trade. The administration should also implement other policies, including CCI and MAC, to maintain the dollar at a level that is consistent with balanced global trade. These policies are needed to make good on the president’s commitments to rebalance trade and rebuild manufacturing.

• Failing to secure any reasonable compensation for those on the losing end of globalization
• Failing to address currency misalignments that have led to large trade deficits and hemorrhaging employment in manufacturing
• Passing trade agreements that have consistently aimed to undercut workers’ economic leverage while carving out ample protections for corporate profits

The effects of globalization and our failed policy response to it are not just a problem for white manufacturing workers in the Rust Belt, but in fact affect the majority of workers and likely fall disproportionately on the wages of nonwhite workers.

Why it matters: Intentional policy decisions have amplified the costs of globalization to American workers on its losing end. Globalization has been used as a tool to shift economic leverage and power away from low and middle-wage workers, and this has contributed to the anemic wage growth for this group.

What can be done about it: To remedy the situation, the United States can:

• Use domestic policy to compensate (offset the losses to) negatively affected workers—but the first step is acknowledging the large scale of these losses.
• Stop pursuing new omnibus trade agreements that protect returns to capital while undercutting wages.
• Reorient international policy away from regressive trade agreements and toward measures that will benefit workers in the U.S. and in other countries—addressing currency misalignments; developing international policies to enable countries to tax capital income, including clamping down on abusive tax havens; instituting an international financial transactions tax; and harmonizing national policies aimed at combating global climate change.

Executive summary

This paper provides the economic background necessary to forge a progressive response to the challenges posed by globalization. A progressive response should focus on the class-based distributional conflicts that are inherent not only in globalization writ large but also in the trade agreements and behavior of policymaking institutions that constitute the “rules of the game” governing it. A progressive response to globalization has the potential to boost living standards for low- and moderate-income Americans.

Conversely, responses to globalization and its rules based on a corporatist nationalism will be far less effective in boosting low- and moderate-wage workers’ incomes. If globalization is viewed as a competition between nations, little in the way of help for low- and middle-wage workers will emerge. If instead globalization and the rules that govern it are correctly recognized as just another set of tools that have mobilized in recent decades in an intentional effort to shift bargaining power away from low- and middle-wage workers and toward corporate owners and managers, then a genuinely useful response might emerge.

Given the themes around trade policy that emerged over the course of the 2016 presidential campaign, one overarching point falling out of this underlying economics is worth mentioning upfront: the economic losses stemming from globalization and our regressively structured trade agreements are not a niche issue affecting only white working-class manufacturing workers in the upper Midwest. That group is only a tiny sliver of the overall losses. The losses are in fact much more widespread and actually fall disproportionately on communities of color. Choosing to worry about the impact of globalization and trade agreements on American workers is not prioritizing the concerns of white working-class workers in the upper Midwest; it is focusing on an issue of importance to all working-class workers.

The pressure globalization has put on American workers’ living standards has been significantly amplified by policy choices

Globalization of trade and capital flows was always likely going to be hard on tens of millions of American workers. Theory predicts and evidence validates that while growing trade (particularly but not exclusively) with poorer nations leads to overall national income gains, it also leads to so much upward redistribution of income that most workers are made worse off. The gross losses inflicted by globalization are not small, and they are widespread. One cannot measure the scale of losses by the number of jobs lost in manufacturing (though these are the most acute losses). Globalization has weighed down wage growth for tens of millions of American workers, if not a hundred million or more.

The damage wrought to many American workers by globalization has been amplified by the profound policy mistake of ignoring exchange rate misalignments. Policymakers have allowed the dollar to rise to levels that have hamstrung the competitiveness of U.S. exporters in global markets. The resulting (and entirely predictable) trade deficits have been a primary driver of job loss in manufacturing in recent decades, and these losses have amplified the regressive redistribution caused by trade.

Trade agreements in recent decades have also amplified the upward redistribution of income from globalization, through a number of channels. They have undercut American workers’ bargaining power with employers and eroded protection for American workers’ ownership claims on American institutional and organizational capital, but have increased protection for corporate managers and shareholders in a range of industries—particularly those that rely on enforcement of intellectual property claims (pharmaceuticals, software, and entertainment, particularly). In short, they are not free trade agreements; they are agreements that decide whose protection from economic competition will be eroded and whose protection will be enhanced.

The net effect of these agreements is that little to nothing has been done to help boost the volume of American exports—particularly in manufacturing. The failure of predictions that signing the agreements would reduce U.S. trade deficits has become conspicuous.

The decision to sign trade agreements that were the result of corporate capture of the treaty-crafting process and the decision to not protect U.S. manufacturing employment against misaligned exchange rates were visible and regressive insults to large swaths of workers already feeling the wage-suppression effects of globalization. These agreements and currency misalignments have made for poisonous politics in the effort to secure class-based solidarity in economic policy debates. Given the extraordinarily modest national economic gains that are estimated to result from these treaties, it seems hard to imagine that they were worth the political fallout.

What can be done to redress the harm to workers?

A standard idea for responding to this problem of trade-induced redistribution—using nontrade policy tools to compensate those on the losing end of expanded trade—has never been tried on any serious scale. It should be. But this compensation is a much heavier lift than commonly thought, for two reasons: the net national gains from trade are much smaller than commonly advertised, while the gross losses to workers on the losing end are much larger.

The wage-suppressing effects of globalization for workers on the wrong end of it, amplified by trade agreements, has been significant, but do not explain anywhere near all of the upward redistribution in recent decades. Purely domestic policies are capable of fully compensating for the downward wage pressure of expanded globalization and even for the amplifying effects of trade agreements. For example, policy change that managed to restore collective bargaining rights to American workers would likely boost their economic leverage enough to fully offset the past drag of globalization.

But even though progressive domestic policy could hold American workers harmless in the face of globalization, there is no virtue to preserving the trade policy status quo. Recent trade agreements have not led to faster growth, and, despite occasional genuine, good-faith efforts to write “better” agreements, the process of writing and enforcing these agreements is completely captured by corporate interests. There is no winning the game of trying to write a worker-friendly omnibus trade agreement, so a new game needs to be played.

Trade policy going forward should abandon the pursuit of ever more omnibus trade agreements and should instead focus on just three things: enforcing aspects of existing agreements and trade law when this will benefit American workers; reducing specific, identifiable trade costs when they are imposing large, regressive costs on Americans; and preserving open access to the U.S. market for poorer countries.

It is clearly true that a number of key economic challenges are best met at the international level and that a retreat to isolationism will not further progressive goals. Examples include international coordination to tax capital and close tax havens; the institution of a global financial transactions tax that could provide funding for pressing social needs; harmonizing climate change policy across countries to ensure that emissions are not just chased out of one country and into another; and ensuring that beggar-thy-neighbor currency misalignments are addressed in a fair and transparent way.

The economics of globalization

In this paper we define globalization as the growing share of trade and capital flows scaled against national income. For the purposes of assessing the effects of globalization on American workers, it really does not matter what underlies the trend of globalization—whether it has been driven by policy reductions in barriers to these flows, or whether it has been driven by the decisions of American trading partners to enter the world trading system. Either one of these scenarios has the same effect on American outcomes.1

Trade-induced losses affect a majority—not a minority—of American workers

The challenge of globalization for American workers is often painted as a problem of industrial workers losing their jobs to imports. Because manufacturing employment is now a small share of overall employment, these trade-induced losses are often described as “small and concentrated.” If it were true that globalization’s losses were concentrated on and borne by only a small group of workers, the politics would not be so challenging for progressives—small groups are easy to compensate. But this assessment of the situation is wrong—growing trade (particularly with poorer nations) actually inflicts losses on the majority of the American workforce.

