Are trade deals bad for America? Part 2.

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The previous post introduced America’s free trade agreement portfolio. Here, we investigate the pros and cons of these agreements.

Debates over FTAs typically focus on three broad questions: 

  1. Do FTAs infringe unfairly on member state sovereignty? 

  2. Do FTAs improve the economic wellbeing of members?

  3. Do FTAs effective regulate the marketplace?

Let’s look at each one of these issues individually.

 

Sovereignty

FTAs are designed to promote trade. But they are also designed to stabilize existing trade relationships that already exist. To that end, FTAs try to limit ad hoc, opportunistic policy changes by member states.

Stabilizing trade is a good thing in its own right. Economists have shown that trade volatility puts governments, firms, and everyday citizens under greater financial strain. However, in order to promote harmonization and reduce vulnerability to trade discrimination, governments must consent to limits on their policy discretion.

This creates a political problem at home for countries concerned about their sovereignty, including the United States. Domestic firms who suffer from liberalization regularly petition the US government for protection. Unfortunately, their preferred trade barriers may not be allowed under FTA rules. Or, more commonly, FTAs limit the size and scope of trade barriers that can be used.

Governments are left with a decision to make. Do they protect domestic producers even if it risks violating an agreement?

This is the core of the debate over FTAs and state sovereignty. Governments recognize a shared interest in having rules that protect them from trade discrimination. Yet many governments also feel pressure to raise entry barriers. If countries raise barriers in a discriminatory fashion, they run two risks: (i) trade retaliation and (ii) vulnerability to being sued.

This vulnerability is precisely why the White House seeks to remove Chapter 19 from NAFTA -- namely, the provisions that mean US safeguards are vulnerable to dispute settlement. It is also why Trump has repeatedly cast doubt on the WTO’s legal authority. The argument is that the US is targeted too frequently – and unfairly – by trade partners.

In terms of actual protection, evidence suggests that the US has not been deterred significantly by its agreement memberships. The US government not only approves a high proportion of anti-dumping petitions. Until very recently, it applies more anti-dumping measures than anyone else.

 
 

In addition, data from Global Trade Alert suggests that the US is more frequent user of a wide variety of other trade policies.

Of course, trade policies are not always easy to detect. Discriminatory practices by some countries can be subtle and buried deep in a country's domestic laws and regulations. However, based on the available data, there is little reason to think that the America’s hands are tied too tightly.

 

Welfare benefits 

Trade policies are one thing. The distributional consequences of those choices are quite another. Many argue that FTAs leave members worse off.

This argument is certainly common in the United States. Take NAFTA for example. NAFTA’s opponents argue that liberalization resulted in the loss of millions of American jobs. Outsourcing production accelerated the decline of US manufacturing by moving jobs south of the border. Early in his administration, Trump highlighted the Big 3 Detroit automakers, who all have production and assembly plants in Mexico.

Making matters worse, the jobs that do remain are less secure and, in some cases, less well-paid.

There’s certainly some evidence to support these claims. Wage growth lags significantly behind the encouraging employment numbers. Unemployment tumbled in recent years. However, incomes in many areas have not recovered from the Great Recession. Earnings for middle-income individuals have remained almost flat and have mildly fallen for the bottom 25%. In fact, while household earnings are up, this is due to working longer hours, not better pay.

 
 

At face value, these numbers certainly give one pause.

The trouble is that the numbers can be spun another way. While manufacturing employment is down, per-hour productivity went up over the last two decades. This supports what some economists argue – namely, that competition makes the economy more efficient.

Of course, cold economic logic ignores the “human cost” of economic adjustment. Greater efficiency doesn’t matter much to the Western North Carolina textile or Ohio steel workers left unemployed by changing market forces.

A more compelling response, perhaps, is the fact that FTAs create new jobs. Estimates put the number of jobs tied to NAFTA-related trade at over 6 million. Moreover, it’s worth noting that the US economy is now operating at near full employment while all 14 of its FTAs remain in force. Whatever jobs have been lost, some argue, are more than made up for with new opportunities.

Either way, there’s certainly a tradeoff. The economy inevitably sheds jobs as markets evolve. The policy question is what to do about the firms and workers who suffer from globalization.

Unfortunately, that’s not a problem that FTAs are good at solving. Trade agreements don’t create comprehensive social safety nets. They don’t make provisions for unemployment insurance or worker retraining programs. Those are difficult, important policy problems member states have to solve on their own.

 

Market Regulation

For many, an FTA’s economic costs and benefits are only part of the story. Trade can have a variety of deleterious effects in other areas of the market and society.

Many argue that FTAs fail to promote labor and environmental standards. And while that may sound obvious, it's not necessarily for lack of trying. During the wave of FTAs formed under Bush, US authorities were pressured to include labor rights in new agreements. In fact, there were a key sticking point in the US-Colombia FTA negotiations.

Even before those recent agreements, NAFTA was ambitious in setting aside bureaucratic resources specifically for monitoring labor rights (NAALC) and trade’s environmental impact (CEC).

Do these rules have any positive effects? That question is difficult to answer. It's not easy to measure labor and environmental outcomes. And, more importantly, it’s difficult to attribute those outcomes directly to an FTA.

Nevertheless, the evidence doesn’t look particularly good. In terms of the environment, advocacy groups argue that NAFTA worsened problems of pollution and deforestation, especially in Northern Mexico where production expanded hugely over the last two decades.

Making matters more complex, these criticisms aren’t limited to labor and the environment. For example, the intellectual property rights protections included in many FTAs have been widely criticized for their public health consequences. While TRIPs are viewed as important for doing business, they are blamed for inflating costs and limiting access to vital drugs.

The trouble is that what’s best for business isn’t often best for labor or the environment. Stricter regulations on working conditions and waste management, to name two examples, increase costs. That’s why some argue that free trade leads to a “race to the bottom.” Global market forces put downward pressure on governments, encouraging deregulation. Hence, the apparent connection between FTAs and poor outcomes in many areas.

Naturally, however, FTAs certainly can’t solve these problems alone. Firms need material incentives to behave more responsibly.

The good news is that attitudes are changing. Consumption is increasingly shaped by preferences for fair trade goods, sweatshop-free clothing, sustainably farmed food, and so on. As these preferences become more mainstream, there may be greater emphasis placed on enforcing the rules built into contemporary FTAs.

ARE TRADE DEALS GOOD DEALS?

No one argues that trade agreements are perfect or that liberalization is cost-free. Trade deals expose the US economy to increased competition from abroad. However, FTAs help maintain a more stable, rules-based system. It’s not obvious that dismantling these agreements will improve the welfare of the average worker. Nor is it clear that throwing out the rules is better for labor or the environment.

Improving on trade agreements means strengthening their provisions. In other words, exactly the opposite of the current administration’s plans. The White House is concerned that FTAs systematically disadvantage the US. It 's worth remembering that the US played a leading role in negotiating these deals. This includes the global trade regime.