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

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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.