This is not some heterodox stance. The most conventional textbook economics actually argues for surprisingly radical conclusions regarding the effects of globalization in the U.S. economy. When people say that economics teaches that expanded trade is a “win-win” proposition, this means only that trade is “win-win” for total national income in each partner country.2 But textbook economics does not predict that expanded trade will be a win-win for all groups within those countries.

To see the logic of why this is so, take the case of China and the U.S. Reducing barriers to trade allows each country to specialize in what they do relatively more efficiently.3 But this specialization means that domestic resources need to be reshuffled between sectors domestically. Because China is likely to specialize more in labor-intensive production while the United States is likely to specialize more in production that uses capital, skills, and credentials (“capital” henceforth) more intensively, this reshuffling will, in the end, reduce demand for labor and boost demand for capital in the United States. Because it can be shown that the sum of capital’s gains exceeds labor’s losses, globalization remains “win-win” at the country level. Within the U.S., however, there is nothing “win-win” about it; labor loses not just in relative terms, but can suffer absolute income losses as well.4

Importantly, these losses are not the damage stemming from the adjustment cost of manufacturing workers’ temporary unemployment spell as they move between sectors after being displaced by imports. This temporary adjustment cost is not even factored into the considerations above (in the real world, they should be). Rather, the big damage is the permanent wage loss resulting from America’s new pattern of specialization that requires less labor and more capital. Further, this wage loss is not just suffered by workers in tradeable goods sectors who are displaced by imports; it’s suffered by all workers who resemble these workers in terms of credentials and labor market characteristics. A simple way to say this is that while landscapers may not be displaced by imports, their wages suffer from having to compete with apparel (and auto, and steel) workers who have been displaced by imports.

There is widespread agreement that domestically driven compensation policies could undo this damage—so why haven’t such policies been implemented?

We could in theory solve this problem through domestic compensation—using nontrade policy tools to progressively redistribute income even as expanded trade regressively redistributes it. But we have not. One reason why we have not is that there has not been any real agreement on the size of the group losing from expanded trade or the economic heft of their losses. Instead, there has been a concerted effort to define the group as “small and concentrated” and to pretend that policies often advertised as “compensation” for trade deals (Trade Adjustment Assistance [TAA], for example) are all that’s needed. But even at its peak, TAA was too small—by orders of magnitude—to fully compensate for trade’s gross losses.5

A relatively wonky point is that because the net national gains stemming from expanded trade are the outcome of much larger gross winnings and losses, the political economy of securing compensation is difficult. Basically, one would have to deny the winning group about 80 percent of their expected benefits from trade to mitigate the damages to the losing group.6 And some of the mechanisms needed to effect a transfer this large (e.g., tax and transfer policies) are (at least in textbook analysis) potentially as distortionary to markets as trade barriers. In short, the “liberalize and then compensate” philosophy is nice in theory, and would be a clear improvement over the status quo for most American workers, but it has very little obvious economic advantage for domestic workers over a baseline of enhanced protectionism.7

Finally, given the intense focus on the plight of manufacturing workers in the 2016 presidential campaign, it is worth stressing one more time how widespread the losses from globalization really are—they are absolutely not confined to manufacturing. Listening to analysis of the presidential election, one would think that concerns about globalization and trade agreements are relevant only to white workers in a small handful of Rust Belt states. This is wrong. The wage-suppressing effects of globalization hit all workers without college degrees, across the country. Workers of all races and ethnicities are affected, and communities of color are disproportionately harmed. The harm of globalization is absolutely not a niche issue affecting only white working-class workers in the upper Midwest.

Globalization can also drag on workers’ bargaining power

The textbook analysis of the effects of trade on wage suppression discussed earlier assume that these effects run through trade flows that shift the relative demand for different types of labor. But trade’s effects on wages could run through other channels as well. After all, in the real world, wages are not set in perfectly competitive labor markets solely through shifts in demand and supply curves. Rather, the relative bargaining power of employers and employees matters greatly for wage-setting, and the threat effects of growing globalization surely hamstring this bargaining power for many American workers. In previous eras, the only fallback position for employers in the face of a breakdown in wage bargaining was to stop production. Now employers have the option of setting up production facilities abroad. This improved fallback position boosts employers’ bargaining power vis-à-vis their American employees, and this can lead to substantial downward pressure on wages.

As is always the case, measuring bargaining power at all, let alone its ebb and fall, is difficult, so the precise empirical impact of this channel of globalization’s wage-suppressing effects is hard to gauge. But there is growing evidence that these effects could be significant. Bertrand (2004), for example, shows that import competition tears down the protection that incumbent workers’ wages have traditionally enjoyed against rising unemployment. Senses (2007) finds that offshoring is associated with greater elasticity of labor demand—implying that wage gains will cut more sharply into employment gains. Bivens (2006) finds evidence that industry-level rent-sharing is eroded by growing import shares. Jayadev (2007) finds capital account openness associated with a shift from labor to capital income shares across countries, and attributes this finding to the bargaining channel. Anderson, Tang, and Wood (2006) construct a model of globalization eroding American workers’ privileged access to institutional and human capital and lowering wages through this channel. They find empirically that greater ease of movement of high-credential, high-skill managers leads to wage declines for American labor, supporting the predictions of their model.

Recognizing the bargaining power channel of globalization’s impact on wages also highlights why a class-based progressive response to trade is more likely to help low- and middle-wage workers than an approach based on corporatist nationalism. A class-based approach to economic policymaking in general should specifically target measures to boost workers’ bargaining power, both in the design of trade policy and through nontrade policies that can be used to compensate workers for the bargaining power erosion induced by globalization and trade policy. A corporatist approach instead just aims to keep foreign pressure from damaging U.S. workers (for example, the Trump threat/payoff approach to keeping the Carrier plant in the U.S., as noted by Bivens [2016]) but is fine with American corporate owners and managers pressuring the pay and jobs of American workers. Evidence of this last point includes the Trump administration nomination of Andrew Puzder for labor secretary, given that Puzder favors a suite of policy changes that would predictably damage the economic leverage and bargaining power of American workers relative to their American employers (McNicholas 2017).

New, growing evidence means nobody can claim they don’t know about trade’s wage impacts

This clear prediction that growing trade will boost inequality and place downward pressure on the wages of most American workers is bolstered by real-world evidence. In earlier rounds of the “trade and wages” debate, Feenstra and Hanson (1999) find that up to 40 percent of the rise in the college premium can be explained by growing trade flows. Bivens (2013) also finds that the implied wage effects of trade expanded rapidly after 1995, as trade with lower-wage nations (particularly Mexico and China) picked up significantly. Bivens (2013) also finds that, by 2013, trade flows with low-wage nations were likely reducing wages for workers without a four-year college degree by roughly 5.6 percent. For a non-college-degreed worker making the median hourly wage and working full time, full year, this translates into just under $2,000 annually.

This estimate is quite close to what Autor, Dorn, and Hanson (2013) have found in a series of now-famous papers measuring the impact of growing trade with China. The Autor, Dorn, and Hanson (2013) results are that each $1,000 in imports per worker reduces American wages by roughly 0.7 percent. Given that Chinese imports in 2016 stand at roughly $4,000 per worker, this translates into a 2.8 percent wage reduction. And the Autor, Dorn, and Hanson (2013) results indicate that the impact on American wages of a given volume of imports from other low-wage countries is no different from the impact of Chinese imports. Imports from all low-wage countries in 2016 stand at roughly $8,000 per worker, implying a wage reduction of roughly 5.6 percent, or about $2,000 annually, for a full-time worker earning the median wage.8

The wage damage caused by trade is not ‘concentrated’

Again and again, the damage done by expanded trade to American workers is described by economic writers as being “concentrated”; the typical worker hurt by trade is assumed to be a manufacturing worker who has lost her job to import competition. While trade-displaced workers clearly face the largest individual losses among those suffering harm, in the aggregate the costs of these job losses are dwarfed by the wider effects of downward pressure on wages. Globalization does not just hurt manufacturing workers; it also actively weighs down the wages of workers in nontradeable sectors.

