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Home Publications Blogs Beat the Press Charles Lane is Wrong on NAFTA and the Trans-Pacific Partnership

Charles Lane is Wrong on NAFTA and the Trans-Pacific Partnership

Tuesday, 04 February 2014 05:47

Charles Lane is wrong, as usual, in arguing that the Trans-Pacific Partnership (TPP), like its predecessor NAFTA, is good for U.S. workers. However, the piece is useful in providing an opportunity to explain some basic economics.

Most of the piece is dedicated to saying that NAFTA, which to some extent is a model for the TPP, was really good for the country. Lane starts by disputing that NAFTA contributed to the $181 billion trade deficit that the United States ran with Canada and Mexico. He tells readers:

"But $100.7 billion of this deficit is because of oil imports, according to U.S. government trade statistics. NAFTA has nothing to do with this; Canadian and Mexican oil imports always flowed freely."

Nope, that's not how it is supposed to work. The United States is a net importer of oil and derivative products. That does not mean that the United States is supposed to run a trade deficit. According to good old econ 101, a deficit on oil trade is supposed to mean that the dollar falls, which then leads us to increase exports and reduce imports of other items. This adjustment would not take place over night, but we would expect it to take place over a long enough period of time. So pointing to oil imports and saying that we really don't have a trade deficit with these countries really is silly. (This doesn't mean the deficit is due to NAFTA, but it certainly doesn't preclude the possibility.)

Then Lane gives us a head scratcher. He tells us this trade figure doesn't include, "almost $90 billion worth of goods that entered this country from elsewhere and then got re-exported to Mexico or Canada." He then points out that re-exports create jobs in the U.S. in shipping and other areas. Incredibly, Lane then adds in the full $90 billion value of the re-exports, telling readers:

"Eliminating oil and including re-exports produces a U.S.-NAFTA surplus of roughly $7 billion in the goods trade."

Wow, so we get just as many jobs from having one million cars pass through ports in Oakland and Los Angeles on their way to Mexico and Canada as we do from building one million cars and exporting them to Mexico and Canada? Apparently we do on the Post's opinion page. Remember these are the folks, who in NAFTA boosterism, claimed Mexico's economy quadrupled from 1987 to 2007. (The actual increase was 83 percent.)


Getting beyond Lane's silliness, there are two ways in which trade has hurt most workers in the United States. First the overall trade deficit has cost the country millions of jobs. This is as basic as it gets. If we have a trade deficit, this is demand that is going overseas rather than creating jobs in the United States. If we spend $100 billion in Europe, that $100 billion is not creating jobs in the United States.

We can in principle offset a trade deficit with increased domestic demand, but that is not easy to do when the deficit is large, as is the case today. With a $500 billion annual trade deficit (3 percent of GDP) we need some mix of large budget deficits, booming investment, or surging consumption, to offset the demand lose due to the trade deficit. We were able to offset this loss of demand with the stock bubble in the late 1990s and the housing bubble in the last decade, but otherwise it does not seem plausible. (Btw, the impact of the trade deficit in reducing demand swamps any plausible effects of reduced consumption due to upward redistribution of income. It is bizarre that economists are finally willing to talk about the latter, but still unwilling to think about the former.)

Okay, so a large trade deficit means less demand and fewer jobs. If we put the deficit at 3-4 percent of GDP (the deficit would increase if we were at potential GDP) then we would be talking about 4.2-5.6 million direct jobs. Assuming a multiplier of 1.5, this would get us 6.3-8.4 million jobs. In other words, this is a big deal.

In addition to the loss of jobs, there is also the mix of jobs. Our trade agreements have been focused on subjecting our manufacturing workers to international competition while largely protecting the most highly paid workers, like doctors, lawyers, and dentists, who make up much of the one percent. The predicted and actual effect of this pattern of competition is to lower the relative wages of ordinary workers while providing overall benefits to the economy in the form of cheaper manufactured goods.

If this is difficult to understand, imagine if our trade deals did the opposite. Suppose they made it possible for smart kids in Mexico and elsewhere in the developing world to study to our standards to be doctors, dentists, and lawyers, take the necessary exams in their home countries, and then come to the United States and work under the same rules as someone who was born and trained in Chicago. This would lower the cost of health care, dental care, and legal services, providing benefits to the economy, but also lower the pay of doctors, dentists, and lawyers. That was the goal of prior trade deals, but the victims were ordinary workers, not the high end workers who are able to ensure continued protection.

But Lane is right that the TPP will not have much effect on overall trade with low-wage countries, primarily because most barriers have already been eliminated. It's biggest impact will be to lock in a regulatory structure that will ensure that rules on the environment, health and safety and competition are friendly to corporations. After all, it is the representatives of corporate America who have access to the text and making recommendations, not the AFL-CIO and the Sierra Club.

And we have our pharmaceutical industry trying to increase patent and related protections to raise drug prices throughout the world. This is the opposite of free trade. These higher drug prices will reduce world GDP and likely cost jobs in the United States. (If foreigners are paying higher patent rents to Pfizer then they aren't buying other goods and services from the United States with their dollars.)

Anyhow, if we look at the TPP with clear eyes it is difficult to see any reason that people who do not own lots of stock in Pfizer and other corporations that stand to benefit would support it. But it's not surprising that the Post would push the deal in its opinion and news pages.


Note: typos corrected, thanks Robert Salzberg.

Comments (11)Add Comment
written by LSTB, February 04, 2014 7:23

If you think aggregate demand is reduced by the trade deficit and not due to upward redistribution of income, then what do you make of Krugman's response last September (http://krugman.blogs.nytimes.c...tagnation/).

