LOS ANGELES, May 16, 2015 – Multilateral trade agreements, such as the proposed Trans Pacific Partnership (TPP) now headed toward debate in the Senate, are minefields of complexity and contradiction. The simplistic view of such agreements tends to surface in the soundbite arguments of supporters and critics alike.
Supporters of the TPP, of which the North American Free Trade Agreement (NAFTA) and the related Central American Free Trade Agreement (CAFTA) are predecessors, claim that negotiations leading to a final agreement will resolve many more collateral issues affecting free trade than existing trade protection in the various countries currently addresses. Such issues could include global warming, environmental reforms, state control of certain business segments, intellectual property issues and labor conditions.
Closely related to the trade protection problem are various international governments’ procurement policies , which essentially constitute the equivalent of trade protection.
Critics of the proposed trade treaty as it relates to the United States decry what they regard China’s manipulation of its currency, arguing that America’s over $500 billion annual international trade deficit is a drag on domestic job creation. Just as damaging, they believe the currency issue helps sustain a decades- long and widening income inequality.
China, at present, is not a party to the negotiations. But many observers believe it may decide to join the trade agreement party at some point.
Compounding the confusion regarding the proposed trade agreement are the numerous competing claims of supporters and opponents. These tend to begin with specific claims with regard to how the TPP will enhance job creation in the U.S.
Comments citing prior agreements, particularly NAFTA, are helpful in providing a context for the current debate. Consider President Clinton’s 1993 statement concerning NAFTA:
“I believe that NAFTA will create 200,000 American jobs in the first two years of its effect. I believe that NAFTA will create a million jobs in the first 5 years of its impact.”
On the other hand, Robert Scott of the Economic Policy Institute (EPI), wrote in “NAFTA’s Legacy: Growing U.S. Trade Deficits Cost 682,900 Jobs” that “it’s clear that things didn’t work out as Clinton promised:”
“NAFTA led to a flood of outsourcing and foreign direct investment in Mexico. U.S. imports from Mexico grew much more rapidly than exports, leading to growing trade deficits… Jobs making cars, electronics, and apparel and other goods moved to Mexico, and job losses piled up in the United States, especially in the Midwest where those products used to be made. By 2010, trade deficits with Mexico had eliminated 682,900 good U.S. jobs, most (60.8 percent) in manufacturing.”
This time around, we hear similar claims from President Barack Obama and his Secretary of State John Kerry, who declared, “Estimates are that the TPP [Trans-Pacific Partnership] could provide $77 billion a year in real income and support 650,000 new jobs in the U.S. alone.”
Although we can see that the promotional tactics for these trade deals are almost identical, the problem lies not only in the fact that past performance fails to bolster these new claims. It’s that the projections cited in themselves are not based on any documentary sources. Rather, they are assumptions based on the smallest possible reference point, coming from one study group − the Peterson Institute for International Economics − whose previous estimates in this area have been proven unreliable.
It was a similar research study prepared by the Peterson Institute that Bill Clinton relied upon for his hyperbolic claim that NAFTA would spur the creation of approximately a “million jobs” domestically in the agreement’s first five years.
In fairness to the authors of both studies, the Clinton and Obama administrations made extrapolations based on this data that went beyond the authors’ estimates. Peter A. Petri, one of the Peterson Institute authors, told the Washington Post:
“The reason we don’t project employment is that, like most trade economists, we don’t believe that trade agreements change the labor force in the long run. The consequential factors are demography, immigration, retirement benefits, etc. Rather, trade agreements affect how people are employed, and ideally substitute more productive jobs for less productive ones and thus raise real incomes.”
In short, the study’s authors never projected a figure for new jobs. What apparently transpired was that the U.S. Trade Representative Office and the Commerce Department took the growth estimates in income and projected trade increase figures, developing economic assumptions based their dubious conjectural estimates.
But these are assumptions that the Peterson study authors simply never made. Petri actually forecasts that an increase in exports of $128 billion will actually be offset by increases in imports, nullifying White House job claims.
In contrast, the Center for Economic and Policy Research found that the TPP will negatively affect the wages of most American workers. It projects gains of 0.13 percent of GDP resulting from the agreement, with modest gains for low-skilled workers and more substantial gains for individuals in the highest income brackets.