Often, the Autor, Dorn, and Hanson (2013) results are invoked to justify the claim that this damage is “concentrated.” They do not. Autor, Dorn, and Hanson (2013) show that their measure of trade exposure—imports per worker—varies by roughly a factor of four between the 90th and 10th percentile of geographic locations in their data (from the years 2000 to 2007).9 As noted above, the Autor, Dorn, and Hanson (2013) results indicate that workers in the area with the median level of trade exposure have suffered wage declines of roughly 5.6 percent, or $2,000 in annual earnings, due to the level of Chinese imports. Because the 90th percentile geographic areas—those areas that have greater trade exposure than 90 percent of all geographic areas—have double the trade exposure as the median area, this implies a $4,000 wage reduction in those areas. But even the 10th percentile geographic areas—those areas that have less trade exposure than 90 percent of all geographic areas—have fully half the trade exposure of the median area, and this implies a $1,000 wage reduction even in these low-trade areas.10 To the extent that these are nontrivial differences between areas with greater and lesser trade exposure, one might call trade’s wage costs “concentrated.” But the fact that even in the least-exposed areas the typical worker likely sees wage declines of $1,000 per year stemming from trade argues strongly that these wage costs are in fact quite widespread.

Autor, Dorn, and Hanson (2013) interpret their results as showing that labor market “adjustment” to trade shocks is slow. That is a more-than-reasonable interpretation for some of the employment effects by geographic area, as mainstream economic theory argues that flexible labor markets tend to absorb all willing workers unless some labor market friction keeps this from happening. But a key part of employment generation in the face of a negative relative demand shock is that wages must decline to support employment growth, so the downward wage pressure found by Autor, Dorn, and Hanson (2013) could (indeed likely would) just get worse as labor markets fully “adjust.”

The wage damage caused by expanded trade is not ameliorated by lower prices

Often, proponents of expanding trade argue that its benefits are progressive because it lowers the prices of goods that are disproportionately consumed by low- and moderate-income households.11 This, however, looks at only one narrow facet of trade’s impact: lower prices for consumers stemming from cheap imports. But these lower prices for consumers are the gross benefits of expanded trade, so of course focusing solely on them would show trade helps everybody. One also has to examine the other effects of trade—those that impose gross costs as well.

For example, while expanded trade lowers prices for imports, it also raises domestic prices for exported items.12 At the national level, because imports are more likely than exports to be consumption goods, this does mean that trade’s net effect is to lower prices faced by consumers. But it is possible that exported items are also disproportionately consumed by low- and moderate-income households. Take an obvious example: the U.S. exports a lot of food products (grain, beef, etc.). If it did not export a lot of these food products, their prices would be cheaper in the United States. Given that lower-income households likely spend a higher share of their income on food than higher-income households, expanded trade of food exports could well have regressive effects.

Further (and much more importantly), looking only at prices misses the effect that growing trade has on wages. The same fall in import prices that benefits consumers also leads to lower wages for most workers. Essentially, as growing imports lower prices of import-competing goods produced in the United States, domestic production of these import-competing goods becomes less profitable, and so this production shrinks. As this domestic production shrinks, resources displaced from this sector have to try to find employment in more capital-intensive sectors. This leads to a reduction in demand for labor (as well as bidding up the price of capital), and this in turn triggers adverse wage effects. The more imports drive down domestic prices for domestic goods, the worse the wage effect is. This wage effect, again, harms most workers, not just those located in particularly trade-exposed regions.

It is clear that the decline in wages stemming from this process will be larger than the decline in prices.13 This means that falling import prices are not a net benefit from trade for the majority of American workers on the wrong end of globalization’s distributional conflict.

Finally, the estimates of wage declines caused by growing trade in this paper are real, inflation-adjusted wage changes—that is, they fully price in the effect of price declines driven by trade (or by anything else). So it is absolutely clear that these workers are losing, regardless of price declines.

Unaddressed currency misalignments have amplified globalization’s challenges

The theoretical case for expanded trade pulling down wages for most American workers generally assumes this wage drag would occur even in the presence of balanced trade. But the United States has run persistent trade deficits, particularly from the late 1990s onward. These deficits, and the sharp job loss they have caused in manufacturing, have amplified the regressive effects of growing globalization.

These deficits have been driven largely by exchange rate misalignments—the result of policy choices that have kept the value of the U.S. dollar too high to be consistent with balanced trade. A strong dollar makes U.S. exports expensive and U.S. imports cheap, and this results in trade deficits. It also means that the United States absorbs more imports than it would otherwise, pushing workers out of import-competing sectors into nontradeable sectors and leading to a reduction in relative labor demand, thus amplifying the wage-depressing effects of trade flows. For this and other reasons, failure to keep the value of the dollar close to its trade-balancing level has been a key policy mistake in recent decades.

Manufacturing job loss is not inevitable

Occasionally it is claimed that manufacturing job loss is inevitable and has more to do with fast productivity growth—the ability to produce more goods with fewer workers, thanks to technology/automation—than with trade deficits.14 This is clearly wrong. From 1965 to 2000, employment in manufacturing hovered between 17 and 19.5 million, depending on the phase of the business cycle. After 2000, it began falling, reaching its trough of under 11.5 million in 2010, and it hovers below 12.5 million today (EPI 2016). Yet the pace of productivity growth from 1965 to 2000 was notably more rapid than the pace has been since 2000.15 In short, it is not the pace of technological change that coincided with the decline in manufacturing employment; it is instead the emergence of large trade deficits sandwiched between two steep recessions.

The fact that manufacturing employment was steady for 35 years in the face of rapid productivity growth often gets muddled when people focus on manufacturing’s share of overall employment. Here it is true that faster productivity growth in manufacturing has clearly contributed to net employment growth occurring in other sectors. But manufacturing’s share of total employment has fallen post-2000 much faster than it would have absent the rise of large trade deficits. In the end, a falling manufacturing share of employment over time is indeed to be expected, but the absolute hemorrhaging of employment levels in manufacturing we have seen over the past 16 years is not. This relatively recent manufacturing employment implosion is much more attributable to rising trade deficits than to productivity growth.

Trade deficits are—by definition—caused by currency misalignments

Trade deficits are, by definition, evidence of a currency that is too strong to balance trade flows. Further, they can only be reduced with a currency depreciation.16 Sometimes people point to other issues in trade policy and claim that these can drive trade deficits: subsidies for exports, for example, or labor rights violations that keep wages artificially low, and argue that these, not currency values, are the source of trade deficits. But as concerning as these other policies may be for other reasons (and the violations of labor rights are deeply concerning), the effect they have on the trade deficit can be entirely neutralized by an exchange rate that is free to adjust to a level that balances trade. But the U.S. exchange rate has not balanced this trade in recent decades, and the result is large trade deficits that have strangled any recovery in manufacturing employment after the 2001 recession and have even placed a drag on recovery from the Great Recession.

Sometimes the too-strong American dollar over the past two decades was the result of private capital flows, and sometimes it was the result of intentional mercantilist currency management on the part of American trade partners. In the end, though, the source of this currency misalignment is irrelevant; the macroeconomy does not respond to why the dollar is strong, only to the fact that it is. In recent years, the debate over exchange rates has focused too strongly on the issue of currency management (or “manipulation”). This in turn has led to it being framed as an issue of a virtuous United States being victimized by predatory trading partners. This moralizing is irrelevant and misleading. A strong dollar vis-à-vis the Chinese yuan, for example, creates both winners and losers within the United States and within China. And while official currency management by China has largely relented in recent years, this does not mean, contra many supposed experts, that the U.S.–China exchange rate is no longer an economic problem. It just means it is a problem now exacerbated by private capital flows rather than official ones. But again, the macroeconomy does not care who is inflating the value of the dollar, only that it is inflated.

