The Real Impact of Trade Agreements

How Trade Affects Jobs, Manufacturing, and Economic Competitiveness

Free Trade Agreements in Perspective

Recent political debate and the anxiety it has fueled have created an unfortunate—and inaccurate—impression that trade agreements are destroying manufacturing and killing US jobs. A look at the facts reveals a more complex story and points to a different conclusion.

Since the 1980s, bilateral and regional free trade agreements (FTAs) have been used by nations around the world to reduce barriers, open markets, and create new and higher standards in areas such as investment, intellectual property, and now digital commerce. Behind the US approach to trade agreements has been a recognition that as global markets grow in importance and emerging markets expand, trade and investment opportunities grow as well.

The collapse of communism, the entry of China and India into the world economy, and accelerating growth in Asia and other regions have brought billions of new consumers into the global market economy. That includes hundreds of millions of consumers who have entered the middle class with new purchasing power. By reducing trade and investment barriers, leaders across multiple administrations have believed that markets overseas will expand, due to the lowering of barriers but also due to growing trade volumes. US companies cannot afford to ignore global investment and trade opportunities, as 95 percent of the world’s population and 75 percent of global purchasing power now reside outside the United States.

Assessments have shown that free trade agreements have clear benefits for the United States. US International Trade Commission economic analysis models have found that in addition to positively affecting real GDP, employment, and wages, FTAs currently in force increased trade surpluses or reduced trade deficits with partner countries by 59.2 percent ($87.5 billion) in 2015 and produced tariff savings of up to $13.4 billion in 2014, benefiting consumers—particularly those with low or middle incomes—through lower costs.

Of the 267 bilateral and regional free trade agreements that have been negotiated around the world, only 14 involve the United States. The provisions included in the proposed Trans-Pacific Partnership (TPP), an agreement between the United States and 11 trading partners, have been positioned as the centerpiece of US strategy both to open markets and cement US economic leadership in the Asia-Pacific region.

Effects on Manufacturing

Taken together, nearly half of US-manufactured exports are purchased by current free trade agreement partners, even though they account for only 6 percent of the world’s consumers and less than 10 percent of the world’s economy. In 2015, the US enjoyed a $6.4 billion goods and services surplus with its 20 free trade partners, compared with a $489.8 billion deficit with non-FTA countries. Currently, the United States’ largest trade deficit is with China, which has no trade agreement with the US and is not a party to the Trans-Pacific Partnership.

Contrary to critics’ claims, trade agreements are not the fundamental cause of erosion in the US manufacturing sector or of the disappearance of manufacturing jobs. Manufacturing output is growing, and US manufacturing companies produced a record $2.2 trillion in value in 2015. Manufacturing production, however, is different from employment, which has been declining for decades. But only a small part (approximately 13 percent) of that decline is due to trade. The real reason we have fewer manufacturing jobs is technology, which makes production more efficient and requires fewer workers. An instructive parallel is agriculture, where US production since 2010 is up 13 percent, while jobs in agriculture fell 15 percent, both trends due to technology. These are inexorable processes that will continue.

Viewed on their own terms, free trade agreements have had a positive impact on manufacturing. In 2015, US manufacturers sold $12.7 billion more in manufactured goods to FTA partners than US companies bought from them. At the same time, we had a manufacturing trade deficit of $639.6 billion with countries where no FTAs are in place.

Asia-Pacific Trade

The United States could expect similar benefits from the Trans-Pacific Partnership or a successor agreement. The US International Trade Commission has estimated that with TPP, exports to TPP partners would grow faster than exports to other countries. Imports from TPP partners would also grow, but not as fast as exports. Regarding employment, the Peterson Institute for International Economics has estimated that the agreement would raise real US wages but would not significantly change overall employment levels.

“Job churn,” the movement of jobs between firms, sectors, and industries, was projected by the Peterson Institute model to be 53,700 annually, including both jobs that would be eliminated in less productive import-competing firms and jobs that would be added in firms that expand. The resulting jobs, in manufacturing and services, would be better paying than jobs in companies that do not compete globally. The great majority of these jobs would be for ordinary, middle-class Americans who produce and move the goods and generate the services.

While manufacturing is a major focus, services are also important: tradable business services (including legal services, consulting, financial services, accounting, architecture, engineering, healthcare, and education) account for 25 percent of US employment—double the share of manufacturing. The service economy is growing fast, and the Peterson Institute projects that 90 percent of US workers will be employed in the service sector by 2030. In contrast to trade in goods, the US enjoys a sizable trade surplus in services.

Expanded Asia-Pacific trade governed by the provisions included in TPP could be expected to benefit both large and small companies across a broad range of sectors. Even where gains may be small relative to the scale of the economy, they would be significant for key sectors, producing higher employment and increased wages. In the Bay Area and California, expanded trade with Asia would support growth and employment in companies ranging from manufacturing and technology to services and agriculture. Under the provisions in TPP, technology companies and their workers would benefit through the opening of service markets, the strengthening of intellectual property protection, the protection of the cross-border movement of data, and the protection of source code from expropriation by foreign governments. Agriculture would benefit, as once-restricted markets such as Japan’s would open to our exports. In other areas of concern to Californians, TPP provisions include enforceable labor and environmental protections, setting the highest standards of any international trade agreement to date.

Looking Forward

Even if it is not passed in its current form, the advances that TPP embodies are good for the economy, and American workers. There is no doubt that they would also contribute to economic churn, as less competitive jobs decline and more competitive ones grow. Many more Americans stand to gain in this process than lose, but for those who lose, the pain is real. We need to overhaul Trade Adjustment Assistance (TAA), the federal program that provides transitional help toward new employment for dislocated workers. Beyond that, our country needs a comprehensive, bipartisan strategy for how to transition workers who are affected not just by trade, but by global competition and the dramatic changes that technology is producing across the economy. This should be a priority for the next Congress.

Anxiety that trade agreements are responsible for these dislocations is misplaced. The evidence is compelling that California and the nation, through competitive companies and workers, would benefit in important ways from more open trade, particularly with Asia. Addressing the impacts of global competition and of the technology-driven changes that are transforming industries and jobs on a massive scale—changes that are not caused by trade agreements—is an important and complex task that should be on the national agenda.

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