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If You Think Trade Deals Have Ruined the American Economy, Reconsider
If you think America’s fundamental economic story over the past few decades is a narrative of decline due to bad trade deals — especially the North American Free Trade Agreement — then you must completely ignore economic consensus.
Some key paragraphs from the new CBO study on trade deals:
In CBO’s view, the consensus among economic studies is that PTAs [preferential trade agreements] have had relatively small positive effects on total U.S. trade (exports plus imports) and, primarily through that channel, on the U.S. economy. The effects have been small because the agreements were mostly between the United States and countries with much smaller economies and because tariffs and other trade barriers were generally low when the agreements took effect (see table below). PTAs have had little effect on the U.S. trade balance (exports minus imports) and have slightly increased flows of foreign direct investment, mostly by encouraging additional U.S. investment in the economies of member countries. As a result, the indirect effects of PTAs on productivity, output, and employment in the United States have also been small and positive. Empirical estimates support that view. But those estimates are uncertain and may be understated, because the effects of nontariff provisions are hard to measure and because issues with data keep researchers from identifying how PTAs affect the service sector. Most economic evidence suggests that the total number of workers directly affected by PTAs has been too small to significantly affect labor market conditions nationwide.
In CBO’s view, the consensus among economic studies is that the small increases in total trade that have resulted from PTAs have yielded modest, but generally positive, indirect effects on the U.S. economy, increasing productivity, average wages, output, and consumer spending slightly. Nevertheless, those agreements have not had uniformly positive effects. Because PTAs encourage economic specialization, some workers and sectors have fared better than others. …
Most of that evidence comes from studies of NAFTA, the agreement with the greatest potential to affect U.S. employment. Those studies concluded that NAFTA’s effects on the size of the labor market and net changes in total U.S. employment each year have been small. Those findings are consistent with the economic theory that PTAs should have little long-term effect on total employment because all displaced workers would eventually find new employment or would have stopped working anyway. However, according to some estimates, NAFTA contributed to many lost jobs. Conversely, many U.S. workers have had some small benefits as a result of PTAs. By lowering consumer prices (primarily through their effects on prices of imported goods) and increasing the productivity of workers (from greater competition), those agreements have probably increased average real wages for U.S. workers, albeit only slightly. If that slight increase occurred, it would have induced more people to work, increasing the U.S. labor supply to a small degree. To CBO’s knowledge, there is no evidence of such an effect on the labor supply, although if it had occurred it would have been small and extremely difficult to detect.
Preferential trade agreements have hurt some U.S. workers (sometimes substantially) and helped others. Workers in low-skilled occupations or in manufacturing industries have typically been harmed the most; those who lost their job usually endured the most substantial hardships. Many of those displaced workers experienced a costly transition to a new job, and most faced lower lifetime earnings as a result of that displacement.70 Other displaced workers could not find a good match in a new job and stopped working. In addition, increased competition resulting from PTAs has stifled wage growth in certain occupations and industries, affecting even those workers who kept their job.
So it’s a story of small of small gains with some winners and some losers from these deals. It’s hard to reconcile these results with the idea that NAFTA has brought down the American economy. CBO also explains why the US does the deals:
The United States establishes preferential trade agreements for economic and noneconomic reasons. Those agreements enable the United States and its partner countries to realize the economic benefits of increased trade and investment. In addition, the agreements sometimes harmonize laws and regulations which, among other effects, make the costs of operating businesses in other countries more similar to those costs in the United States. An important noneconomic reason for establishing PTAs is to achieve foreign policy goals. Those goals include supporting the economies of U.S. allies and promoting the adoption of preferred domestic policies, such as environmental conservation or stronger workers’ rights.
Indeed, as my colleague Claude Barfield has written, “Trade policy stands at the intersection of a nation’s diplomatic and security strategies and its broad economic goals.” I’m not sure the current presidential campaign reflects that reality.
Published in Economics
I thought it was precisely the “some winners and some losers” narrative that was at the centre of this campaign, in contrast to the “everyone’s a winner (on average and in the long term)” narrative that has dominated until now. I can quite see the democratic legitimacy of asking why, if the world has to be remade because a handful of guys in dresses want to use the ladies’ room, shouldn’t some care be taken not to plunge vast tracts of the country into despair for the sake of improvement in a theoretical economic aggregate. I think I’m on the free trade side of this debate, but our arguments need to be a hell of a lot better.
