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January 9, 2017
With Responses From
Jan 9, 2017
8 Min read time
It is not trade, per se, but the rules of trade agreements that matter.
Two disturbing new economic studies, released about a month after the 2016 U.S. election, provide important insight into the populist surge that roiled both major political parties and resulted in the once-unthinkable election of Donald Trump.
The first study—by economists Thomas Piketty, Emmanuel Saez, and Gabriel Zucman—offers a mixed report. The good news is that the U.S. economy more than doubled in size over the last three decades. The bad news is that these gains benefited almost exclusively those at the very top of the income distribution. The bottom half of Americans—117 million adults—were “completely shut off from economic growth since the 1970s,” the authors find.
The second study, by economist Raj Chetty and colleagues, reports that economic mobility—what some call the American dream—is collapsing. Only half of those born in 1980 earn as much as their parents, compared to 90 percent of those born in 1940. While working-class Americans struggled with stagnant wages and broken dreams, the top 1 percent saw their share of the nation’s income almost double to more than 20 percent.
What does this skewed economic picture have to do with trade? For many workers, trade deals such as the North American Free Trade Agreement (NAFTA) and the Trans-Pacific Partnership (TPP) have become potent symbols of what is wrong with the economy. Workers in Youngstown, Flint, and the like don’t have to read the studies to know that the present is bleak and the future uncertain. They have felt firsthand the collapse of manufacturing employment—often good jobs at high wages—and seen plants close as jobs move offshore.
It is not trade, per se, but the rules of trade agreements that determine who wins and who loses.
But while the losses are undeniable, is trade the culprit? Not really. As Dean Baker points out, there is nothing natural or inevitable about workers and communities being shortchanged by trade, whose benefits, theoretically, are available to all. It is not trade, per se, but the rules of trade agreements that determine who wins and who loses. If we want widespread prosperity, the choice isn’t between more trade and no trade. It is between inclusive trade, whereby benefits are broadly shared, and corporate protectionism, whereby gains flow to transnational firms and well-connected investors. Ironically, those who embrace corporate protectionism are called free-traders, while those who favor inclusive trade are considered anti-trade.
The reality is that free trade today exists only in economics textbooks and political debates. A classic free trade agreement might fit on a postcard: all parties agree to eliminate tariff and non-tariff barriers. What, then, comprises the 6,000 pages of TPP? The agreement defines enforceable protections for corporations and investors, narrowly crafted to privilege corporate interests over those of consumers, workers, and the environment. TPP “is not a trade agreement,” Paul Krugman writes. “It’s about intellectual property and dispute settlement; the big beneficiaries are likely to be pharma companies and firms that want to sue governments.”
President-elect Trump announced in November that he would pull out of TPP on his first day in office and renegotiate or scrap NAFTA soon after. TPP is off the front burner, but, given its strong corporate support, it may yet return. While the agreement has drawn sharp criticism for many of its provisions, I will focus on labor rights, which relate directly to the collapse of manufacturing employment and to wage decline in the United States. For while trade policy is not the only source of job losses—5 million in manufacturing alone, 30 percent of the total, between 1997 and 2015—it is a significant one. In a widely cited study, MIT economist Daron Acemoglu and colleagues estimate “job losses from rising Chinese import competition over 1999–2011 in the range of 2.0–2.4 million,” of which a million were in manufacturing.
What Happened with NAFTA?
The NAFTA experience over the last two decades underscores the role of labor rights in trade agreements. During the U.S. debate over the agreement in 1993, supporters maintained that expanded trade would create jobs in the United States and improve labor conditions in Mexico. Neither has occurred. The Economic Policy Institute estimates that the United States shed more than 850,000 jobs between 1993 and 2013 because of NAFTA. In Mexico virtually no independent unions have been created in the export sector, and serious labor-rights violations remain widespread.
If we want widespread prosperity, we must choose between inclusive trade and corporate protectionism.
NAFTA supercharged U.S.-Mexico merchandise trade. Cross-border shipments soared from almost $80 billion in 1993 to $480 billion in 2015, a six-fold increase (based on domestic exports and imports for consumption). At the same time, the U.S. goods trade balance with Mexico went from a $1.6 billion surplus in 1993 to a $60.6 billion deficit in 2015.
