Evaluating Trade Agreements Realistically: NAFTA, KORUS, TTP, and TTIP

The United States seems to get blamed for everything. An article in The Economist frets because trade deals currently being negotiated may not come to pass because of a lack of enthusiasm and determination on the part of the US.

"….Congress is likely to block two big free-trade deals—one with Asia, the other with Europe—until after November’s mid-term elections, and possibly to scupper them altogether."

"For all its self-image as a place where doing business comes first, America has often found trade deals frightening. This is partly because its continent-spanning economy is more self-contained than many people realise: imports and exports of goods amount to 23% of GDP, compared with 26% for the EU or 46% for China, so the constituency for reducing tariffs and opening markets is relatively small."

And what is at stake in these proposed agreements?

"Peter Petri of the Peterson Institute, a think-tank, estimates the boost to global income from the Trans-Pacific Partnership (TPP) alone to be $295 billion a year, $78 billion of that accruing to the United States. The Transatlantic Trade and Investment Partnership (TTIP) is roughly as large. And the deals could generate big extra benefits by paving the way for more competition in services, the largest but least globally traded part of the economy."

Perhaps US legislators are dubious about free trade agreements (FTAs) because they rarely deliver what was promised and the US, as a nation, usually comes out a loser. Robert E. Scott presents possible explanations in an article for the Economic Policy Institute: The Trans-Pacific Partnership Could Be Much Worse Than the Over-Hyped Korea Deal.

Scott blames shoddy economics for much of the error in predicting trade outcomes. The U.S. International Trade Commission (USITC) and most economists focus on tariff reduction as the dominant feature of free trade. Perhaps this is because it is something they have a hope of measuring.

"The fundamental problem with the USITC model….is that it is designed to evaluate the effects of tariff changes on trade flows. The structure of this model reflects most economists’ view that tariff cuts are the most important policy changes in FTAs….but they cannot be used to predict the impacts of FTAs on offshoring, on foreign and domestic investment in factories making products for export to the United State and other countries, on other factors affecting trade, investment, and wages that are unrelated to tariff changes."

In a separate study of NAFTA, Scott pointed out that when NAFTA went into effect the trade balance with Mexico was very small, but by 2010 it had grown to a negative $97.2 billion. At the time it was predicted that lowering tariffs on goods would increase exports to Mexico and create about 200,000 new jobs in the US. What actually happened is that US manufacturers, and those of other countries, took advantage of cheap labor in Mexico and low tariffs on Mexico’s exports (thank you NAFTA) to move manufacturing operations to Mexico. The net result was a large flow of exports into the US and, by Scott’s estimate, the loss of 682,900 US jobs. It is difficult to believe that the US did not see this coming.

Other economists would argue with Scott’s numbers, but whatever the actual number lost, Scott provides a useful rule of thumb for evaluating trade agreements.

"When it comes to trade, the issue is simple: Increased exports support U.S. jobs and increased imports cost U.S. jobs….Thus, it is trade balances—the net of exports and imports—that determine the number of jobs created or displaced by trade agreements. Unless trade agreements promise to reduce our too-high trade deficit, they will not have a net positive effect on U.S. employment. Rather than reducing trade deficits, past trade agreements have actually been followed by larger trade deficits."

When it came to negotiating the U.S.-Korea Free Trade Agreement (KORUS), one might have expected that a wiser approach would be taken. Scott indicates that preliminary data suggests that the US has been had again.

"KORUS took effect March 15, 2012. In the year after the agreement took effect (April 2012 to March 2013), U.S. domestic exports to South Korea (of goods made in the United States) fell $3.5 billion, compared with the same period in the previous year, a decline of 8.3 percent. In the same 12-month period, imports from South Korea (which the administration consistently declines to discuss) increased $2.3 billion, an increase of 4.0 percent, and the bilateral U.S. trade deficit with South Korea increased $5.8 billion, a whopping 39.8 percent. Estimates for 2013 suggest no reversal in these trends…."

It was claimed that KORUS would support 70,000 new jobs through increased exports. Instead, exports have fallen, imports have risen, and Scott suggests we can expect to lose at least 40,000 jobs.

Free trade advocates such as The Economist claim that the world will be $600 billion poorer each year if the US does not complete the two deals being negotiated with European and Asian nations. Trade doesn’t make the world wealthier, it makes individuals wealthier. Trade is good at creating wealth, but poor at distributing it. The best way to distribute wealth is by creating jobs for those who do not have one. That must be our primary goal.

Scott’s advice is sound. You should never make a deal in which you expect to lose money.

And never enter into a deal where you can expect to be the only honest participant.