Home » Money » Trade Deals – Bad Deals?

Trade Deals – Bad Deals?

Through this populist uprising standing in for an election, one issue unites all the candidates that are left. Sanders was always against free trade agreements, like the pending Trans-Pacific Partnership (TPP). Clinton is too, at least now she is. Cruz doesn’t seem to have much time for them, and after years of talking both ways Trump is now firmly against these “bad deals”.

It’s not about TPP or any new trade pacts, either – it’s about (supposed) horrors of the North American Free Trade Agreement (NAFTA) and our current deal with China.

Going over the past is a way to pin down the establishment, which is to say Clinton. But Trump, at least, once to re-negotiate the old deals and turn them back. Was free trade such a bad deal for the US? Is it worth going over old ground?

For all the noise on this issue this year it’s actually not a good issue outside of its value as a populist rallying cry.

Obama attending one of the more public moments in TPP negotiations.

Obama attending one of the more public moments in TPP negotiations.

The TPP is not worth talking about in this climate as it dies a slow death. Whether the Senate turns Democrat, as the betting money now says, or not it doesn’t matter. There is no appetite for a new deal on either side of the aisle. Clinton, should she become President, as the betting money also says, is unlikely to bring it up. The issue of trade deals is largely academic unless old agreements are revisited.

That is exactly what Trump, for one, has suggested should be done in the past. Sanders hasn’t explicitly said he would revisit NAFTA, but his passionate insistence that it was a bad deal does beg the issue as well.

It’s common to cite the study by the Economic Policy Institute (EPI) that NAFTA cost the US 850,000 manufacturing jobs. They calculated this through a series of methods, but mostly through the harsh reality shown below. From 2000 to 2010 the US lost over 5 million jobs in manufacturing, about 30% of the total:

Total US Manufacturing Employment.  Data from the St Louis Federal Reserve.

Total US Manufacturing Employment. Data from the St Louis Federal Reserve.

The jobs are there!

The jobs are there!

The chart above starts in 1992 for the purpose of comparing everything to the pre-NAFTA world. The treaty was sold on the premise that it would create, not destroy jobs – and there is certainly little evidence of that. Manufacturing employment was rather steady before it fell off a series of cliffs in the two official recessions that Barataria, for one, considers one long Depression.

In fact, this is given as evidence that the period from 2000-2010 at least is one economic event, as the bloodletting continued.

That’s not to say that the figure of 850k jobs lost to free trade is universally held. The Institute for International Economics (IIE) calculates that as many as 1 million jobs were created by NAFTA, and the US Chamber of Commerce puts the figure at closer to 5 million. How is that possible? The graph below shows relative manufacturing output over the same period, adjusted for inflation:

Manufacturing output, adjusted for inflation, with 2012 defined as 100.  Data from the St Louis Federal Reserve.

Manufacturing output, adjusted for inflation, with 2012 defined as 100. Data from the St Louis Federal Reserve.

The total value of manufacturing output in the US has nearly doubled since 1992, which is to say that we’re producing quite a bit more stuff. That probably seems counter-intuitive in an age where “Made in China” appears on nearly everything, but it’s true. Manufacturing is booming – it’s just not creating jobs.

At some point you have to ask, "Who are the robots really working for?"

At some point you have to ask, “Who are the robots really working for?”

The term for this is “productivity gains”, which is to say that American manufacturers are making a lot more with less. We’ve covered this before in greater detail. The overall increase in productivity in the economy is nowhere near as intense as the net gains in manufacturing.

How is this possible? Some gains are certainly due to better management and organization methods, but the majority of it must be due to automation. American workers are far more productive than ever before and much more productive than workers anywhere else in the world – because we have the fanciest tools at hand to do it.

More stuff is made by fewer people.

This trend, which defined the recent Depression, is unlikely to continue. There are many signs that productivity gains are slowing and there is an approaching shortage of labor as Boomers retire. That’s the reason why Barataria sees good times coming after 2017 and a much stronger economy as there is strong upward pressure on wages – something we saw in 2015 for the first time in 15 years.

That’s after the election, of course.

Not all robots are evil.

Not all robots are evil.

Was NAFTA a net job killer or a job producer? It’s nearly impossible to tell given the trends that we see. The gains in productivity certainly overwhelmed any benefit we might have had by opening up trade and there is certainly a loss of some production due to foreign competition.

Trade deals are convenient in politics because they put the blame for our woes on foreigners and politicians – two easy scapegoats. Blame is probably better put on robots and large companies, although the latter has the reasonable excuse that they have to remain competitive. Still, effects like a strong US Dollar and the overhead per employee are probably far more important than trade deals as the manufacturing workplace changes.

