It’s getting hard to keep track of all the various trade negotiations going on right now.
As this blog’s readers may recall, in his State of the Union speech, President Obama announced that the United States would begin trade negotiations with the EU. And no doubt you know that the United States, Canada, and Mexico are part of NAFTA.
But less prominently, the United States, Canada, and Mexico are also part of trade talks among various nations in the Pacific region, called the Trans Pacific Partnership (TPP). And now Japan has announced that it would like to join these talks.
In addition, Canada and the EU have been negotiating their own trade agreement for several years now.
And just the other day, Japan and the EU started trade talks.
Oh, and Mexico has suggested a broader NAFTA-EU trade deal.
Got all that? It’s OK if you don’t — I’m not sure I do either.
There are some good reasons to use international trade agreements to promote free trade. The world trading system has been very successful in bringing down tariffs and other protectionist barriers over the past few decades. But the recent proliferation of agreements, with sometimes conflicting rules (going beyond just protectionism), may be steering us away from real free trade. Real free trade would lower trade barriers for all countries, not just for some. Hopefully some day trade negotiations can get back to that principle.
The federal system of government in the United States has the invaluable consequence of enabling policy experimentation. If a state legislature is considering adopting a particular policy, it can often look at the experiences of other states that have tried that policy before. A recent study from the Milken Institute in California tries to take advantage of such potential comparisons to offer ways that California could increase its dwindling share of U.S. exports. It is a valiant effort, but California’s decline is not the consequence of inadequate trade policy and no amount of export promotion is going to fix it.
The study begins by comparing California’s decline in export share to the dramatic rise in cross‐border trade originating from Texas, the nation’s leader in goods exports. After using Texas’s success as an example of how California is lagging behind, the study decides not to use Texas as a model for reform and instead focuses on other states that have used export promotion (subsidy) agencies as case studies for how California can improve its bureaucracy to reverse the current trend.
If the success of Texas is what California should seek, then why not look at Texas as a model for reform? The study says that Texas is “unique” because it 1) has no export promotion agency, 2) has a low cost of doing business, and 3) has benefited from increased trade with the growing economy of Mexico by virtue of NAFTA‐enabled integration. These differences seem to point to clear policy choices: don’t worry about export promotion (easy), improve your state’s business environment, and be close to Mexico (done!).
If it becomes more business‐friendly, your state will have more business, export‐oriented business included. Since we’re looking at Texas as a model, may I suggest improving the business environment by lowering taxes and reducing regulation.
Now, I realize that the Overton Window for politically feasible reform proposals in California may not include lowering the cost of doing business. It makes a lot of sense for the authors of the study to point out the root causes of different outcomes in Texas and California but still seek a different solution more palatable to Californian sensibilities. I think their specific proposals for enhancing the capacity and quality of the export promotion process are insightful and well‐supported.
There is a larger lesson in all of this for national economic policy. Increasing exports through the National Export Initiative has been a major goal of the Obama Administration’s economic recovery plan, and subsidizing loans through the Export‐Import Bank has been a primary tool in that endeavor. But the people of the United States don’t need more bureaucracy to engage in more trade. They need policies that remove artificial barriers and decrease the cost of doing business — international and otherwise.
As its governor, Rick Perry, weighs a run for the White House, Texas has drawn attention for its healthy job growth. Since the recession ended in June 2009, Texas has accounted for half of the net new jobs added to the U.S. economy, according to the lead story in this morning’s USA Today. That’s quite a record for one lone state.
We’ll leave it to others for now to argue over how much credit Gov. Perry can claim. Some credit surely goes to high oil prices, fueling job growth in a sector important to the Texas economy. Another reason for its relatively strong job growth is a friendly business climate, including no state income tax and relatively light regulations. And for those who scapegoat trade for the nation’s persistently high unemployment rate, consider that Texas is the nation’s number one trading state. As the USA Today story notes:
Overseas shipments by Texas’ strong computer, electronics, petrochemical and other industries rose 21% last year, compared with 15% for the nation, according to the Dallas Federal Reserve Bank. The state also benefits from its proximity to Latin American countries that are big importers of U.S. goods … The surge creates jobs for Texas manufacturers and ports.
As I can attest from recent speaking engagements in San Antonio and Laredo, Texans have embraced their state’s position as the nation’s leading gateway for trade with NAFTA‐partner Mexico and the rest of Latin America.
