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Saturday, August 18, 2012

Most U.S. Trade Agreement Improve Trade Balance, but Effect Overwhelmed by NAFTA and China Trade

The U.S. trade deficit figures heavily in the analysis of Jeff Faux's new book, The Servant Economy. Faux, the founder of the Economic Policy Institute (EPI), was one of the most important voices speaking out against NAFTA when it was debated and ultimately passed by Congress in 1993.

According to EPI's 2011 Annual Report,"Presently, the United States' non-oil deficit alone costs more than five million U.S. jobs." This underscores the importance of the deficit and what is at stake. In the book, Faux points out that the theoretical benefits of free trade assume full employment, but that is hardly ever the case. Thus, he argues, the trade deficit is indeed a job killer.

Yet, as David Cay Johnston notes, the United States continues to negotiate new trade agreements while government agencies and government officials from the President down, tout them as engines of job creation. Johnston points out that the government predicted that our small pre-NAFTA trade surplus would continue, when instead we quickly went into a deficit that in 2011 reached $64.5 billion. Similarly, he says, the U.S. International Trade Commission predicted that normalizing trade relations with China would lead to a trade deficit of just $1 billion, when in fact it grew by 2011 to $295 billion!

How have these trade agreements performed? At present, according to the U.S. Trade Representative, the U.S. has free trade agreements with 19 other countries, with a 20th (with Panama) approved but not yet implemented. The 19 countries are: Australia, Bahrain, Canada, Chile, Colombia, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, South Korea, Mexico, Morocco, Nicaragua, Oman, Peru, and Singapore.

The U.S. Census Bureau (then click on individual countries) has the answer to this. In 11 cases, the goods trade balance has improved from the year prior to the agreements' coming into effect through 2011, in one case it's too soon to tell (Colombia, effective May 15, 2012), and only in seven cases did the trade balance worsen.

Unfortunately, that's the end of the good news, because our trade with most of these countries is relatively small: in six cases the improvement was under $2 billion dollars, which pales against the country's overall goods deficit of $727.4 billion in 2011. The biggest gains have been with Singapore ($10.7 billion) and Australia ($9.1 billion).

The losses, on the other hand, have been huge, with the culprits being NAFTA and liberalizing trade with China (not even a full free trade agreement, just making it easier for U.S. firms to offshore their production to China). In the wake of NAFTA, the U.S. goods trade balance with Mexico has worsened by $66.2 billion, while our Canadian goods trade balance has worsened by $23.7 billion. Just since 2001, when China joined the WTO, and 2011, the goods trade deficit has increased from $83 billion to $295 billion. Robert E. Scott of the EPI estimates that this massive deficit has "eliminated or displaced nearly 2.8 million U.S. jobs since 2001." In addition, our Israel free trade agreement has added about $10 billion more to the deficit.

As Faux argues, the trade deficit reduces demand for U.S. labor, and pushes wages down in the aggregate. Indeed, this is the tendency of trade in general for a labor-scarce country like the United States. Faux's vision of where this is leading us in the long term is a depressing one, which I will discuss in more detail in a future column.

Cross-posted at Angry Bear.


  1. EPI isn't credible. They did a report on the Colombia and Korea FTAs that insisted they would result in larger trade deficits based exclusively on the experience with Mexico and China. They completely ignored what you wrote above that the experience of most of our FTAs has been exactly the opposite. They obviously knew that and cherry-picked the countries that had larger trade deficits to get the results they wanted. I wouldn't trust a thing they write.

    Their argument on the trade deficit is equally bizarre. In 2008 our trade deficit was $800 billion, and in 2009 it was lower, only $500 billion. According to EPI logic, that means in 2009 we saw a huge boom in job creation in the US. Anyone remember that happening? The truth is, whenever the US economy is doing well the trade deficit goes up (we're consuming more of everything, including imports) and when we're in recession the trade deficit goes down (because we're consuming less of everything, including imports). If you're cheering for lower trade deficits, you're cheering for recession.

    The fact that pretty much every economist of note disagrees with these guys should give you pause. They're the global warming deniers of economics. They're people who should know better cherry picking data to get the results they want based on their ideology, not based on facts.

  2. You can also cheer for lower trade deficits by demanding changes in trade laws and by calling for actually using existing law against currency manipulators. Do you really think folks at EPI are unaware that imports increase during boom times?

    The jury is out on the Korea FTA, but our trade with Korea is large enough that it could have significant effects. Colombia will not be noticeable one way or another, but the question to me is whether you really trust the government to stop the killing of union organizers. I'm not yet persuaded on that point.

  3. Of course EPI isn't unaware. That's why they're not credible.

  4. Interesting in the fact that many Canadian working class interests have the same complaints about NAFTA, which was set up on the premise of Canadian raw materials, Mexican labour and American capital. Obviously the major beneficiaries are not the working classes in any of the signatores countries. American and Canadian manufactoring jobs have been gutted and sent to lower wage areas, causing a surplus of labour with the effect of stagnation and real decline in wages and an increase in credit use to maintain standard of living. Of course the real purpose of trade agreements is obtaining sovereign rights for the operations of transnational corporations and leverage over governmental regulatory bodies with the real threat of non or withdrawal of investments. Over 80% of U.S.-Can. trade was tariff free before NAFTA. The "free" in trade agreements is in the labour and resource extraction markets to maximise profit while corporations are given monopolistic advantages. forcing a "race to the bottom."