New deals are almost certainly done for now, and that’s not necessarily a bad thing. They are probably still good foreign policy tools but as economic development tools they are likely pretty neutral overall. Barataria will take the position that supporting Mexico is very much in the best interests of the US for many reasons, but aside from that free trade agreements are just not that important.

Lowering the cost of workers by taxing profits, not labor, is something we can do right here at home. Such reform has been rejected by the Republican voters but might yet form a good policy position for Democrats if given a populist flavor. And investment in infrastructure like high speed rail will certainly pay great dividends as shipping from US manufacturers becomes cheap enough to eliminate inventory, giving a plant or craft shop here a great advantage.

There is a lot of public policy and investment we should implement to fix manufacturing, but much of it is likely to fix itself now that massive productivity gains have been digested. Trade deals are dead for now, but that probably doesn’t matter. There isn’t any old ground worth going over, however.

None of this will stop the constant battle cries, however. Trade deals just feel bad and people are still hungry and angry over the struggle. That’s OK, even if it is probably the wrong place to focus anger on.

19 thoughts on “Trade Deals – Bad Deals?

  1. “More stuff is made by fewer people.”
    Almost. It should be “more value is added by fewer people in the US”. The labor-intensive parts of the process, like all those wire assemblies in every car, move to low-labor-cost places. This counts as a productivity increase.

    • That’s true – extended supply chains have changed the mix. That could be blamed on trade agreements. But it also is an effect that will at least slow in the future as it also worked its way through the system.

  2. Yes those trade deals weren’t the best idea for the west. It wasn’t the “trade” so much as the other issues such as the Chapter 11.
    Leslie

    • But it’s probably not the most important thing that has gone wrong lately. No new trade deals plus an increased focus on what we know is wrong would be good.

      • How many politicians have back room deals with the multinational businesses that are anti-American in nature? Is there anyone running for political position that doesn’t have baggage that hinders their ability to serve the people with justice?
        Leslie

      • For the first question, it depends on what you mean by anti-American, but my guess is that in the biggest sense there aren’t that many. Politicians want to create jobs in their district first and foremost. Raising money? It’s important, but they do want to create jobs.
        As for the second part it really depends on what you think is improper. Transparency is the key to everything – keeping an eye on everything that is done. The internet age lets us do that much better but there is a ton of garbage out there clogging the information stream.

      • They all know what we want to hear but transparency is the last thing we’ve been seeing in Canada.
        By anti-American I mean (hypothetically) deals that allow corporations to sue local governments if they can’t open up a bomb factory next to a school or hospital.
        We have free flu shots and we know that the government has made deals with Big Pharma. The government buys the vaccines as pay back for political contributions.
        Leslie

  3. Free trade is going to be good for everyone in the long run. I can see how it’s a problem in the short term but this will work out. We need it to promote stable democracies around the world. If that is all it is good for then it’s still worth pursuing but maybe we have to be more careful who we have treaties with.

    • That is pretty much what I’m thinking. I would have to re-read TPP to see how it stacks up in this view, but offhand it seems like a pretty standard open agreement without a lot of calls for worker advancement et cetera.
      No matter what nothing is going anywhere for a while, though, so it’s a totally academic question IMHO.

    • Probably not. Look at how we’re still arguing over NAFTA 25 years after it was passed. There isn’t a good way to measure the effects of these trade deals that is universally accepted.
      Personally, I like the methodology of the IIE, which matches the number of jobs related to export / import before the treaty was passed and then looks at how trade expanded. In the case of Mexico, our net imports from Mexico expanded slightly after NAFTA and our exports expanded a lot more – meaning we had a net gain. But, then again, Mexico tends to export lower value goods to us and I’m not entirely sure how it was all taken into account.
      Bottom line – these will always be up for interpretation one way or the other. What I am sure of is that the standard analysis, based on “We lost a lot of manufacturing jobs in the 2000s” is not valid. Many other things were happening that are summed up as “productivity increases”. That seems to be the real issue we have yet to grapple with – not trade.

  4. The thing with trade is that not all countries are able to run a trade surplus. Some nations have to have trade deficits.

    • And as long as there is more demand for US Dollars out there we will have a deficit. It goes up with increased global trade, which is probably part of the reason that free trade has always been presumed to be good for the US – we’ve always like having a strong greenback. But I happen to think that we would probably benefit more by having a weak currency, assuming energy independence, because it would keep our good competitive. Every other nation thinks this is true, why don’t we? So we may not always have a trade deficit if China gets its way and the Dollar isn’t the global reserve currency for 85% of all transactions anymore.
      Why on earth China supports this, however, is something I’ll never quite understand. They play the currency war as well as anyone else – except when they are playing the global superpower game.

    • You have an excellent point and have a very good leading indicator. I hope the blip downward at the end is reversed.
      You are right, we have not hit our stride yet. I’ll accept this as a measure of when we are ready to enter a period of expansion. Excellent find!

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