He wrote:

But the deficits began long before [2000] ... So the causation could run the other way, with deregulation and rising leverage pulling in foreign capital, keeping the dollar overvalued, and producing persistent deficits. And you might therefore argue that we can avoid secular stagnation by letting low interest rates lead to a debased dollar (hi, Congressman Ryan!), more competitive U.S. manufacturing, and balanced trade.

Isn't it possible that underconsumption causes the trade deficit and not vice versa?
written by jm, February 04, 2014 9:31
In a properly functioning trading system, the oil imports would be paid for by exports of goods and services.

There would be no trade deficit.
27% of doctors in the U.S. are foreign born
written by The Doctor is IN, February 04, 2014 9:54
There is foreign competition in many U.S. labor markets for high-income professionals. For example, 27% of physicians are foreign-born; 37% of the Ph.D. scientists and engineers employed in the United States were born abroad. In both cases, the percentages are considerably higher than the percentage of the foreign-born in the general population or in the U.S. labor force.

This may not be competition of the kind introduced by trade agreements such as NAFTA. But for U.S.-born doctors, scientists, and engineers it is competition nonetheless. To argue that high-income U.S. professionals earn their pay in markets that are devoid of foreign competition is a bit disingenuous.
Talk About Stupid
written by Last Mover, February 04, 2014 10:52

Charles Lane thinks he is talking about international trade, comparative advantage and growth instead of a trade deficit or surplus.

The US is a net importer of oil because of comparative advantage gained by buying it elsewhere rather than producing it domestically. Whether the US produces something else domestically for export to replace this lost demand doesn't change the status of net imported oil per se, but it could reduce the trade deficit with more exports.

To claim the trade deficit is caused by imported oil is about as stupid as saying in the other direction, because Guatemala exports Del Monte bananas to the US it always has a trade surplus because it never has enough economic sense to spend the gains of comparative advantage from banana production on other imported goods it cannot produce as well as bananas.

It's even more stupid to double count exports by including the total value of resold imports as if they were somehow separate from other exports and therefore increase falsely, the added value of all exports by 100% of the assigned value of the re-exports.

True re-exports don't include added value, only reflecting arbitrage price changes through buy-sell manipulations. That's why they are subtracted - not added - to exports when calculating final export value.

According to Charles Lane, any trade deficit can easily be reduced or converted into a surplus overnight as long as there are enough imports to resell as re-exports with fake added value. (Example: Add $100 of imports and $100 of re-exports which cancel out in terms of trade deficit or surplus, but still increase total trade by $100.)

The effect is a fake increase in growth credited falsely to free trade, where the only thing "free" is the added value made up out of thin air, the same way Lane cheers on NAFTA and TPP.

To be fair, the theme of this column by Lane is the rising cry of protectionism from the left designed to derail TPP, with NAFTA thrown in as a hindsight prop.

Indeed. It's not like Lane gets it exactly backwards on who gets protected is it ... you know, the usual protectionism from free markets that actually work that Dean Baker talks about regularly. Lane needs to stop masquerading as the supporter of free markets he actually hates and reveal himself as the loser liberal he actually is.
No one said there are no foreign doctors
written by Dean, February 04, 2014 11:33
Doctor Is In,

don't pick imaginary fights. I never said there are no foreign physicians in the U.S. I said that we could have many more, which would lower doctors' pay, if we designed our trade agreements for that purpose. If you have reason why you think this is not true, let us know.
written by kharris, February 04, 2014 11:45
Doesn't Lane not know anything about economics? Law degree. Background in political journalism and court coverage. That sort of thing. Other than being beholden to Fox and Peretz, so needing to do whatever pleases them, why does he write about economics?
Charles Lane knows this much
written by ifthethunderdontgetya™³²®©, February 04, 2014 12:38
Write right-wing propaganda, get a paycheck from a plutocrat (Peretz -> Donald Graham -> Jeff Bezos).

P.S. Dean, I often link this Robert E. Scott post when discussing the ills brought by NAFTA. He wrote it in November of 2003, how do you think it's held up?


Dr. Dr., tell me the news I got a bad case of payment blues ...
written by Squeezed Turnip, February 04, 2014 2:30
27% of doctors in the U.S. are foreign born
written by The Doctor is IN, February 04, 2014 10:54 ...

Yes, but 100% of MDs that stay in the US compete for the same high-salary jobs that are located in the US. These foreign-born MDs naturalize and get the same high pay as "native born" MDs do.

Dean is talking about economic competition. You are talking about academic competition. Need I say that those 77% got those degrees because they were better students and more highly motivated than those they "replaced" (i.e. those who didn't make the cut because they couldn't compete their way into artificially low medical school enrollments).
how about
written by joe, February 04, 2014 4:19
how about instead of decreasing protections for highly paid professionals, we instead increase protections for lesser paid workers. So we raise up the bottom instead of lowering the top.
written by Bloix, February 04, 2014 4:44
Your argument refuting Lane's position on oil and the deficit seems to prove too much.

If imports of $100 billion in oil don't "cause" a $100 billion deficit (because a properly working economy would adjust), then how can one argue that NAFTA "causes" any part of the deficit?

Aren't you arguing that 100% of the deficit is caused by an over-valued dollar? And if you are, how does NAFTA contribute to an over-valued dollar?
Exporting labor, not capital
written by Squeezed Turnip, February 04, 2014 6:52
Bloix: here is a stylized version of one thing that goes on:

Step 1. Ship auto parts via train to San Antonio (there is a direct line to places such as Chicago).
Step 2. Ship parts via Mexican trucking companies over the border of Mexico (only 3 hours away).
Step 3. Assemble parts in Mexico at 1/10th the cost of doing so in the US.
Step 4. Truck the assembled vehicles back to San Antonio.
Step 5. Ship via train throughout the US.

voilå: you've just imported the difference between materials/parts and finished product. Also known as a trade deficit.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.