The economics of trade agreements

As noted in the previous section, the integration of the U.S. with the poorer global economy was always likely going to put some drag on wage growth for most American workers. But the regressive consequences of this within the United States have been amplified by the structure of specific trade agreements we have signed in recent decades.

Recent decades’ trade treaties have gone far beyond simple tariff-cutting (which would have by itself put some drag on wages, through the mechanisms described above). Many of the non-tariff-related innovations in trade agreements began enhancing protections for corporate interests while undercutting workers’ wages. For example, trade agreements in the 1990s began including investor-state dispute settlement (ISDS) provisions. These ISDS provisions made it much safer and more profitable for international corporations to invest in export facilities abroad by providing enhanced legal protection for corporate assets abroad.

This investment abroad lowers costs in trading partners’ export industries and leads to cheaper imports coming into the United States, which pressures American wages through standard Stolper-Samuelson channels. The ISDS provisions can also hamstring American workers’ bargaining power. One way to view these provisions from the American perspective is that they purposefully eroded American workers’ implicit monopoly on the legal and institutional capital that made employers confident about investing in the United States.17 In a sense, business environments in other nations that were either more worker-friendly or capitalist-risky helped boost American wages. Trade agreements have tried to level this previous advantage, thereby undercutting American wages.

From our trading partners’ perspective, these ISDS provisions have often been used aggressively by American companies to not just enforce uncontroversial property rights claims, but to attack any policy change—including prudential regulatory changes—that threaten profits. These provisions are the starkest example of how class-based approaches can highlight areas where workers here and abroad have common interests. American workers have an interest in keeping ISDS provisions from making it easier to send production overseas and erode their stake in institutional capital that keeps their wages up. But foreign workers have an interest in keeping ISDS provisions from allowing their governments to undertake corporate-friendly restructuring of their economies—which might not be politically popular—in the name of adhering to trade agreements while claiming that these agreements will provide benefits through access to the U.S. market.

Despite the fact that trade agreements erode protections for U.S. workers’ wages, it would clearly be wrong to label recent trade pacts as “free trade” agreements, as these ISDS provisions provide increased protections for investors. Further, many specific provisions of recent decades’ trade agreements have clearly increased protections for specific corporate interests. For example, these agreements universally force other countries to meet much higher levels of protection for intellectual property claims of American companies than they had to meet formerly. Essentially, poorer countries are forced by these treaties into spending resources to act as domestic bill collectors for companies like Pfizer, Microsoft, and Universal. Given that the beneficiaries of enforcement of these amped-up intellectual property claims are shareholders and corporate managers of these companies, it is obvious that these provisions just magnify the regressive consequences of trade flows.

Often debates over trade agreements get muddied by proponents’ insistence that the damage done by trade to the majority of American workers is somehow unrelated to the trade agreements we have signed in recent decades. It is certainly possible that we would have seen a sharp increase in international trade and capital flows even in the absence of trade agreements over the past 20 years. But a range of new research indicates that these agreements themselves boost trade significantly more than was previously thought.18

More importantly, this “hate the trade, love the trade agreements” argument is largely a dodge. The entire point of these agreements has been to increase trade and capital flows. If you think these flows put pressure on American wages and yet you work to maximize these flows by passing trade agreements (that contain no measure of compensation), you cannot claim to be innocent of doing anything bad to American workers.

How should a progressive policy respond to all of this?

From the perspective of the majority of American workers, expanded trade—amplified by trade agreements—has the primary effect of dragging on American wage growth. And wage growth for the typical American worker has lagged far behind overall productivity growth in recent decades. This growing wedge between productivity and pay is the root cause of the rise in income inequality over this time.19 It is important to note that globalization does not explain all, or even most, of this growing wedge between productivity and pay. But it does play some role.

As a society we could have decided that the best response to the regressive redistribution of income caused by globalization was to use other policy tools to reverse this effect. So, for example, we could have responded to the trade-induced wage losses by improving labor standards or using taxes and transfers to hold workers’ take-home pay constant. And it is clear that any comprehensive policy aimed at boosting American wage and income growth should indeed do most of these things.

In short, we could have given American workers a relatively prosperous life with growing opportunities even as we signed regressive trade agreements. But why should we even bother with the “regressive trade agreements” part of this equation?

Some would object to the idea that trade agreements must, by definition, be regressive. They would argue that the next trade agreement could be better for American workers if we just tweaked the rules to get them right. But by now it is clear that the entire process of pursuing large, omnibus trade agreements has been captured by corporate interests. This capture has happened with every agreement since the North American Free Trade Agreement (NAFTA). Each new agreement has text that has been tweaked for better (U.S.–Jordan) or worse (the Central American Free Trade Agreement [CAFTA]). But the constant is that the highest priorities of the corporate sector (ISDS and intellectual property protection) are given the most attention while efforts to use trade agreements to serve progressive goals largely fail.

Others would argue that the benefits to overall national income from trade agreements are so large as to justify undertaking the agreements. But these benefits are generally far oversold. Take, for one example, widely cited estimates from the Peterson Institute for International Economics on the potential growth payoff for the United States from the Trans-Pacific Partnership negotiated by the Obama administration. Their most aggressive growth forecast was that the TPP would provide a one-time level shift in U.S. gross domestic product of 0.4 percent after 10 years.20 Essentially, the U.S. economy with TPP was forecast to reach an income level by September 2016 that it would have reached in December 2016 without TPP, and then to grow at the same pace afterward. Importantly, these estimates only examined the provisions of TPP that liberalized trade; they made no attempt to quantify the growth drag resulting from the increase in protectionism included in some portions of the treaty.

The US should stop pursuing new trade agreements

Given the regressive insult that recent decades’ trade agreements have layered on top of the regressive injury caused by globalization writ large, our perpetual pursuit of ever more trade agreements should be stopped, once and for all. One institutional change that a president could make to halt the perpetual pursuit of these agreements is to announce that under the current administration, the office of the United States Trade Representative (USTR) would no longer be in the business of negotiating treaties. Instead, it would simply focus on enforcing provisions of existing trade law that benefit American households.

This does not mean that there is no possible scope for (genuine) trade liberalization to be used as a tool to help American households. But this liberalization should be targeted in areas and sectors where it would relieve genuine economic challenges. For example, a clearly pressing problem for most American households is the high cost of health care. Health care costs in recent decades have been driven in part by the rising cost of pharmaceuticals. Given that drugs cost much less in many other countries than they do in the United States, genuine trade liberalization could provide some relief to American households by allowing drug reimportation. But the larger point is that efforts to liberalize trade should be driven by the desire to solve actual problems facing American households; it should not be driven by an assumption that the pursuit of ever-more trade deals is good in and of itself.

How should the US renegotiate existing trade agreements if the opportunity arises?

Abandoning the perpetual pursuit of omnibus trade agreements will stop additional harm, but it won’t undo harm that’s already been done. The Trump administration seems to be proposing to undo or renegotiate past trade agreements, starting with NAFTA. In looking at NAFTA, the first thing to note is that the U.S. and Mexican manufacturing sectors have become tightly integrated in recent decades. One need not like the new equilibrium to which this integration has led our economies to recognize that ripping this integration apart could well impose new costs on American workers. Undoing a treaty like NAFTA, even if done intelligently with a progressive focus, would be challenging. Undoing it rashly, with a simple-minded aim of declaring American victory over Mexico, will most certainly provide no help to American workers.