Yes. Abstract economics and trade theory is sterile. The political reality is that we do protect the losers who are powerful enough to demand it. This hurts existing winners and emerging technologies which we can’t know and if we try to guess we get wind mills solendra, ethanol and other boondoggles K street wants and we always will. We want growth; protectionism offers stagnation and crony capitalism. Protectionism is government interference writ large and it can seldom be undone because it quickly rots and enriches its protectors. It is why the third world is third world. Far better to make it easy to form new business, borrow money, learn new skills. There are ways to deal with the overvalued dollar and predatory trade but we can’t seem to address issues that require a broader understanding. The sound bite of negotiating better trade deals works as long as we don’t take it too seriously and as long as we then put some adults in charge at Treasury and USTR.
Keep preaching feel good numbers while record numbers of the citizenry are under-employed. If you have no ideology that creates opportunity for a large share of the citizens to be gainfully employed, get another one.
TKC, I suspect that Obamacare, Obama’s tax increases, hyper-regulation and anti-business rhetoric “You didn’t build that’ have responsible for the suppression of job creation. Most new jobs come from small businesses and Obama has worked hard to stifle entrepreneurs.
Those are exactly the kinds of industries that are most vulnerable to foreign economic warfare and the least protected by the Washington Donor Service Department. We lost many small and mid sized manufacturers to that and we are inhibiting the survivors from growth by regulation and saving the planet.
I see carnage and they see aggregates. I see asset stripping and they see cheap inbound goods with wealth creation now overseas.
We are killing it by our action on trade and our action on regulation. One does not absolve the other.
What a great article! What I mean by that, of course, is “How well that confirms my biases!” Free trade is good, mostly. Fair deals between equal countries are all win. Among unequal countries, it’s more complicated. The free trade purists who say, “trade is so good that even a bad deal beats no deal” go too far.
What I find perplexing is that Pethokoukis seems to think this forms an anti-Trump argument.
Well. If the CBO has spoken, it is the unvarnished truth, just as the CBO told us ObamaCare would work and cost less than a trillion dollars.
The CBO has spoken. They are never wrong nor do they have an agenda. Let us all — and especially James Pethokoukis — bow in obedience.
Tell US Aluminum manufacturers that NAFTA was a good idea. As the Wall Street Journal has consistently reported, China transships through Mexico to avoid import controls. Smelters have gone from 23 to 5 in the US over a very short time period. Now WSJ is reporting that Chinese steel is being transship via Vietnam and corruption in China’s state owned corporations is uncontrollable. Let’s not be naive about “free trade” when WTO members don’t abide by the rules.
If you have been paying any attention to politics you have heard that Carrier is moving production from Indiana to Mexico. NAFTA is being blamed, but that blame may be misplaced. HVAC equipment is largely made of steel. To protect steel worker jobs in the U.S. we have a tariffs on steel. The amount varies, from 1% to over 500%, depending on the country it comes from and the type of steel. By moving to Mexico, Carrier avoids these tariffs. Even if they buy steel from the U.S. the tariff is subtracted off the price. Thus the incentive to move to Mexico and reduce their cost is high.
What about people that work in industries that use aluminum? Should they be losing their jobs because we protect workers in the aluminum industry? Often in our efforts to protect one group, we hurt another.
True but take in consideration that the tarriffs were imposed on Chinese manufacturers due to the state underwriting massive over production and thus providing an unfair advantage in dumping aluminum (and other metals) into the US market. This helped the consumers of aluminum but then it turns into a race to the bottom. As you mentioned, next consumers of aluminum move production to low cost labor markets, i.e. Mexico, that have “no tarriff” access to the US market.
However, my main point was that China does not play by the rules. Try shipping the latest US medical technology to China. A nightmare of barriers.
Reading through the various articles (both pro and con) regarding the decision to move, the cost of goods factor is never mentioned. The majority mention the wage difference between Mexico and US Labor Union rates but also the company blames 53 federal regulations affecting the business for its decision to cut 1,400 jobs in Indianapolis and 700 in Huntington. The annual cost savings are projected to be $65m, less than .03% of Carrier’s annual revenue. (UTC has moved other factories to non-union locations in the Southern USA). Over regulation and cheap labor with non-tarriff access to the USA markets are the reasons.