For better or for worse, support for "free trade agreements" often hinges on perceived impacts on American jobs. While most economists prefer to focus on impacts on GDP and trade, policymakers fixate on potential job gains and losses. Advocates, both for and against FTAs, are more than happy to fill the void. Sadly, too many FTA studies on both sides of the debate use one-sided, back-of-the-envelope estimates that fail to examine the true impacts of trade on the economy. The result is confusion and, potentially, bad policy responses.
Trade critics universally argue that FTAs are job killers. A favored arrow in their quiver: the agreements increase imports from low-wage FTA partners and cost jobs of U.S. workers. They say trade agreements expand U.S. trade deficits with FTA partners, more than offsetting potential job gains from greater U.S. exports. Particularly hard-hit, they claim, are workers in U.S. manufacturing sectors who cannot compete with imports. This rationale for opposing FTAs is attractively simple and alarming. The public — and many members of Congress seeking to protect their constituents from further job losses at home — easily embrace such arguments and push to oppose FTAs.
The traction trade critics get from their dire job loss estimates forces FTA supporters into the jobs debate fray, where they tend to tout the number of U.S. jobs that would be created as exports grow under the proposed FTA. But they do so cautiously, recalling the drubbing they took during the "NAFTA fight," when their estimated job increases evaporated as Mexico devalued its peso just after NAFTA went into effect.
Increasingly — but not always — FTA supporters recognize that export-related jobs are only part of the story. They acknowledge that some U.S. workers lose jobs to import competition but understand that the import story is also one of job creation. Expanding global supply chains means that today, more than ever, U.S. manufacturing (and services production as well) is increasingly taking place in multiple locations around the world. U.S. consumers purchase imported finished goods, but U.S. producers purchase plenty of raw materials, parts, components, machinery, and services that support their value-added operations in the United States. In short: imports don't just "cost" U.S. jobs, they "create" them too. An FTA that increases trade — both exports and imports — expands related jobs as well. These jobs tend to go unaccounted for in the analyses of both FTA critics and supporters alike.
A Transatlantic Trade and Investment Partnership (TTIP) agreement with the European Union will present some new twists to debate over the impact of FTAs on jobs. For starters, it will be more difficult for opponents to draw adverse inferences about TTIP's potential impacts on U.S. jobs. Over 75 percent of the value of U.S. imports from the EU in 2014 came from countries where manufacturing workers, on average, are paid more than they are in the United States. It will be hard to argue that the trade deficits the United States has recorded with the EU since 1993 reflect an excess of job-sucking imports made by low-wage foreign workers, and that an increase in those imports bodes further U.S. manufacturing job losses.
So it is time for a new approach to assessing the impacts of trade agreements on jobs. Such evaluations must consider all the ways in which a change in trade barriers affects each layer of the economy. They must go beyond a focus only on direct and indirect export effects, or direct and indirect net import effects, and include the extra economic activity that happens because workers, companies and consumers have additional money to spend.
For example, export-related job gains tend to be in sectors where workers are paid higher wages and salaries. More higher-paying, export-related jobs means more spending, which in turn creates new economic activity that supports additional jobs. More efficient production (thanks to new spending on equipment, for example) further boosts output, as well as demand for inputs, which increases revenues of suppliers and creates more jobs still.
And it's not only exports. Studies focusing on the net import effects ignore the increased spending that happens when lower barriers to U.S. imports reduce the costs of goods and services. Lower costs benefit U.S. producers, who use imported inputs, and U.S. families, who purchase finished goods imported from the FTA partners. The end result is the same: companies, farmers, and households have more money to spend on new goods and services. That spending — whether it is for new plants and equipment, restaurant meals, education or health care — further boosts economic activity, which in turn supports new jobs in those sectors.
Too many analysts estimating the effects of FTAs fail to account for the impact of new economic activity on jobs. But the positive impact is almost always quite large, so failure to account for that activity would likely result in underestimations of the positive impacts of trade agreements on the U.S. economy and U.S. workers.
Such an assessment of TTIP yields interesting results. To date, there is only one study (from the Atlantic Council et al, 2013) that has sought to measure the full range of impacts of a hypothetical TTIP on U.S. workers. Drawing from CEPR 2013, it considered a so-called "ambitious scenario"1 for TTIP, which yielded the following findings: U.S. GDP, imports, and exports all increase; U.S. households would have, on average, an additional $865 to spend, annually, once the agreement is fully implemented; and, the boost to economic activity would lead to creation of more than 740,000 net U.S. jobs.
This job estimate differs from those which are typically produced by both pro- and anti-trade interests. Supporters focusing on exports and export-related jobs might multiply the expected export gains by the number of U.S. jobs supported by $1 billion of exports. Using estimated export gains of $264 billion (Euros from the CEPR study converted to dollars) and 5,796 jobs per billion dollars of exports for 2014, they might conclude that the TTIP-related exports would support 1.5 million new U.S. jobs.
Anti-FTA analysts might want to multiply the change in the net exports by the same jobs per billion in exports figure. The CEPR study shows a $43 billion surplus — a bit of a wrinkle all by itself for FTA critics — but they might still claim that the hypothetical TTIP would support a fraction of the jobs promised by FTA supporters.
Clearly, failing to account for the numerous channels through which a trade agreement affects the U.S. economy will yield unrealistic estimates of the impact on jobs. But no matter what side you take in the TTIP debate, it will be hard to argue that this agreement will not be a job "winner" for the United States.
1 The study assumed TTIP would cut U.S. and EU tariffs to zero, reduce U.S. and EU nontariff barriers (regulatory differences, differences in standards, and other such barriers) by just 25 percent, and cut U.S. and EU procurement barriers by 50 percent.
The opinions expressed here are solely those of the author and do not necessarily reflect the views of the Cato Institute. This essay was prepared as part of a special Cato online forum on The Economics, Geopolitics, and Architecture of the Transatlantic Trade and Investment Partnership.