All of this said, removing the ISDS provisions and putting enforceable labor and environmental standards in the body of the treaty (such standards are currently in toothless side agreements) would be welcome changes to NAFTA.21 Further, provisions harmonizing intellectual property protection and financial regulation could be scrapped as well, with little downside. It seems hard to imagine why Mexico and Canada would object to this latter change, especially if the U.S. agreed to allow changes those countries wanted (perhaps some enhanced agricultural protection in Mexico).

In essence, the goal in any reform of NAFTA, and in all trade talks going forward, should be to make access to the U.S. contingent on basic respect for the labor and environmental standards rather than contingent upon the adoption of a range of corporate-friendly domestic policy preferences. How closely the Trump administration’s priorities overlap with this goal will be a key tell as to how much help their trade policy reorientation will actually give American workers.

The US should pursue international cooperation on economic policy to solve these problems

Are calls to abandon the modern process of pursuing omnibus trade agreements tantamount to isolationism? Not at all. There are numerous challenges facing the United States and other countries that can only be solved through international cooperation. We should reorient our international economic policymaking to focus on these challenges, not on the problems allegedly addressed by current trade agreements. Below are a few ways the international community can work together to forge solutions with widespread benefits.

Coordinate globally to enable countries to tax capital income and to clamp down on abusive tax havens. Capital is mobile internationally, and capital incomes are extremely concentrated at the top of the income scale (in all countries). If progressive taxation is seen as a desirable policy, then countries must be able to tax capital without it simply fleeing (either for real or on paper) to low tax rate havens. Zucman (2015) has documented how enormous the problem of untaxed capital is.

Institute a global financial transactions tax (FTT). A particularly good way to tax capital is through FTTs. But FTTs would be far more effective—both in curbing speculative excess in finance and as revenue generators—if they were instituted internationally, rather than in any one specific country.

Harmonize national policies aimed at combating global climate change. At the moment, some of the benefits of any single country undertaking policies to increase the cost of carbon emissions are lost when carbon-intensive production migrates to countries without a climate policy. This carbon “leakage” makes the policy less effective and implicitly penalizes workers in tradeable goods sectors that live in countries with aggressive climate change policies. This is a terrible dynamic with serious international economic policy implications.

Coordinate internationally to address exchange rate misalignment. Perhaps most relevant to debates over trade, international coordination on exchange rate misalignment would be of huge help to workers around the world. For most of the past 20 years, the value of the U.S. dollar has been too high to balance trade. In some periods, this misalignment was driven by private capital flows (for example, a large appreciation versus the Euro during the U.S. stock market bubble in the late 1990s, as foreign investors reached for dollars to invest in American companies). In other periods, this misalignment was driven by intentional policy decisions of trading partners (for example, the very large accumulation of official currency reserves by the Chinese government from the late 1990s to roughly 2012). Whatever the source of exchange misalignments, they are damaging. In the United States in the 2000s, these misalignments sapped aggregate demand through net export channels, while the capital inflows associated with them kept long-term interest rates low, propping up demand through home-building. This constellation of demand was eventually unsustainable and contributed to the Great Recession. Conversely, China throughout the 2000s was not demand-constrained, so benefits from net exports were minimal and could have been achieved with other instruments besides managing the value of its currency. Using international coordination to keep misaligned exchange rates from causing damage around the world should be a much higher priority than pushing more business-as-usual trade agreements.

Conclusion

Finally, it is worth noting how odd it is that recent decades’ trade agreements have so often been championed by Democratic presidential administrations. Again, the textbook understanding of trade liberalization is that it will boost national income overall while redistributing enough income regressively to leave most workers worse off. In this sense, it is quite similar to the textbook effects of cutting top marginal tax rates and financing these cuts with across-the-board cuts to government transfer payments like Social Security or Medicare.23 Yet almost no Democratic president would champion such a tax-cut-cum-transfer-cut strategy. So why would a Democratic president champion trade liberalization without compensation that leads to the same outcome? Most Democratic members of Congress seem to understand the regressive effects of trade liberalization. While the major trade agreements of recent decades have tended to be supported by Democratic presidents and a majority of Republican lawmakers, most Democrats in Congress have opposed these agreements.

Of course this does not mean that Democrats must never support a decent trade agreement (should one be found); instead it means that their role in this debate should be to insist upon good agreements and compensation sufficient to restore the wage growth prospects of the huge number of workers that will be harmed. This compensation should come in the form of broad-based, large domestic interventions that restore bargaining power or boost incomes for low- and moderate-wage working people and their families. A full menu of policies to do this can be found in Mishel and Eisenbrey (2015).

Relying only on domestic compensation to deal with the effects of trade on American workers, however, assumes that the trade agreements we have signed in the past 20-odd years have been exercises in good-faith liberalization of trade that have greatly expanded access of the world’s poor to U.S. markets. But, in fact, they have not been. They have instead been the result of corporate capture that has engaged in selective and regressive protectionism while restricting the policy space of our trading partners. This is not how we should be engaging in the world, and it is not retreating into isolationism to recognize this. We can do better by both America’s workers and the workers of our trading partners.

About the author

Josh Bivens joined the Economic Policy Institute in 2002 and is currently the director of research. His primary areas of research include macroeconomics, social insurance, and globalization. He has authored or co-authored three books (including The State of Working America, 12th Edition) while working at EPI, edited another, and has written numerous research papers, including for academic journals. He often appears in media outlets to offer economic commentary and has testified several times before the U.S. Congress. He earned his Ph.D. from The New School for Social Research.

Acknowledgments

This research was made possible by support from the Alliance for American Manufacturing.

Endnotes

1. As long as the increase in trade flows is exogenous, it is straightforward to map out its effects on American wages. In theory, trade flows could have increased because American wages were changing, but very few professional participants in the trade and wages debate consider this possibility a serious hurdle to assessing trade’s impact on wages.

2. Of course, even this claim that expanded trade is “win-win” between countries is subject to all sorts of caveats. The most important one is that it assumes full employment in both countries. Samuelson (2004) identifies other important caveats as well.

3. “Relatively” is the crucial word here—even if production costs were lower in China for both clothing and aircraft (they are not—and U.S. productivity advantage in the latter dominates the wage costs), it would still make more sense for China to specialize in the former, as their cost advantage is naturally much greater in more labor-intensive industries. Think of a lawyer who types faster than her secretary—will she decide to cut back on the legal services she provides to do more typing? Of course not—she’ll concentrate on the activity where her relative (not absolute) advantage is greater.

4. Those familiar with trade theory will recognize this as a description of the Stolper-Samuelson theorem. This theorem says that expanded trade will see the return to a country’s abundant factor of production increase, while the return to its scarce factor will decline. What’s key in this description is that “abundant” and “scarce” are relative terms that compare the U.S. to the global economy. So, while workers without a four-year college degree constitute the majority of the U.S. workforce, they constitute the scarce factor of production for the U.S. because they represent a smaller fraction of the U.S. workforce than the global workforce. There is a longstanding debate in the international economics realm about whether this Stolper-Samuelson theorem is precisely correct. For a good sampling of this debate, see Davis and Mishra (2007) and Wood (2009). While the strict mapping of factor prices and product prices may well not hold in the real world, there is ample supporting empirical evidence that the bundle of imports and exports in the United States economy really does lead to excess supplies of labor and deficient supplies of capital relative to the nontraded economy. It is hard to see how this would not translate into lower returns for labor and higher returns to capital. As Wood (2009) argues, “narrow” versions of Stolper-Samuelson that work through textbook, perfectly competitive markets that allow precise mapping of product and factor prices will likely fail. But “broad” versions that simply say trade leads to lower demand for labor and higher demand for capital in the United States will almost surely hold. Finally, there is a temptation to say that because the first versions of Stolper-Samuelson predicted relative increases in the Global South, and this has not generally happened, that it cannot be relevant for the United States. This is far too facile an argument. For one, it could be that Stolper-Samuelson effects are indeed at work in the Global South, but are simply being swamped by other determinants of wage growth (growing productivity, the move from rural to urban labor markets, etc.). For another, since Feenstra and Hanson (1997), there has been a modified form of Stolper-Samuelson that argues for trade and offshoring in a continuum of goods (not just two) that pushes all countries’ factor demand toward capital and away from labor, as globalization allows every country to “take a step up” the value chain.

