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NAFTA Rejoinder: The US Effects Are Clearly Positive for Most Workers (Part II)

by and Cathleen Cimino | July 30th, 2014 | 05:57 pm
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The Center for Economic Policy Research (CEPR) is challenging an op-ed in the Financial Times by Adam S. Posen, president of the Peterson Institute for International Economics, with a litany of familiar denunciations of trade agreements. The CEPR blog post maintains that trade agreements with Mexico and other lower-income economies increase US unemployment, suppress wages, and foster US trade deficits. The post accuses Posen of “magical thinking” in citing the benefits and limited harms of the North American Free Trade Agreement (NAFTA) and other trade pacts.

Posen’s arguments, many of them drawn from our Policy Brief NAFTA at 20 [pdf], are his own. But we share many of his views. Our case, presented here, also draws on evidence by independent authors outside PIIE.

As everyone recognizes, trade liberalization and globalization create winners and losers. But the claim of large net and systemic losses to all American workers advanced by CEPR is not supported by the evidence. Posen does not claim a “wondrous impact” on the US economy, as CEPR contends. He does argue that the evidence supports the conclusion that gains from NAFTA, which are widely dispersed, far outweigh the losses, which are highly concentrated and not nearly as large as CEPR claims.1

Jobs

Among the claims assessed by the NAFTA at 20 Policy Brief is that trade agreements increase US unemployment by fostering trade deficits and substitution of production at home by business firms offshoring. Historically, however, rising trade deficits correspond not with rising unemployment, but rather with falling unemployment.

Within industries, moreover, increased trade has the net effect of downsizing less efficient firms and expanding more efficient firms. The resulting job displacement is painful for the affected workers, but the country as a whole gains through lower prices, higher productivity, and better paying jobs. Little net change in employment occurs in the short run, but increased US productivity does generally lead over time to employment growth and national income gains for the whole economy.

On our reckoning, since NAFTA’s enactment, fewer than 5 percent of US workers who have lost jobs from sizable layoffs (such as when large plants close down) can be attributed to rising imports from Mexico.2 By our calculations for the roughly 200,000 out of 4 million people who lose their jobs annually under these circumstances, the job losses can be attributed to rising imports from Mexico, and almost the same number of new jobs has been created annually by rising US exports to Mexico. The net annual job losses are perhaps in the low tens of thousands, about 15,000. For every net job lost in this definition, the gains to the US economy were about $450,000, owing to enhanced productivity of the workforce, a broader range of goods and services, and lower prices at the checkout counter for households.3

Beyond NAFTA, globalization payoffs derive from investment as well as trade. Research by Lindsey Oldenski and Theodore Moran [pdf] shows that when US-based multinational corporations (MNCs) invest abroad, expanding their sales or employment overseas, the average statistically significant impact is both increased employment and investment at home. As Posen notes, Oldenski and Moran (2014) find that, on average, for every 100 jobs US manufacturing multinational corporations created in Mexican plants, nearly 250 jobs were added in their US operations. The data are available on the PIIE website for those who wish to replicate this result (as are all of our data used in NAFTA at 20).

By asserting that Odenski and Moran want the United States to “subsidize the export of jobs,” the CEPR is distorting the argument, which simply is that when US multinationals make business decisions to invest abroad, they improve their productivity, enabling them to hire workers and make investments at home. Forcing uncompetitive practices on MNCs, whether to move more or less production abroad, would backfire for the US economy.

Wages

The CEPR blog post asserts that trade imposes downward pressure on wages earned by low-skilled workers by putting them “in direct competition with low paid workers in the developing world while protecting our doctors, lawyers, and other highly paid professionals.” Neither we nor Posen support the protection of any US profession from competition. We do, however, deny the claim of there being a significant downward pressure on US low-skilled wages from NAFTA. Research summarized by the noted academics Autor and Hanson (2014) shows that rising imports from China have indeed put modest and localized downward pressure on wages in competing industries (about 3 percent of base wages), and increased the pace of layoffs—effects somewhat offset by Trade Adjustment Assistance (TAA) and Social Security Disability Insurance (SSDI).4 The scale and source of these downside impacts are a far cry from a general war on workers resulting from trade portrayed by the CEPR. The studies cited find no clear evidence of a significant downward pressure on US lower-skilled wages from Mexican competition.

We know that specific instances of import competition from Mexico leading to wage cuts in US plants do exist, as do cases of threats of moving to Mexico being invoked by companies in attempt to increase leverage in wage negotiations. Such anecdotes and claims, however, do not constitute evidence that Mexican imports have generally suppressed the growth of average US wages over the past two decades. For example, analysis by Autor et al. (2013) finds that imports from Mexico and Central America trading partners had no effect on US wages.5 In another recent study, McLaren and Hakobyan (2010) find that blue-collar workers in NAFTA-vulnerable locations saw on average slower wage growth, but that the NAFTA effect on US industries as a whole and on average workers was insignificant.6 If anything, any US wage effects from the expansion of trade with Mexico should have become evident by now, but we know that they have not, and the persisting wage gap between comparable workers in the United States and Mexico has fluctuated but remains at worst unchanged (see, for example, Gandolfi, Halliday, and Robertson 2014 and Robertson 2006).7

The past decade has not been prosperous for low-skilled workers, as Posen acknowledges and we also regret. Median nominal wages (excluding fringe benefits) between 2004 and 2014 increased by only about 1.5 percent annually. But the principal causes of subpar performance for average American workers are low productivity growth, rising technological intensity of work, and the financial crisis, not expanding trade. Wage growth was better during 1994–2004, the period immediately following NAFTA.

