Signing trade deals is a terrible jobs strategy

As part of his proposals to spur job growth, President Obama promised in last night’s State of the Union address to complete negotiations on the proposed Trans Pacific Partnership (a proposed free trade agreement (FTA) with at least eight other countries in Asia and Latin America), and announced new talks on a comprehensive FTA with the European Union. This is a shame, because chronically high unemployment is a real crisis, while trade agreements are a fake solution.

The issue is simple: it is trade balances – the net of exports and imports – that can affect jobs. Unless trade agreements promise to reduce our too-high trade deficit, they will have no positive effect on jobs. Even worse, past trade agreements have actually been associated with larger trade deficits in their aftermath.

This is not some proprietary EPI stance on trade – the economics textbook teaches that, as Paul Krugman has summarized, “Trade Does Not Equal Jobs.” Responding (in 2010) specifically to claims that the Korea FTA could be a driver of recovery, he pointed out that in macroeconomic terms, the United States had too little spending on domestically-produced goods and services, with total spending (Y) defined by:

Y = C + I + G + X – M

Where C is consumer spending, I is investment spending, G is government purchases of goods and services, X is exports, and M is imports.  He noted that while trade agreements lead to higher X, they also lead to higher M.  Exports support demand for domestically produced goods, so higher X increases employment.  However, the growth of imports reduces demand for domestically produced goods, which reduces domestic employment.  Professor Krugman claimed that “on average, they’re a wash.”

In the real world, FTAs have hurt U.S. employment.  The United States had a small trade surplus with Mexico in 1993, before the North American FTA took effect.  In 2010, the U.S. trade deficit with Mexico totaled $97.2 billion, which displaced 682,900 jobs.  The President claimed that the U.S. Korea FTA would “support 70,000 American jobs from increased exports alone.”  That agreement took effect on March 15, 2012, and yet U.S. exports to Korea fell last year, and the trade deficit increased, meaning that Korea trade reduced demand for domestically produced goods in 2012 and cost the U.S. jobs.

And the permanent normalization of trading relations with China in 2001 led nearly instantly to a steep rise in the bilateral U.S./China trade deficit – interrupted only temporarily by the Great Recession. These deficits displaced 2.1 million jobs in U.S. manufacturing between 2001 and 2011, alone.

Some might argue that because the EU is a rich region, it should be a good market for U.S. exports, right? Not lately.  Last year, the U.S. trade deficit with the EU increased from $99.8 billion to $115.7 billion, an increase of ($15.8 billion, 15.9 percent).  That was larger than our entire trade deficit with Canada and Mexico, our NAFTA partners (a combined deficit of $93.1 in 2012).  Trade with the EU hurt our economy last year, largely because the Euro’s weakness led to increased competitiveness for EU exports.  And this actually points to another universal weakness with FTAs – they’re essentially a long menu of giveaways and protections to various corporate sectors yet leave genuinely crucial issues like protecting countries from import surges caused by disequilibrium exchange rates off the table.

Why is the president claiming that FTAs – especially those with no macroeconomic safeguards to keep U.S. trade deficits from blowing up – support exports and jobs?  The simple answer is that he’s only telling half the story (about exports) and ignoring the bad news about imports.

More importantly, why do these FTAs have such irresistible political momentum no matter who is in the White House? It surely doesn’t hurt that the biggest beneficiaries of these FTAs are multinational companies (MNCs).  U.S. and foreign MNCs carried out 68 percent of all U.S. goods trade in 2010 (the last year for which we have data), and globalization, the proliferation of FTAs, and the growth of outsourcing are three of the most important causes of the historically high share of corporate profits in U.S. GDP and flat U.S. wages over the past decade that the president bemoaned last night.  MNCs and their allies, such as the Business Roundtable and the Chamber of Commerce, are big supporters of FTAs, and they have tremendous influence on the politics of trade.

It’s sad to see that President on the same side as the republican Ignorance Caucus, which does its best to hide unpleasant truths from the public and to suppress research on issues ranging from global warming to the impacts of gun ownership to, yes, the economics of international trade.

More FTAs will only slow the already fragile recovery and further depress middle class wages that the president so eloquently described last night.  It’s time for Obama, the trade-deal salesman, to meet and answer to his visionary self.