Technology & Trade
Commentary

A Case for Free Trade Agreements

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By William Reinsch: 

Earlier this week I had an opportunity to participate in a debate at Brookings. The proposition was: Free trade deals have been a net positive for working Americans. I was on the affirmative team. The following are excerpts from my opening statement.

This appears to be an issue that proves wrong Pat Moynihan’s statement that “everyone is entitled to his own opinion but not his own set of facts.”  When you try to discuss the impact of free trade agreements (FTAs) on the U.S. economy and on American workers you are immediately confronted with multiple, conflicting sets of data. It appears that who, what, and when you count determines the answer you get. Let’s look at each of those elements.

First, who.  Census Bureau data show that last year the U.S. ran a merchandise trade surplus with 14 of our 20 FTA partners. Deficits with Jordan, Nicaragua, and Israel are fairly small. Those with Canada, Mexico, and Korea are larger. Taken together the latter three tip the overall goods trade balance into negative territory — $64 billion last year out of a total goods deficit of $763 billion, or 8.4% of the total.  Even so, that’s a pretty good record compared to non-FTA countries.

Second, what. That data is about merchandise trade — goods, not services.  That’s important because the U.S. has become largely a services economy. Excluding them omits an important piece of the puzzle, and one where the U.S. generally runs a substantial surplus — $263.5 billion last year. That included a $27.4 billion services surplus with Canada and a $9.6 billion one with Mexico.  In the case of Canada, that was enough to wipe out the goods deficit.

Third, when. The data I’ve cited is from 2015, but if you look at other years you can come away with a different picture. For that reason, it is useful to look at the trend over a longer period of time. For example, from 2001 to 2015 our merchandise trade deficit with all our FTA partners as a share of our total deficit fell by more than half — from 20.7% to 8.4%. Percentage data can be misleading, but if you look at actual numbers, you can see the same trend. The 2015 FTA partner deficit was the smallest ever, except for the recession year of 2009, even while our total deficit has continued to grow.

So, what does all this mean?  The International Trade Commission (ITC) is tasked with answering that question, and its 2016 report concluded that in 2012 our FTAs:

1) Increased trade with our partners by 26.3%.
2) Increased total trade by 3%.
3) Increased real GDP by $32.2 billion (0.2%).
4) Increased employment by nearly 160,000.
5) Increased real wages by 0.3%. 

The ITC also found gains to consumers through lower prices, greater product variety, increased receipts for IP, and a positive effect — on average — on U.S. bilateral merchandise trade balances.
 
It’s a fair point that these are not all large gains in percentage terms, given the overall size of our economy. But they are net positives nonetheless, including in real wages. 
 
FTA skeptics, who have their own data, also make several other arguments I want to address briefly. 
 
First, we should be clear what workers we are talking about. Looking at the opponents of TPP, for example, one might get the impression that the only real workers in America are the ones who make steel, autos, furniture, or clothing, mine coal, or move stuff around. There have been job losses over the past 20 years, often in those and other manufacturing sectors, and trade agreements are often blamed for them. That is an argument that can be sustained by anecdote — there are factories that have shut down and moved to Mexico, for example — but not by data. As Mireya pointed out, 85% of the job losses in question were caused by productivity improvements, mostly technology. Trade is an easy scapegoat. It lets us blame foreigners for our problems rather than our own policies. But we can also match the other side in anecdotes. The head of the American Iron and Steel Institute last week noted that we had a 3 million ton steel deficit with Canada and Mexico before NAFTA, and we now have a small surplus. In other words, steel appears to be a NAFTA winner.
 
The reality of trade is that there are always winners and losers, but the losses tend to be short term and specific and the wins long term and diffuse. It is cold comfort to someone who lost her job because her plant closed to be told that on a net basis more jobs were created than lost, in large part because the people who lost the old jobs are rarely the same ones who get the new jobs.
 
That is why an effective adjustment assistance program is so important. Trade accelerates change, and it is inevitable we will have people whose skills become less important as our economy grows and changes. Helping those people acquire new skills and helping them broaden their horizons should be an integral part of our trade policy.
 
And if we do that, we need to remember the composition of our work force. 91.8 million workers are private sector services employees. That is 82% of the total, and it is likely to go up. Last year the Bureau of Labor Statistics said the occupations with the greatest projected job growth between 2012 and 2022 included personal care aides, registered nurses, retail salespersons, nursing assistants, secretaries and clerical workers, customer service representatives, and construction workers.
 
Nostalgia about lost factories is just that — nostalgia. We can berate past administrations for not doing enough about that, but FTAs did not lose them and getting rid of the ones we have will not bring them back. Instead an effective adjustment program will help people acquire the skills they need for the 21st century economy, not the 20th century, and which are not only STEM skills but also a range of skills that prepare people for jobs that are actually available like those mentioned above. And such a program should focus on protecting the worker not an existing job.  Otherwise we lock ourselves into the old economy instead of the new one.  
 
Finally, let’s remember that “net positive” means more than more jobs and wages. Some of the most compelling arguments for FTAs have been geopolitical — building better relationships, maintaining or enhancing the U.S. regional position, promoting democracy and human rights. Promoting stability.  These are American interests and American values, and they provide benefits to all of us, including American workers.    
___
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.

Photo credit: Brian Stalter via Flickr
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