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The Scapegoating of Trade

September 16, 2016
The Trans Pacific Partnership (TPP) will be the largest, most complex trade agreement in U.S. history. During my summer internship at the International Trade Administration at the Department of Commerce, I got to see first-hand how exports and free trade agreements help American businesses succeed and promote economic development and job growth.

By Stephanie Aliaga, W’19

In the office where I worked, the Trade Promotion Coordination Committee Secretariat, we coordinated with various trade agencies across the U.S. government to educate businesses about export assistance, conduct market research, and help U.S. businesses connect with their next customer abroad. Throughout this summer, I learned a great deal about the important impact free trade agreements have on our economy and labor force.

Countries wanting to sign the Trans Pacific Partnership 

 

The Trans Pacific Partnership (TPP) includes agreements with 12 countries, 5 of which are new trade agreement partners to the United States under TPP. The agreement is an open platform and a number of other countries such as the Philippines, South Korea, Thailand, and China, have expressed interest in joining. The partner countries constitute 40% of global GDP, 30% of global exports, and 25% of global imports. The agreement will eliminate 18,000 foreign taxes in the form of tariffs, giving Asia-Pacific consumers a lower end-price and increasing the competitiveness of U.S. goods and services in the global market.

Legitimate concerns about the state of the U.S. economy and labor force have become topics at the forefront of the 2016 election; these involve income disparity, underemployment, and the loss of manufacturing jobs. Such frustrations have led to the call for radical change in government policies, allowing for the success of populist messages this election season. These messages have blamed trade for America’s economic woes, causing the political atmosphere to be swamped with anti-free trade rhetoric and challenging Congressional approval of TPP in a meaningful timeframe.

It is true the United States has suffered a continual decline in manufacturing jobs and as a result, the economic ladder that was once extended to high school graduates without a college degree is shrinking. The frustration is understandable, because 60% of Americans don’t have a college degree and the current student loan system makes it very difficult for them to pursue one. Yet the loss of manufacturing jobs is primarily due to the expansion of technology and automation, which has boosted productivity and requires fewer workers. The Center for Business and Economic Research at Ball State University found that productivity growth accounted for more than 85% of job loss in manufacturing from 2000 to 2010 compared to a 13% of overall job loss resulted from trade. Trade has become a scapegoat for the loss of manufacturing jobs and TPP has been incorrectly hailed as “the job-killer”. Turning down TPP won’t serve as a solution or bring manufacturing jobs back, and will only tilt the playing field further against the millions of workers who are unemployed on the account of technological change.

The current reputation of free trade also ignores the importance and benefits of export-related jobs. American exports are currently supporting 11.5 million jobs. In addition, these jobs are more lucrative than non-export related jobs, paying on average 16% more. Under TPP, although imports will rise more than exports in manufacturing, exports will rise more than imports in primary goods and services. Overall, the difference between total exports and imports will be unchanged and gross trade changes show promising opportunities for productive firms in every sector of the economy. In terms of the displacement of workers, the Peterson Institute released an analysis that found that besides adjustment costs as workers move to more productive industries, TPP will not likely affect overall employment. To put this into perspective, the U.S. had 5.5 million workers switching jobs in 2015 and the transition effects of TPP would represent less than a 0.1 percent increase in labor market churn in a typical year. Workers displaced by TPP are likely to find new jobs, but concerns have been raised of those who face greater challenges due to geographic or educational obstacles. To that end, the World Trade Organization (WTO) and World Bank who have proposed strategies to support workers offset by trade. However, while being laid off is a painful experience, the lifetime impact for displaced workers is much larger than the initial wage loss and cost of unemployment. Another major concern of TPP is whether it will add to income disparity by disproportionately helping those at the top and hurting those at the bottom. One study by Peter Petri and Michael Plummer finds that the percentage gains to labor would actually be more than the gains to capital, thus slightly reducing income inequality. The study also finds that TPP will increase real incomes by $131 billion annually by 2030, equating to nearly $1,000 per household.

 

Structural Changes in Employment in the US

 

Many TPP critics often cite the trade deficit as evidence of trade deals hurting American workers, but the correlation between the trade deficit and economic loss is not backed up by data and sound economic policy. In reference to the trade deficit, critics have described America as a business that loses money every year. However, countries, especially the United States with its reserve currency, can actually run a trade deficit indefinitely without enduring any economic losses. In fact, the trade deficit often increases when the economy is growing and creating jobs and decreases when it is contracting and losing jobs.

 

<p>US EXPORTS HAVE MORE THAN KEPT PACE WITH RISING IMPORTS FROM FTA PARTNERS, 1987-2015 (%)</p>

 

Free Trade Agreement (FTA) opponents argue that U.S. accession into a new trade agreement would widen the trade deficit, essentially arguing that it would cause the new partner to account for a larger share of the U.S. trade deficit. If this were true, the blue line measuring the share of US global merchandise trade deficit with our FTA partners, would persistently rise as the U.S. enters more FTAs, but instead it fluctuates and then descends. Thus, while countries that join in FTAs with the U.S. evidently account for a growing share of U.S. imports, they do not account for a growing share of U.S. merchandise trade deficits. Rising U.S. merchandise exports to FTA partners have thus more than kept pace with rising U.S. merchandise imports from them.

Trade is also not a zero-sum game and there are no clear “winners” or “losers”. Trade is rather a two-way street, allowing both sides to benefit. The U.S. sells goods and services that it produces relatively efficiently in exchange for goods and services another country produces relatively efficiently. By closing America off to trade, what we save in U.S. jobs, we lose in lower prices to consumers. For instance, Foreign Affairs sheds light on this trade-off by pointing to the United States’ 135,000 jobs in the apparel industry at risk with free trade but also the 45 million Americans in poverty who would suffer from increased prices of clothing should we close our doors.

The question isn’t TPP versus no TPP, but rather whether is America going to be the one to write the rules for commerce and trade in the 21st century or will we surrender the pen to competitors. It will either be America’s open system or a closed system like China’s, embodied by its own free trade agreement in the Asia-Pacific that does not include the United States, the Regional Comprehensive Economic Partnership (RCEP). Passing up the opportunity to write the rules will have huge implications. The Peterson Institute projects that delaying TPP for even a year would result in the U.S. economy losing $94 billion in total gains in net present value. Asia’s middle class is projected to reach 3.2 billion people by 2030 (which will be 10 times the size of the United States’) and those consumers will be the biggest drivers of global demand. With TPP, America has the opportunity to set a model for future trade deals allowing U.S. values such as high labor and environmental standards to be represented for decades to come.

While there may be arguments over improvements to the TPP text, the reality is that there is far too much at stake with TPP to turn it down. Negotiations went on for eight years, and opening the agreement up to renegotiation risks every hard-fought policy America has won. News outlets have reported hopes for a window of opportunity for the TPP this fall, but the current anti-free trade political climate is a serious challenge to our competitiveness. Congress has a once-in-a-generation opportunity to pass the most influential and job-creating piece of legislation that affirms America’s values and position as a global leader. I can only hope the anti-free trade rhetoric of this election cycle does not give the United States a false sense of protectionism.

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