Trade Deficits

By far, the main scapegoat of globalization skeptics is the trade balance. Larger US trade deficits are often cited by critics of NAFTA as a consequence of trade pacts. The skeptics echo mercantilist teachings from a bygone era that exports are good, because they support jobs at home, and imports are bad, because they supposedly substitute for products that could be made by American workers. Such ideas have been proven repeatedly fallacious.

Yet the CEPR blog embraces this mistaken worldview by asserting that the United States has undergone a “massive loss of demand due to the trade deficit,” and that by importing $500 billion a year more than it exports, the United States is “creating demand in Canada, the European Union, Mexico, and elsewhere, rather than in the United States.” The CEPR post concludes that the $500 billion trade deficit, “coupled with a standard multiplier of 1.5, translates into $750 billion of lost annual output (roughly 4.5 percent of GDP). This in turn would come to about 6 million jobs. That is close to enough to get us back to full employment.”

This assertion puts the blame where it doesn’t belong. As stated above, trade deficits rise at precisely those times of maximum employment in the United States, because consumers are able to buy more imported goods. Moreover, blaming trade deficits on trade agreements is contrary to the evidence in NAFTA at 20, which includes the fact that there is no correlation across countries in the size of their trade deficits and the extent of trade covered by preferential agreements.

Most important, blaming trade deficits overlooks the fundamental economic reality that fiscal and monetary policy is what ensures that the potential gains in output from efficient trade are translated into actual gains in output. Trade improves the underlying potential of a nation’s economy, but full employment or not depends upon movements in aggregate demand, which is one objective of macro policy. An economy may be affected by a trade deficit, but that deficit can be offset through full employment policies at home (see Gagnon 2014).8

Exports and imports of goods and services improve long-run economic performance through a number channels (drawn from Bradford, Grieco, and Hufbauer 2005). These include the following:

  • Comparative advantage. Ricardian analysis teaches that free trade allows countries with differing cost structures to specialize in exporting products that they are relatively efficient at producing and importing products that they make less efficiently. Exchange enables greater consumption of products without increasing the country’s resource endowments or technological capabilities.
  • Economies of scale and scope. Scale economies result from spreading fixed costs over a greater volume of production, and scope economies result from applying better techniques to a wider range of products. Through specialization, freer trade fosters both scale and scope.
  • Technological spillovers. International trade and investment accelerate the dissemination of new production and distribution techniques between countries, increasing productivity across the world.
  • Sifting and sorting. Import competition downsizes less efficient firms and encourages more efficient firms to grow within a narrowly defined industry. The important result is an increase in average industry productivity.
  • Monopoly power. Import competition also curbs monopoly power, to the benefit of household consumers and industrial purchasers.

All of these channels have helped maintain productivity growth and employment as a result of NAFTA. The CEPR blog exaggerates the costs of adjustment and misses the benefits of integration, which accrue to workers as well as employers.

See also Part I of this post.

Notes

1. Our past calculations, which explain the nature of supply side gains: Scott C. Bradford, Paul L. E. Grieco, and Gary Clyde Hufbauer. 2005. The Payoff to America from Global Integration, in The United States and the World Economy: Foreign Economic Policy for the Next Decade. Washington: Peterson Institute for International Economics; Gary Clyde Hufbauer, Jeffrey J. Schott, and Woan Foong Wong. 2010. Figuring Out the Doha Round. Washington: Peterson Institute for International Economics.

2. The US Bureau of Labor Statistics defines “displaced” or “dislocated” workers as “persons 20 years of age and older who lost or left jobs because their plant or company closed or moved, there was insufficient work for them to do, or their position or shift was abolished.” (See “Displaced Workers Summary,” 2012, www.bls.gov/news.release/disp.nr0.htm.)

3. We estimate that for developed countries like the United States and Canada, $1 billion in increased trade will increase GDP by $200 million (Hufbauer, Schott, and Wong, 2010, appendix A, table 2). We attribute a $635 billion increase in trade to NAFTA; therefore the total income gains would be roughly $127 billion (for more detail on this calculation see Hufbauer, Cimino, and Moran 2014). With 15,000 net jobs lost per year on account of imports from Mexico, we calculate about 300,000 net jobs would have been lost over the 20 year period of NAFTA. Thus, US GDP is expected to be some $450,000 higher per net job lost.

4. David Autor and Gordon Hanson. 2014. Labor Market Adjustment to International Trade. NBER Reporter 2014, no. 2. Cambridge, MA: National Bureau of Economic Research.

5. David H. Autor, David Dorn, Gordon H. Hanson, and Jae Song. 2013. Trade Adjustment: Worker Level Evidence. NBER Working Paper 19226. Cambridge, MA: National Bureau of Economic Research.

6. John McLaren and Shushanik Hakobyan. 2010. Looking for Local Labor Market Effects of NAFTA. NBER Working Paper 16535. Cambridge, MA: National Bureau of Economic Research.

7. Davide Gandolfi, Timothy Halliday, and Raymond Robertson. 2014. Globalization and Wage Convergence: Mexico and the United States. Working Paper 2014-4 (March). Economic Research Organization at the University of Hawaii; Raymond Robertson. 2006. Globalization and Mexican Labor Markets. Federal Reserve Bank of Dallas: 61–80.

8. Joseph E. Gagnon. 2014. Alternatives to Currency Manipulation: What Switzerland, Singapore and Hong Kong Can Do. Policy Brief 14-17. Washington: Peterson Institute for International Economics.