Lost Jobs and Lower Wages

Fast Track to Lost Jobs and Lower Wages

By Robert Scott

This week, Senator Orrin Hatch (R-UT) will reportedly introduce “fast track” (trade promotion authority) legislation in the Senate, to help President Obama complete the proposed Trans-Pacific Partnership (TPP), a trade and investment deal with 11 other countries in Asia and the Americas. “Fast Track” authority would allow the president to submit trade agreements to Congress without giving members of Congress the opportunity to amend the deal. Experience has shown that these trade and investment deals typically result in job losses and downward pressure on the wages of most American workers. The last thing America needs is renewal of fast track and more trade and investment deals rushed through Congress.

The administration has claimed that the TPP will create jobs, but it will not. There are other policies that have attracted bipartisan support, including ending currency manipulation and rebuilding infrastructure that could each create millions of US jobs. President Obama has limited political capital to expend with the Republican-controlled Congress and he must choose his policies wisely.

Trade and Jobs?

For more than 20 years, both Democratic and Republican administrations have claimed that free trade agreements like the US – Korea Free Trade Agreement (KORUS) and the North American Free Trade Agreement (NAFTA) would lead to growing US exports and stimulate creation of goods jobs in the United States. Bill Clinton claimed that NAFTA would create 200,000 jobs in its first two years and a million jobs in five years. President Obama claimed that KORUS would “support 70,000 American jobs” because the agreement would “increase exports of American goods by $10 billion to $11 billion.”

Claims that trade and investment deals would support domestic job creation have proven to be empty promises. Expanding exports alone is not enough to ensure that trade adds jobs to the economy. Increases in US exports tend to create jobs in the United States, but increases in imports lead to job loss — by destroying existing jobs and preventing new job creation — as imports displace goods that otherwise would have been made in the United States by American workers. Thus, it is changes in trade balances — the net of exports and imports — that determine the number of jobs created or displaced by trade and investment deals like NAFTA and KORUS.

More than five million US manufacturing jobs were lost between 1997 and 2014, and most of those job losses were due to growing trade deficits with countries that have negotiated trade and investment deals with the United States.

Between 1993 (before NAFTA took effect) and 2013, the US trade deficit with Mexico and Canada increased from $17.0 billion to $177.2 billion, displacing more than 850,000 US jobs. Growing trade deficits and job displacement, especially between the United States and Mexico, were the result of a surge in outsourcing of production by US and other foreign investors. The rise in outsourcing was fueled, in turn, by a surge in foreign direct investment (FDI) into Mexico, which increased by more than 150 percent in the post-NAFTA period.

KORUS took effect in March 2012. Between 2011 and 2014, US exports to Korea increased by about $1 billion, but imports have increased by $13 billion, so the trade deficit has increased by nearly $12 billion. This growing trade deficit with Korea has cost more than 75,000 US jobs.

Then there is China, until now a part of the biggest trade and investment deal of all. In 2000, President Bill Clinton claimed that the agreement then being negotiated to allow China into the World Trade Organization (WTO) would create “a win-win result for both countries.” Exports to China “now support hundreds of thousands of American jobs,” and these figures “can grow substantially with the new access to the Chinese market the WTO agreement creates,” he said.

Between 2001, when China came into the WTO, and 2013 the US trade deficit with China increased $240 billion. These growing trade deficits eliminated 3.2 million US jobs. China became the third largest recipient of FDI in the world, which fueled the growth of thousands of new manufacturing plants that generated exports to the United States and other markets.

Manufacturers were willing to invest in Mexico and China because of special protections offered in these deals for investors, including greatly expanded intellectual property rights and special, extra-judicial dispute settlement mechanisms to protect corporate investments (so-called investor-state dispute settlement or ISDS). The TPP threatens to roll back US regulations in areas such as food safety, banking, and finance regulations. These changes will be enforced through private actions under the ISDS, as well as changes in government rules.

