Published in Boston Globe, March 22, 2016
FOR MANY YEARS, American presidents of both parties have sold free trade deals by claiming they would create jobs, raise living standards, and strengthen national security. Now most of the presidential candidates of both parties are saying these were bad deals that off-shored millions of jobs while capping wages for most Americans and strengthening the country’s biggest challengers, like China. What gives?
For starters, the United States runs an annual trade deficit of about $500 billion. The Commerce Department estimates that every $1 billion of exports creates 6,000 jobs. By extension, one might expect that every $1 billion of imports would eliminate 6,000 jobs. This is not entirely true, because imports of things like rare earth elements in which the United States is not self-sufficient actually create jobs rather than eliminating them. On the other hand, economists at MIT and the Economic Policy Institute in Washington conclude that imports from China eliminated about 2.4 million US jobs between 1999 and 2011.
While economists argue endlessly over the impact of the trade deficit, one incontrovertible conclusion stands out. None of the trade agreements have eliminated it, or even reduced it, as promised, and none of them have come close to achieving other promised benefits.
Take the 2000-01 deal to include China as a member of the World Trade Organization. At the time, the US trade deficit with China was about $80 billion. The US trade representative and the secretary of commerce told Congress and the public that getting China into the WTO would dramatically reduce that deficit because China had more and higher barriers to US exports than the United States had to Chinese exports. Ergo, in the wake of a deal, US exports to China would soar far faster than Chinese exports to America. Well, 15 years later the US deficit with China is almost $370 billion.
Or, consider the US-Korea Free Trade Agreement of 2012. In 2011, the US trade deficit with Korea was $13 billion. Top US trade officials again told Congress and the public that this deal would dramatically open the Korean market to US exports and sharply cut the bilateral trade deficit. But by 2015, the deficit had climbed to $28 billion as Korean exports to America exploded, while US exports to Korea remained about the same. The growth in this deficit, contrary to the forecasts of the government and most of the leading economic think tanks, represents the elimination of about 90,000 US jobs, if we apply the Commerce Department’s calculation of 6,000 jobs for every billion dollars of exports or imports.
Fair hits on free trade
Mainstream economists fretting over the presidential elections are making some bad assumptions.
In addition, many economists have expressed concerns about the impact of trade and globalization on the rise in income inequality, which the trade deals, again, have done nothing to mitigate. The US Budget office has shown that, between 1979 and 2007, the income of the top 1 percent grew 275 percent while that of the majority of the American population grew by only 39 percent.
But, if the deals are so bad, why have intelligent, well-educated officials of both the Republican and Democratic parties persisted in making them, and in making the same old discredited cases for them?
There are two major reasons. The first is that the primary purpose of the trade agreements is not to improve the economic welfare of the United States. Rather, it is to strengthen the American geopolitical position. For instance, I was one of several people invited to the White House in 2009 to discuss the possibility of a Trans Pacific Partnership free trade agreement. When I asked what the purpose of the agreement was, I heard that it was to show our Southeast Asian friends and allies that America is back, and that it really cares about the region. In other words, this deal was not primarily aimed at creating American jobs or raising American incomes. It was aimed at reassuring allies and friends and at countering China’s influence
The second reason is that universities, think tanks, and media still propagate a badly outdated notion of trade and globalization. It is argued that trade is always and everywhere a win-win proposition and that even if a trading partner doesn’t reciprocate with open markets, unilateral free trade is still better than mutually closed markets. The problem is that these assumptions include full employment, fixed exchange rates, no cross-border investment or technology flows, and no costs for moving or closing one industry and opening a new one.
This clearly isn’t the world in which we live. Just think about exchange rates. They have been floating since the early 1970s. Countries like China and Switzerland, to name just two, have systematically intervened in global currency markets to devalue their currencies. So, in a trade deal, maybe every country agrees to cut its tariffs by, say, 10 percent. But then perhaps one of the countries acts to devalue its currency by 20 or 30 percent, negating the effect of the tariff cuts. Or think of investment. In today’s world, global financial flows are greater than trade flows. As for technology, countries like Japan, in the past, and China, today, have often made technology-transfer a condition of market access.
In this real world, the presidential candidates are correct to question the trade deals of the past and to suggest that there has to be a better way.