5. For this comparison of globalization-induced redistribution and various policy initiatives, see Bivens (2008).

6. This is based on the rough rule of thumb that trade redistributes about five to six times more income than it creates.

7. Securing better market access for workers in developing countries is a persuasive reason why “liberalize and compensate” is a better overall strategy if one is also concerned (as one should be) with the welfare of workers outside of the United States.

8. See Bivens (2013) for how imports from low-wage countries are measured.

9. The specific geographic areas they examine are “commuting zones,” or “CZs.” In 2000, the Census Bureau identified 709 CZs across the United States.

10. This implicitly assumes that all other developing country imports have the same dispersion across geographic locations as imports from China.

11. An example of this is Matt Yglesias’s recent claims on the Vox podcast regarding trade, wages, and prices: “[Trade protection] is not really a transfer from fancy coastal people who don’t really spend that high a share of their income on import goods, but a transfer from residents of places like Eastern Kentucky and Mississippi to residents of not-rich but more-affluent areas like Wisconsin, Michigan, and Pennsylvania” (Vox 2016).

12. The intuition for this is relatively simple: as trade barriers fall or as incomes abroad rise, there is greater competition to buy the output of American producers. As exports rise, American consumers are in effect competing with foreign consumers for purchasing this output, hence prices rise.

13. The intuition is that the cost of producing something can be broken down into the constituent price of inputs. Since trade leads to prices for one of these inputs falling (labor) while the other input’s price rises (capital), the percentage fall in labor’s price (wages) must be greater than the percentage change in prices.

14. See Bivens (2015b).

15. See Scott (2015) for some evidence on productivity growth, trade deficits, and manufacturing employment.

16. This is true even if one believes that the root cause of trade deficits is deficient domestic savings, a commonly expressed view. Focusing on domestic decisions about how much to save is largely a distraction in debates over trade deficits. In recent years, trade deficits have surely affected the level of saving, as income and savings have been largely driven by the level of aggregate demand, which is affected by the trade balance. Further, even at full employment the savings decisions of American trading partners (the global savings glut, for example) can have very large impacts on trade deficits. But even if one believed that increasing domestic savings is the key to reducing trade deficits, this increased savings would only translate into a lower trade deficit through an exchange rate change. And if one believes that these necessary exchange rate changes are being blocked by policy action, then one can cut right to changing these exchange rates directly.

17. A formal description of how this monopoly is eroded and affects wages is provided by Anderson, Tang, and Wood (2006).

18. Two papers demonstrating that trade liberalization might have stronger effects on trade flows than conventional measures might indicate are Pierce and Schott (2016) and Ruhl (2008).

19. See Bivens and Mishel (2015) for an extensive discussion of this pay–productivity disconnect.

20. See Bivens (2007) and Bivens (2015a) on the overselling of estimated gains from specific trade liberalizations.

21. The labor standards would mandate that all signatories respect the labor standards that the International Labour Organization (ILO) has identified as fundamental rights for workers. Failure to recognize and enforce these standards could then constitute grounds for countervailing trade protection measures.

22. This is, by the way, entirely consistent with economic theory—in mainstream trade theory (see Krugman [1993]), the benefits of “free trade” are dominated by the benefits of importing cheaper goods, and the benefits of expanded exports are very minor. And the ability to import cheaper goods is entirely at the discretion of our trading partners and not contingent on any decisions we make about market access.

23. Furman (2016) makes an excellent point that the GDP gains stemming from cuts in tax rates predicted by textbook models actually boost welfare by a much smaller amount, as these gains mostly stem from either more work (which causes disutility) or more savings (which means consumption is deferred). This criticism does not apply to the income gains spurred by textbook trade liberalization. However, more importantly, the losses from a tax/transfer cut strategy and from expanded trade are both welfare-damaging in comparable ways.

References

Anderson, Edward, Paul Tang, and Adrian Wood. 2006. “Globalization, Co-operation Costs, and Wage Inequalities.” Oxford Economic Papers vol. 58, no. 4, 569–95.

Autor, David H., David Dorn, and Gordon H. Hanson. 2013. “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” American Economic Review vol. 103, no. 6, 2121–68.

Beauchamp, Zach. 2016. “If You’re Poor in Another Country, This Is the Scariest Thing Bernie Sanders Has Said.” Vox, April 5.

Bertrand, Marianne. 2004. “From the Invisible Handshake to the Invisible Hand? How Import Competition Changes the Employment Relationship.” Journal of Labor Economics vol. 22, no. 4, 723–66.

Bivens, L. Josh. 2006. “Wages, Profits, and Rent-Sharing in an Open Economy.” International Review of Applied Economics vol. 20, 1–26.

Bivens, Josh. 2007. “The Gains from Trade: How Big and Who Gets Them?” EPI Working Paper no. 280, December 17.

Bivens, Josh. 2008. Everybody Wins, Except for Most of Us: What Economics Teaches About Globalization. Washington, D.C.: Economic Policy Institute.

Bivens, Josh. 2013. Using Standard Models to Benchmark the Costs of Globalization for American Workers without a College Degree. Economic Policy Institute Briefing Paper no. 354, March 22.

Bivens, Josh. 2015a. The Trans-Pacific Partnership Is Unlikely to Be a Good Deal for American Workers. Economic Policy Institute Briefing Paper no. 397, April 16.

Bivens, Josh. 2015b. “Yes, Trade Deficits Do Indeed Matter for Jobs.” Working Economics (Economic Policy Institute blog), May 28.

Bivens, Josh. 2016. Why Is Recovery Taking So Long—and Who’s to Blame? Economic Policy Institute, August 11.

Bivens, Josh, and Lawrence Mishel. 2015. Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real. Economic Policy Institute Briefing Paper no. 406, September 2.

Bradford, S., Paul Grieco, and Gary Hufbauer. 2005. “The Payoff to America from Global Integration.” In The United States and the World Economy: Foreign Economic Policy for the Next Decade, C. Fred Bergsten, ed. Washington, D.C.: Peterson Institute for International Economics.

Davis, Donald R., and Prachi Mishra. 2007. “Stolper-Samuelson Is Dead: And Other Crimes of Both Theory and Data.” In Globalization and Poverty, A. Harrison, ed. National Bureau of Economic Research.

Economic Policy Institute (EPI). 2016. The Top Charts of 2016.

Feenstra, Robert, and Gordon Hanson. 1997. “Foreign Direct Investment and Relative Wages: Evidence from Mexico’s Maquiladoras.” Journal of International Economics vol. 42, nos. 3–4, 371–93.

Feenstra, Robert, and Gordon Hanson. 1999. “The Impact of Outsourcing and High-Technology Capital on Wages: Estimates from the United States, 1979–1990.” Quarterly Journal of Economics vol. 114, no. 3, 907–40.

Furman, Jason. 2016. “Dynamic Analysis, Welfare, and Implications for Tax Reform.” Remarks at the National Bureau of Economic Research Tax Policy and the Economy Conference, Washington, D.C., September 22.

Jayadev, Arjun. 2007. “Capital Account Openness and the Labour Share of Income.” Cambridge Journal of Economics vol. 31, no. 3, 423–43.

Krugman, Paul. 1993. “What Do Undergrads Need to Know About Trade?” American Economic Review vol. 82, no. 2, Papers and Proceedings of the 105th Annual Meeting of the American Economic Association, 23–6.

McNicholas, Celine. 2017. Puzder’s Anti-Worker Positions Disqualify Him from Serving as Labor Secretary. Economic Policy Institute Policy Memo, February 2.