As a frame of reference, a gain of 0.13 percent is measurably smaller than the impact to U.S. GDP that occurs whenever a new iteration of the iPhone is released into the marke, one quarter of one percent. The bulk of the workers in the middle 90 percent, according to CEPR, will actually lose ground on income.
Intriguingly, as he has on so many other policy matters, Barack Obama has actually done a 180 on trade agreements. When campaigning in 2008, he said,
“It is absolutely true that NAFTA was a mistake … NAFTA was an enormous problem. You travel through communities in my home state of Illinois … You will see entire cities that have been devastated…”
The fact that the effects of past trade agreements have not been favorable does not mean that the loosening of international trade restrictions and protectionism cannot be a positive for the American middle and working classes. The results all depend, however, on how the trade agreements are structured and negotiated. And it’s additionally true that our persistent international trade imbalance is only one of many symptoms of our ongoing jobless “recovery,” as well as concurrent wage stagnation and income inequality.
Another problem with the current TPP discussion is apparent currency manipulation conducted by some of the prospective partners in these negotiations. Yet currency manipulation is not on the table for discussion at this point and likely won’t be, whether China joins TPP or not.
While both China and Japan come in for a large degree of criticism on this front, it cannot be denied that the U.S. is a player in this game as well. The Federal Reserve’s monetary policies, including the just ended Quantitative Easing (QE) efforts and its consistent near-zero interest rate environment also have an obvious effect on international currency translations. For that reason alone, the relative strength of both the yuan and the yen against the dollar is simply not going to be resolved in the TPP.
Aside from this, because the negotiations on the TPP are being conducted behind closed doors − much in the same manner as Obamacare − there remain more questions than answers as to whether anything that could emerge in such an agreement would help mitigate the longstanding U.S. trade deficit. Such a development, however, is unlikely, because a large trade deficit does not disadvantage trans-national corporations, only American workers. And anything that drives wages down benefits employers.
Along these same lines, there is a strong possibility that the eventual effects of the TPP will serve to drive even more desperate immigration northward to the U.S. from Mexico. Robert Blecker, a professor at American University in Washington, D.C., who specializes in international trade and economics, writes in the Baltimore Sun:
“The TPP could divert significant amounts of trade and jobs away from Mexico and Central America. While NAFTA and CAFTA did at first move many manufacturing jobs across the United States’ southern border, the job gains in Mexico and Central America were offset by other trade-induced job losses within their economies. In the Mexican case, manufacturing employment grew by about 1 million in the late 1990s but then fell substantially after 2000 as more and more jobs moved to China or other Asian countries.
“As a result, the net increase in manufacturing jobs from 1993 to 2013 was only about 400,000 — less than half of the annual growth in the Mexican labor force and far less than the post-NAFTA drop in agricultural employment of about 1 million (as cheap imports of U.S. corn helped to displace poor peasant farmers).”
This situation could be exacerbated by more competition from extreme low-wage economies like Malaysia and Vietnam.
What else is affecting the persistent trade deficits we face? The ingrained habits of Americans habits must also be factored in, such as the strong tendency in government and in households to take on too much debt.
Federal and the state governments alike are not targeting spending in ways that help make America more competitive. At the same time, consumers are once again piling up enormous personal debt, much of it involving the purchase of unnecessary imported items.
We may criticize Walmart, for example, for aggressively sourcing its merchandise from China. But at the same time, the discipline of personal savings has evaporated in this country.
Our current materialistic culture, with all its relentless marketing and advertising, is making us, at least in part, the architects of our own economic lassitude.
In today’s economy, spectator sports and entertainment trump education. America’s trade deficit runs, on average, roughly half a trillion dollars. Of that deficit, about $350 billion is attributable the purchase of consumer goods that are often of dubious long-term value.
Perhaps Americans can be persuaded to allocate more per household spending toward domestically produced goods. But such a behavioral change would require active and creative decision-making to start turning things around, something that’s in short supply at all societal levels in the America of 2015
This collective value system will need to be transformed. That’s because at the end of the day, trade agreements in many ways only amplify the economic strengths or weaknesses of the nations that engage in them. On this side of the Pacific, we clearly need to take corrective measures, and soon.
At the same time, we need to demand more, not less congressional oversight in the trade agreements and negotiations currently on this country’s front burner. Clearly to further abdicate that crucial congressional oversight by granting the president “fast track authority” in matters of trans-Pacific trade would be a grave error indeed.