NAFTA also reinforced a troubling paradox: as Mexican workers produce more, they earn less. Manufacturing productivity rose 80 percent between 1994 and 2011, while real compensation (wages and benefits adjusted for inflation) slid almost 20 percent. The absence of labor rights fractures the link between rising productivity and wages. Low wages in advanced manufacturing in Mexico are not a natural part of the habitat but rather reflect policy: labor rights are suppressed to keep wages low and attract investment. As a result, comparative advantage rests on exploitation rather than productivity or innovation. Mexican workers receive far less than their productivity makes possible, and U.S. workers feel the pressure of competing with depressed wages.
What does this look like on the ground in the United States? On February 9, 2016, the Carrier Corporation made a fateful announcement. “The best way to stay competitive and protect the business for long-term is to move production from our facility in Indianapolis to Monterrey, Mexico,” a manager told 1,400 agitated workers at the Indiana plant. “I want to be clear; this is strictly a business decision.” A phone call from President-elect Trump and promises of tax cuts from the state secured a reprieve for about 700 workers but in no way changed the underlying rules of the game. The threat of moving jobs to Mexico is still enough to push down wages and undermine unions.
Jobs on the Move
Consider the auto industry in Mexico, which accounts for 25 percent of merchandise exports to the United States. In 2013 wages in advanced auto assembly plants in Mexico averaged $5.21 an hour, 19 percent of U.S. levels, and wages in parts plants were only $2.40 an hour, 12 percent of U.S. levels. Not surprisingly $25 billion in new auto investment poured into Mexico from 2010 through mid-2016, as international automakers committed to building nine major plants there. The rest of North America will get only two new plants of similar scale.
NAFTA reinforced a troubling paradox: as Mexican workers produce more, they earn less.
Mexico exported 2.8 million light vehicles in 2015, almost three-quarters of them to the United States. Because auto factories north and south of the border largely produce for the U.S. market, workers in the two countries are in direct competition. The number of Mexican hourly auto jobs has grown to 620,000, while the United States lost 360,000 between 1999 and 2016. NAFTA incentives—not just automation—propelled these losses; hundreds of thousands of jobs supplying the U.S. market have been relocated to Mexico. Moreover, autoworkers’ pay in the United States, which paved the way to the middle class for millions, slid almost 13 percent from January 2009 through 2015.
Proponents often argue that consumers benefit from lower prices as a result of these arrangements. However, the “savings” are more likely to supply increased corporate profits and stratospheric executive salaries. Automakers don’t offer discounts on vehicles just because they are produced in Mexico.
You might be thinking, doesn’t manufacturing account for only 8 percent of U.S employment in any case? Yes, but manufacturing has a broader impact throughout the economy than that figure suggests. Some towns are dependent on plants; when plants close, municipal finances collapse and infrastructure implodes. Factory workers are devastated, but so are teachers, cashiers, and restaurant workers. Real estate prices fall, and, in extreme cases, communities such as Flint tumble into bankruptcy. Economic dislocation puts deep stress on families and shatters communities.
Trade Agreements for the Middle Class?
The day after the election, Automotive News explained what many were thinking: “Donald Trump’s come-from-behind victory over Hillary Clinton signals that the state of the U.S. auto industry was clearly on the mind of the American voter. Not the industry that is reporting record profits and sales after a near-death experience, but the one that shed dozens of plants and tens of thousands of high-paying jobs in the years leading to the 2008–9 crisis, leaving just a shell of itself in once-thriving manufacturing communities across America.” In other words, unbalanced trade propelled a political backlash.
We should demand that our trade partners respect labor rights.
The issues in trade agreements extend to important questions of environmental and consumer protection and beyond. But, for a start, we should demand in our trade partners respect for labor rights. If future trade agreements are to fuel broadly shared prosperity rather than hyper-inequality, three labor-oriented goals must be given top priority. First, labor-rights reform needs to be the price of admission to trade agreements, not an issue to be addressed after the fact. Otherwise, governments will interpret what they have done before signing as all they need to do. Second, agreements must include meaningful language ensuring long-term protection of labor rights and continued improvements in wages. Third, we need a more robust social safety net in order to proactively address the social costs of dislocation and transition.
This isn’t an attempt to hold onto the jobs of the past but to ensure fair competition for the advanced jobs of the future. In this way, trade agreements can be used to benefit workers, their families, and their communities in the United States and in our partner nations. That is how we realize the democratic promise of broadly shared prosperity.
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