While politicians and union bosses from other states grumble about allegedly unfair trade, the latest trade and job numbers show that the people of Texas are making the most of the opportunities created by our more open economy.
Our friends at the Economic Policy Institute are at it again, issuing another study this week that shows some particular trade agreement has cost X thousands of jobs over a certain number of years.
The latest target of EPI’s flawed model is the North American Free Trade Agreement. Enacted in 1994, NAFTA has created a free trade zone comprising the United States, Canada, and Mexico. According to the EPI report,
U.S. trade deficits with Mexico as of 2010 displaced production that could have supported 682,900 U.S. jobs; given the pre‐NAFTA trade surplus, all of those jobs have been lost or displaced since NAFTA. This estimate of 682,900 net jobs displaced takes into account the additional jobs created by exports to Mexico.
The report’s author, Robert Scott, claims it foreshadows job losses if Congress passes pending trade agreements with South Korea, Colombia, and Panama.
The EPI model has little relevance to the real American job market. As I’ve pointed out before (here and here), its model is based on an overly narrow view of trade’s impact on the job market. Yes, some people do lose their jobs because of import competition, no news there, but trade also creates jobs through increased exports. And even if we run a trade deficit with a country such as China or Mexico, jobs are also being created by the net inflow of foreign capital, which spurs domestic job creation through lower interest rates and direct investment. The money we save from lower‐priced imports also liberates consumer dollars to fuel growth elsewhere in our economy, and cuts costs for import‐consuming businesses, boosting their sales and employment.
Next, consider the EPI numbers on their face. Those alleged 682,900 net jobs lost came over a 16‐year period. That’s a bit more than 40,000 jobs lost per year. That is a drop in the bucket in a dynamic economy like ours that creates and eliminates about 15 million jobs each year. Even when unemployment is low, 300,000 or more Americans file for unemployment insurance in a typical week. So even if true, the EPI job loss numbers amount to less than one day’s worth of job displacement for the whole year.
When we look at the actual job market performance since NAFTA was enacted, the irrelevance of the EPI model becomes plain. In the first five years after NAFTA’s passage, 1994 – 98, when we could have expected it to have the most impact, the U.S. economy ADDED a net 15 million new jobs, including 700,000 manufacturing jobs. In the 16 years since its passage, despite two recessions, our economy still employs 20 million more workers than it did the year before NAFTA passed. (Check out the employment tables in the latest Economic Report of the President.)
In my own April 2011 study of trade and the economy, “The Trade‐Balance Creed,” I found that civilian employment in the past 30 years has actually grown quite a bit faster during periods of rising trade deficits compared to periods of declining deficits, just the opposite of what EPI’s distorted model would predict.
The Mexican government announced yesterday that it will expand the list of U.S. products subject to punitive import duties in retaliation for a brazen, 15‐year‐long refusal of the United States to honor its NAFTA commitment to allow Mexican long‐haul trucks to compete in the U.S. market. Given continued U.S. intransigence on the issue, Mexico’s decision is understandable, if not laudable.
The dispute is not very complicated. Under the terms of the deal, Mexican trucks were to have been able to compete in U.S. border states by 1995, and throughout the United States by 2000. But President Clinton, at the behest of the Teamsters union, suspended implementation of the trucking provision on the grounds that Mexican trucks weren’t safe enough for U.S. highways.
By 1998, the Mexicans had had enough, and brought a formal complaint under the NAFTA dispute settlement system, and in 2001, prevailed with a unanimous panel decision that found the United States in violation of the agreement, and ruled that Mexican trucks meeting U.S. safety standards had to be given access to the U.S. market.
In response to the NAFTA decision, Congress stipulated 22 safety requirements that Mexican trucks had to satisfy in order to gain access to the U.S. market. But before the U.S. Department of Transportation could grant any permits to Mexican truckers, in 2002, environmental and labor groups filed a lawsuit to block implementation on the grounds that the regulations violated U.S. environmental law.
In 2004, the U.S. Supreme Court unanimously struck down the truck ban, and soon after a government pilot program was developed to allow a limited number of Mexican trucks to serve the U.S. market. But funding for the pilot program was cut off by a Teamsters‐friendly Congress in 2008, which effectively put the U.S. market off limits to Mexican trucks once again — and the United States squarely in violation of its NAFTA obligations, again.
In August 2009, after it became apparent that the administration and Congress preferred the economic cost of the trucking ban to the political cost of crossing the Teamsters, the Mexican government tried to change the equation by imposing $2.4 billion in retaliatory duties on about 90 U.S. products. A Mexican trucking association also filed a $6‑billion lawsuit against the U.S. government.