Mishel, Lawrence, and Ross Eisenbrey. 2015. How to Raise Wages: Policies That Work and Policies That Don’t. Economic Policy Institute Briefing Paper no. 391, March 19.

Pierce, Justin, and Peter Schott. 2016. “The Surprisingly Swift Decline of U.S. Manufacturing Employment.” American Economic Review vol. 106, no. 7, 1632–62.

Ruhl, Kim J. 2008. “The International Elasticity Puzzle.” Working Papers 08-30, New York University, Leonard N. Stern School of Business, Department of Economics.

Samuelson, Paul A. 2004. “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization.” Journal of Economic Perspectives vol. 18, no. 3, 135–46.

Scott, Robert. 2015. Manufacturing Job Loss: Trade, Not Productivity, Is the Culprit. Economic Policy Institute Issue Brief no. 402, August 11.

Senses, Mine. 2007. “The Effects of Outsourcing on the Elasticity of Labor Demand.” Working Papers 06-07, Center for Economic Studies, U.S. Census Bureau.

Vox. 2016. “The Weeds: TPP, the Nevada Caucus, and the Great Texas Abortion Clinic Shutdown.” The Weeds podcast, February 26.

Wacziarg, Romain, and Karen Horn Welch. 2008. “Trade Liberalization and Growth: New Evidence.” World Bank Economic Review vol. 22, no. 2, 187–231.

Wood, Adrian. 2009. “A Practical Heckscher-Ohlin Model.” QEH Working Paper no. 170. University of Oxford: International Development Department.

Zucman, Gabriel. 2015. The Hidden Wealth of Nations: The Scourge of Tax Havens. Chicago: University of Chicago Press.

• Putting pen-to-paper on trade agreements contributed nothing to aggregate job loss in American manufacturing. This is almost certainly true.

• The aggregate job loss we have seen in manufacturing is due to automation plus declining domestic demand for manufactured goods, period. This is mostly false. Trade deficits, especially with China in the last 15-20 years, have contributed significantly to overall manufacturing job-loss..

• The source of these rising trade deficits is mostly an overvalued U.S. dollar, which has nothing to do with trade policy. It’s true that an overvalued dollar is what’s behind rising trade deficits, but saying that has nothing to do with trade policy is semantics. Call it macroeconomic policy if you want, but the way an overvalued dollar hurts Americans is through its impact on trade flows.

• The trade agreements we have signed are mostly good policy and have had only very modest regressive downsides for American workers. This is false.

• Globalization writ large has been tough on some American workers and policymakers have failed to compensate losers. This is true, but I think DeLong underestimates the number of losers and the size of their losses.

So, let me dive deeper into each one of these arguments:

Putting pen-to-paper on trade agreements contributed nothing to aggregate job loss in American manufacturing.

This is almost certainly true. The only thing that keeps me from being more unambiguous is that recent research actually does provide some empirical evidence that trade flows and trade deficits respond surprisingly strongly to trade agreements—much more than standard trade models would predict. But by and large the problem with trade agreements has not been that they’ve led to large trade deficits, but that they have amplified the already-regressive impact of globalization writ large on U.S. income distribution and have contributed to the too-slow wage growth experienced by the majority of American workers. This is key—it’s not just manufacturing workers who can be harmed by trade deals, but all workers economy-wide who resemble these workers in terms of skills and credentials.

Of course, the signing of trade deals has cost some manufacturing workers their jobs. Workers in sectors shielded from competition that see that protection eroded by deals have surely lost jobs—and any potential export gains from these deals have certainly not absorbed the same workers whose jobs were lost to import competition. But, in the aggregate, I think the judgement that these deals in-and-of themselves is trivial in driving overall manufacturing job loss is sound.

The aggregate job loss we have seen in manufacturing is due to automation plus declining demand, period.

This is wrong, and easily seen by looking at the trajectory of manufacturing employment over the past 50 years. From 1965-2000, the level of manufacturing employment was extraordinarily stable, hovering between 17.5 and 19.5 million jobs (depending mostly on the phase of the business cycle). Automation was certainly happening in that period. In fact, it was happening at a faster pace than it has since 2000. And yet it’s only beginning in the late 1990s that manufacturing employment first stalls and then falls off a cliff starting in 2001. From nearly 17.5 million in 1997, manufacturing employment hit a trough of just over 11 million in 2011 and is now still below 12.5 million.

Choosing 1997 as our start year is no coincidence; it’s when the Asian Financial crisis began leading to rapidly-growing U.S. trade deficits. As the overall U.S. economy was booming in the late 1990s, these deficits at first just kept manufacturing from seeing any job gains from the boom. But as the economy entered recession in 2001, persistent (and even rising) trade deficits keep manufacturing from seeing any part of the post-2001 recovery.

Some numbers: In 1997, domestic demand for manufacturing goods (calculated as domestic output plus imports minus exports) was 10 percent greater than domestic production. The wedge between domestic demand (or apparent consumption) and domestic production in manufacturing is, by definition, the manufacturing trade deficit. Between 1997 and 2015, domestic demand for manufactured goods rose by 62 percent, while productivity rose 79 percent. All else equal, this interplay of domestic factors (demand and productivity) should have cut manufacturing employment by 17 percent (79 minus 62). But hours worked in manufacturing fell by over 35 percent in those years.

Where did the other 18 percent come from (35 percent fall in hours minus the 17 percent accounted for by domestic factors)? An 18 percent rise in the wedge between domestic demand and output—or a rising manufacturing trade deficit. This translates into roughly half of the 5 million jobs lost in manufacturing over the 1993-2015 period accounted for by trade deficits. Yes, this is a too-rough calculation, but the order of magnitude is right: trade deficits have significantly contributed to the loss in manufacturing jobs in the last 15 years.

DeLong highlights that manufacturing employment has been falling as a share of total employment steadily for decades. That’s true, but it’s a separate question from whether or not aggregate jobs have been lost in manufacturing. Further, the decline in manufacturing’s share of total employment has obviously been significantly hastened by the rise in manufacturing trade deficits.

The source of these rising trade deficits is mostly an overvalued U.S. dollar, which has nothing to do with trade policy.

It’s clearly true that trade deficits in manufacturing are driven by an overvalued dollar. It’s also true that the exchange rate is a macroeconomic price, and is not directly related to trade policy (including barriers to trade) per se. But this is largely semantics. The way that the macroeconomic policy decision to allow the dollar to become overvalued ends up harming some American workers is through its impact on trade flows. It’s no surprise, then, that many of these same American workers blame trade rather than macroeconomic policy for their distress. Policymakers and economists who want these workers to not blame trade for manufacturing job-losses should support policies that stop the job-losses, not just give lectures on textbook economics.

Further, trade policy may not be totally unrelated to exchange rate policy. The paper referenced earlier about the surprisingly large empirical association between trade policy changes (the permanent normalization of trade relations with the U.S. and China and China’s entry into the World Trade Organization) and subsequent growth in trade flows could surely reflect an interplay between trade and exchange rate policy. When China’s market access to the U.S. was up for review each year, any large surge in the U.S. trade deficit with China could potentially have drawn a countervailing response. This would have greatly reduced the potential payoff to mercantilist exchange rate management for China. Once this trade policy was permanently normalized, the chance of a countervailing response to a surge in the trade deficit was greatly reduced. This essentially gave a green light to China to engage in mercantilist exchange-rate management.

The trade agreements we have signed are mostly good policy and have had only very modest regressive downsides for American workers.

DeLong argues:

“I could write an entire piece on what has been wrong with America’s international economic policy. But NAFTA and China-WTO ain’t it. They are good trade deals…The economic case against the two agreements that passed, and the one that did not, doesn’t hold water.”

