Misconceptions About Trade Agreements

April 13th, 2011

by and


This piece was originally published in The Wall Street Journal.

The U.S. and Colombia appear near a deal on a trade agreement. With this deal and others move closer to congressional debate, Ed Gerwin, Senior Fellow for Trade and Global Economic Policy at Third Way, and Jon Cowan, president of Third Way, point to five misconceptions about trade agreements.

Later this year, the Obama administration and Congress will seek bipartisan votes to pass free trade agreements with South Korea, Colombia and Panama. With 87% of global economic growth over the next 5 years taking place outside of the United States, trade supporters believe these agreements will create jobs and prosperity by helping American companies tap into fast-growing export markets.

Opponents disagree. They argue that “NAFTA-style” trade agreements hurt rather than help the U.S. economy — and polls show that much of the public agrees.

But is this conventional wisdom correct? Or do trade deals work? As Washington gears up for hard-edged debates about trade, it’s worth exploring some common misconceptions about free trade agreements.

1. Trade Agreements Drive Trade Deficits.
Not really.

Critics often tie free trade agreements to U.S. trade deficits. For example, opponents note that the overall U.S. trade deficit in goods ballooned from $103 billion before NAFTA to over $830 billion in 2008.

But customs data for trade agreement countries tells a different story. In 2008-09, the U.S. had a manufactured goods trade surplus of almost $50 billion with its 17 free trade agreement partners, and our manufactured exports to these countries continued to exceed imports for 2010. The real drivers of America’s overall trade deficit are the manufactured goods deficit with countries with which we don’t have free trade deals (over $345 billion in 2009) — especially China (almost $227 billion in 2009) — and massive petroleum imports (almost $205 billion in 2009). Trade critics also usually ignore America’s strong global trade surpluses in services and agriculture ($136 billion and $27 billion, respectively, in 2009). In short, in their focus on deficits, trade skeptics often confuse the cause with the cure.

2. Trade Deals are a “Zero-Sum” Game.
They’re not.

Trade critics are preoccupied with deficits because they believe that trade agreements are essentially “zero-sum” games — where, if one country wins, the other necessarily loses. They see exports as essentially “good” and imports as essentially “bad.” But the real world is much more complex.

To be sure, exports are vital to the American economy, supporting one in three manufacturing jobs and accounting for one in three acres planted on American farms.

But imports also make important contributions to America’s economy. Imports supply low-cost inputs that enable American manufacturers and their U.S. workers to make products more competitively, and support millions of American jobs in research, design, transport, logistics, retail and manufacturing. Additionally, reduced tariffs on imports have increased the purchasing power of an average American family by as much as $2,000 each year — allowing families to spend more in local communities.

3. Trade Deals Weaken the Economy.
They don’t.

Critics attribute a variety of serious economic ills to trade agreements. For example, they repeatedly cite a 2006 study that claims that NAFTA “displaced” some 1 million U.S. jobs, and assert that the U.S. manufacturing sector has declined by over 30% because of NAFTA.

The NAFTA job loss claim is refuted by a series of other studies, including analyses by the Congressional Research Service, the Congressional Budget Office, the U.S. International Trade Commission and the Carnegie Endowment for International Peace. Additionally, Bureau of Labor Statistics data shows that U.S. manufacturers actually added 500,000 jobs in the seven years after NAFTA entered into force.

America has lost manufacturing jobs in recent years, but it’s hard to pin those losses to any substantial degree on trade deals. Instead, the predominant cause of declining U.S. manufacturing employment is increased productivity – the reality that a better educated workforce using more sophisticated equipment can produce more with fewer workers. Manufacturing jobs have been declining steadily as a proportion of total U.S. employment since World War II – long before modern trade agreements were ever envisioned. At the same time, America manufactured 4.7 times more goods than in 2005 than in 1959. It’s also difficult to blame trade deals for manufacturing job losses when America posts manufactured goods surpluses with trade agreement countries.

4. Time to Take a “Time Out” from Trade.
We can’t afford to.

Trade critics want the United States to stop work on new trade deals. They insist that we must first renegotiate existing agreements and adopt new trade policies, including measures that would restrict imports and make it harder for American companies to export.

But the rest of the world isn’t waiting for us. In any market, there’s a premium on being first — just ask Apple about the iPod. If America fails to get and stay in the game, our exporters will lose not only new opportunities in foreign markets, but increasingly lose current business as their foreign competitors face fewer and fewer trade barriers. For example, without the Korea trade deal, U.S. pork producers would be priced out of South Korea’s market within a decade and lose $215 million in annual sales.

To their credit, the Obama Administration and many in Congress understand this. The Administration has taken a highly inclusive approach to U.S. trade policy, particularly in developing a new model trade agreement in the Trans-Pacific Partnership negotiations. But they also know that America can no longer sit still while our major international competitors negotiate a raft of new trade agreements to open markets to their exports.

5. Trade Deals aren’t “Fair.”
No, they’re about fairness.

Contrary to the claims of opponents, America often gets the short end of trade relationships in which we lack a robust trade agreement. It is no coincidence that China — a country with which the United States does not have a free trade agreement — extensively uses highly discriminatory currency policies, technical standards, bidding requirements and other barriers to deny essential fairness to American companies and workers. And, when compared to America’s trade agreement partners, China has failed to make meaningful commitments to enforce environmental laws and labor rights.

At their core, trade agreements win fairness for America by breaking down unfair foreign barriers to U.S. commerce. They mandate that our trading partners apply quintessentially American principles like fair play and due process to American traders and investors. Trade agreements require that rules be developed in an open and transparent manner, prohibit unfair discrimination against American products, services or parties, and protect American property rights against seizure without due process and just compensation. And, ultimately, they give American exporters, workers and investors greater freedom from unfair interference by foreign governments.

As America debates trade agreements that have the potential to support new economic growth, it’s imperative that we focus on the merits of each agreement — and not simply fall back on longstanding misconceptions.