But with no discernible progress toward resolution over the past year, the Mexican government announced yesterday that it will expand the list of U.S. products subject to punitive, retaliatory duties in an effort to convince Congress and the administration to finally live up to America’s word.
The Mexican government is right to retaliate — and to expand the list of products subject to punitive duties. Of course, retaliation hurts innocents, like U.S. businesses and workers, and Mexican businesses and consumers, who have nothing to do with the central dispute. And it increases the amount of red tape and the role of governments in international trade. But retaliation — when authorized by agreement and properly targeted — can also be an effective tool in promoting trade liberalization, reducing red tape, and diminishing the impositions of government.
It is by changing the political calculus that retaliation can be effective. Thus far, U.S. politicians have found the economic costs of the Mexican trucking ban and the retaliation to be tolerable (for themselves) — at least relative to the expected political costs from doing the right thing by ending the ban. By expanding the list to include other products, like oranges, the Mexicans hope to impress upon other U.S. interests, like the citrus industry in a very important swing state, that they have dogs in this fight as well.
Between the rising costs on the economic side of the equation and the diminishing political benefits on the other, support among politicians for the truck ban should dissipate.
The Obama administration’s failure to connect the dots is surprising. Its fealty to the Teamsters directly undermines the lofty goals of its National Export Initiative — which seeks to double U.S. exports in five years. On trade policy, the administration appears yet to fully grasp that the hip bone’s connected to the thigh bone, the thigh bone’s connected to the knee bone, the knee bone’s connected to the ankle bone, etc. When you restrict imports (in the immediate case, imports of Mexican trucking services), you restrict exports.
The rising economic and political costs of the truck ban suggest that something’s going to have to give soon. By amplifying the stakes, the Mexicans are right to hasten that day.
In a bid to revive their sagging election prospects, congressional Democrats have hit on the theme of promoting domestic U.S. manufacturing. As a front‐page story in the Washington Post reports today, the party has adopted the bumper‐sticker slogan, “Make It in America.”
I’m all for making things in America, when it makes economic sense to do so. But the Democratic plan opens a window for all sorts of government intervention, including trade barriers, higher taxes on U.S.-owned affiliates abroad, and subsidies for “clean energy” and make‐work infrastructure projects.
The campaign relies on two major but faulty assumptions: That U.S. manufacturing is in deep trouble, and that creating more manufacturing jobs is the key to prosperity. Neither assumption is true.
As I explained in a Washington Times column yesterday:
Despite worries about “de‐industrialization,” America remains a global manufacturing power. Our nation leads the world in manufacturing “value‐added,” the value of what we produce domestically after subtracting imported components. The volume of domestic manufacturing output, according to the Federal Reserve Board, has rebounded by 8 percent from the recession lows of a year ago. Even after the Great Recession, U.S. manufacturing output remains 50 percent higher than what it was two decades ago in the era before NAFTA and the WTO.
Manufacturing jobs have been in decline for 30 years, not because of declining production, but because remaining workers are so much more productive.
Again, I’m all for manufacturing jobs supported by a free market, but members of Congress need to wake up to the reality that America today is a middle‐class service economy. As I wrote in the column yesterday:
More than 80 percent of Americans earn their living in the service sector, including a broad swath of the middle class gainfully employed in education, health care, finance, and business and professional occupations.
It is one of the big lies of the trade debate that manufacturing jobs are being replaced by low‐paying service jobs. Since the early 1990s, two‐thirds of the net new jobs created have been in service sectors where the average pay is higher than in manufacturing. Members of Congress who belittle the service sector are ignoring the interests of a large majority of their constituents.
Congress and the president should focus on economic policies that promote overall economic growth, not policies that favor one sector of the economy over all the others.
In honor of World Trade Week—and for its decreed purpose of educating Americans about trade—this post is about U.S. trade policy working at cross-purposes with other policies or goals of the administration. So numerous are these examples of trade policy dissonance, that a committed wonk could devote an entire website to the task of documenting them.
If the administration were serious about making trade policy work—rather than just paying it lip service—it would compile its own exhaustive list of laws, regulations, policies, and practices that actually undermine its stated objectives of facilitating economic growth, investment, and job creation through expanded trade opportunities. Then, it would make the changes necessary to ensure that our policies are paddling in the same direction. But that is not happening—at least as far as I can see.