This is false. Trade agreements proposed and enacted since NAFTA have had a number of provisions that eroded protections for American workers’ claim on returns from American institutional and organizational capital—an erosion that has helped stifle wage growth. At the same time, these agreements have beefed up protections for the monopoly profits of many American companies, particularly those whose profits rest on enforcing intellectual property claims (such as pharmaceutical, software and entertainment companies).

My judgement is that most of the downward pressure stemming from globalization writ large would have likely happened even if NAFTA and subsequent agreements had not been signed. Yet the trade agreements, from NAFTA onward, have at the least constituted a regressive insult on top of the injury inflicted by globalization.

In short, these treaties have rather predictably become a key political focus for workers who feel like they have had their economic prospects damaged by trade, and this has opened up deep and unproductive fissures in broader coalitions hoping to move the ball forward on progressive policy. And there is no serious analysis that says that the net benefits of these agreements for the country at large are so large that they make the toxic politics resulting from them worth it.

Globalization writ large has been tough on some American workers and policymakers have failed to compensate losers.

In this DeLong is right, but I think he still underestimates the number of losers and the size of their losses. There is ample evidence now that American imports (particularly, but not exclusively, from lower-wage nations) are labor intensive, while American exports are capital intensive (if we include human capital). This naturally means that expanded trade will reduce demand for labor and boost demand for capital, hence widening inequality. This prediction is confirmed by direct empirical estimates of trade’s effect on wages.

On top of this effect, there is growing evidence that globalization writ large has reduced the bargaining power of low- and moderate-wage workers. Essentially, globalization has given many American employers a better fallback position should wage-bargaining with workers break down. In the event of this bargaining breakdown in earlier eras, there was simply no production and both sides lost. In the era of expanded globalization, employers have the fallback option of producing abroad. In essence, globalization has become the anvil against which American workers’ bargaining power has been broken by hammer-wielding corporate owners and managers. Of course, this aspect of globalization’s wage-suppressing effects could be ameliorated by domestic policies that take the hammer out of the hands of capital-owners and corporate managers.

But we should be clear that this reduction in bargaining power and the resulting drag on wages are not confined to manufacturing workers. Instead, all workers without a four-year college degree are likely seeing slower wage growth because of globalization (while workers with more human capital are seeing substantial gains). And the size of the redistribution is large. Not large enough to explain, say, all of the increase in the wedge between economy-wide productivity and pay of the typical worker, or even most of it. But trade has likely redistributed a full percentage point of GDP annually from the bottom two-thirds of American workers to the top third in recent years.

But the compensation policies most often paired with measures (like trade agreements) to further boost trade and capital flows (and hence globalization’s pressure on wages) have always been orders of magnitude too small to counteract this regressive redistribution. At its historic peak, long ago, trade adjustment assistance (TAA) was $1 billion, or about 0.5 percent of the full redistribution caused by globalization. This is not a shock—TAA only aids a subset of a subset of workers harmed by globalization: manufacturing workers who can prove their jobs were directly lost to import competition. Restricting definitions of the group of workers losing from expanded globalization is the perennial move in these debates that keeps genuinely fair compensation from happening.

Summing-up

American workers (and the policy wonks who criticize current trade policy on their behalf) are correct to think that the integration of the U.S. economy and the global economy has been done on terms that are bad for many—if not most—of them. Compensation for the inevitable wage drag stemming from importing lots of labor-intensive goods has never been forthcoming. Complementary policy choices (mostly exchange rate policies) have led to trade deficits that have buzzsawed manufacturing jobs. And the specific trade agreements we’ve signed in recent decades have been blatant exercises in selective protectionism that tear down institutional supports for workers’ wages while beefing up buffers for corporate profits.

In the end, DeLong seems to be on board with two crucial things that would make for much better outcomes for American workers: getting exchange rates right to narrow trade deficits, and throwing out lots of the worst of the corporate welfare in trade agreements (he mentions, for example, the pitfalls of intellectual property protections and investor-state dispute settlements). If he would stress these points, instead of all the ways trade critics are allegedly being foolish (especially since they’re not), this would be a good start to healing the poisonous politics of trade in the Democratic coalition.

First, let’s be clear—if it’s true that 1,000 jobs are kept in the U.S. and these workers are not laid off, that’s great for them and any relief and gratitude they feel about this deal is justified. Losing a job is terrifying, particularly in a country where policy titled towards the already-rich keeps good jobs scarce and makes losing a job so economically devastating.

But, let’s also be equally clear that even if this was somehow a good deal from a public policy perspective, it’s an entirely not-scalable approach to solving the challenges of globalization. A world in which your job depends on whether or not you’re useful as a public relations prop for the President is not a recipe for broad-based security.

And, the deal is a policymaking disaster. The precedent it sets is horrendous. A company announced a plant would move. A president and vice-president-elect offered them a deal that included tax breaks to stay. Why wouldn’t every employer in the country now not publicly announce they’re moving unless they get some government largesse? One reason why they might not is that deal making includes using sticks as well as carrots: are we sure that Trump and Pence didn’t threaten retaliation via cut-off federal contracts or an IRS audit if Carrier left? Carrier is a major Pentagon contractor, so that’s plausible. As soon as Presidents start negotiating and making policy company-by-company in backrooms, this is a logical potential worry.

Further, the other broad outlines of the deal are that Trump and Pence agreed to stop pushing for a tariff against imports from Mexico (which would have hurt Carrier had they moved to Mexico and tried to export back to the United States) and promised to fast-track the push to cut corporate taxes and regulations. If Carrier was negotiating on behalf of the entire U.S. corporate class, well, I’d say that they fleeced Donald Trump, but that would presume he was actually sincere in trying to side with workers versus this corporate class. He wasn’t. Instead, the corporate-friendly agenda he is actually sincere about (huge tax cuts for corporations and deregulation) will deliver hundreds of billions to corporate owners and managers, but would strip regulatory protections from millions of workers and lead to an increased tax burden or spending cuts that reduce incomes for millions more.

The tariff that he promised on Mexican imports during the election would have provided protection for far more workers than those still employed at Carrier. To be clear—I’m not a fan of this promised tariff. It seems to me to be fighting the last war and it’s not smart policy. But at least it could plausibly be defended as a way to protect manufacturing workers in the U.S. from low-wage competition. But, it’s now back-burnered because a CEO promised to keep 1,000 jobs in the United States? And how long will these jobs stay? And what are the guarantees that Carrier won’t send another plant abroad?

Finally, the Carrier move was announced in March. Yet the hundreds of thousands of dollars of tax incentives the state and Governor and Vice-President-elect Pence offered in this deal were not accepted until this week. Why the progress now? Well, because it became a PR stake in presidential politics.

To step back, there’s a reason why Presidents and Congress should make policy and not undertake company-by-company negotiations in back-rooms. The reason is that policy sets rules and guidelines that make for a fair economy and help the most people. So, if you think the U.S. should charge a 35 percent tariff on imports from Mexico as a policy because it would be good for the U.S. economy, then you should do that (I don’t agree with this, as I noted above). But you shouldn’t threaten a 35 percent tariff on a particular business simply because they have become a potential PR nuisance. This is the definition of crony capitalism. Today’s “deal” is soft-pedaling tariffs, pledging to accelerate the coddling of corporations through tax and regulatory changes, and giving outright cash (tax breaks) to win a PR war. What’s tomorrow’s deal? Threatening company-specific regulatory scrutiny and tax audits to firms whose executives criticize policies of Trump?

Again, the lesson to American workers and companies here is clear: if you can manage to make your cause a helpful PR stunt for the Trump administration, he just might be willing to help you by giving a raw deal to other workers. But you better be the first in line and useful to Trump’s own political fortunes. In short, the Trump administration seems to have found creative new ways to make the U.S. economy even more zero-sum among the bottom 90 percent than it’s been in the past generation.