The United States already has a large and growing trade deficit with the 11 other countries in the proposed TPP, which reached $265.1 billion in 2014. In contrast, the United States had a small trade surplus with Mexico in 1993, before NAFTA took effect. In other words, outsourcing to the TPP countries is a potentially much greater threat than it was under NAFTA with Mexico.

TPP Will Increase Wage and Income Inequality

Globalization has already increased wage and income inequality. Me and my colleagues’ research has identified two channels through which trade and globalization have driven down the wages of working Americans. First, the growth of trade deficits with China (along with Mexico and other low wage countries) has forced workers out of good-paying jobs with excellent benefits into lower-paying jobs in non-traded (e.g., service) industries. I have estimated that this resulted in direct wage losses of $37 billion for the 2.7 million workers displaced by China trade in 2011 alone.

And second, Economic Policy Institute Research and Policy Director Josh Bivens has used standard trade models to estimate that expanded trade has changed the composition of jobs in ways that reduced the annual wages of a full-time American worker without a four-year college degree who earns the median wage by $1,800 per year. Given that there are roughly 100 million non-college-educated workers in the US economy, the scale of wage losses suffered by this group likely translates into close to a full 1 percent of GDP — roughly $180 billion.

While most workers would be hurt if trade with low wage countries were increased by the TPP, most of the benefits would go to those at the top of the income distribution. As Dean Baker notes, the regulatory structures being developed in the agreement would “largely benefit US corporations, since they would get more money for the patents and copyrights,” and would gain new tools to use against foreign governments who threaten those profits.

The corporations that stand to benefit have few, if any, organic ties to the US economy — most have outsourced a large share of production jobs to other countries. The primary beneficiaries will be people from the United States who happen to own stock in these companies. And the greatest benefits will flow to those who own the most stocks, primarily those in the top 1, 5 and 10 percent of the income distribution. So, the TPP and similar agreements will only serve to worsen US income inequality.

What’s more, there are costs to providing greater protections to intellectual property. As Paul Krugman recently noted, protecting intellectual property creates a monopoly for the patent or copyright holder, which makes the world poorer. And Dean Baker points out it diverts resources to the monopolists, reducing demand for everything else made by producers of other products. Questions about the impact of the TPP on income distribution and the distortions imposed by tightening intellectual property rights have motivated Nobel Prize-winning economists such as Krugman and Joseph E. Stiglitz to challenge the justification for the TPP.

There Are Choices

The administration has chosen to conduct a high-stakes campaign for fast track authority to conclude negotiation of the TPP and a similar agreement with the European Union (the Transatlantic Trade and Investment Partnership). While fast track requires congressional approval of negotiating objectives, it creates a process for consideration of final agreements that denies members of Congress the right to revise or amend any part of those agreements.

Alternatively, the president could forget about fast track and instead work with Congress to boost US jobs by ending currency manipulation by China and more than 20 other countries, mostly in Asia. The president and federal agencies already possess the tools needed to end currency manipulation. The Treasury and Federal Reserve Board of Governors have the authority needed to offset purchases of foreign assets by foreign governments by engaging in countervailing currency intervention. By taking these steps, the US government could make efforts by foreign governments to manipulate their currencies costly and/or ineffective.

Eliminating currency manipulation could reduce the US trade deficit by $200 to $500 billion, adding 2.0 to 4.9 percent to US GDP and creating 2.3 to 5.8 million US jobs, with about 40 percent (900,000 to 2.3 million) of those jobs gained in manufacturing.

Another policy option that could create millions of jobs is to invest in rebuilding America’s crumbling infrastructure. The American Society of Civil Engineers has estimated that we need to invest $3.6 trillion by 2020 to rebuild our aging roads, ports, airports, waste- and drinking- water and other critically need public facilities.

The United States could create up to three million net new jobs and boost GDP by $400 billion through debt-financed investments of an additional $250 billion per year in infrastructure for the next seven years. Many of the new jobs supported would be in construction and manufacturing, which would provide critical inputs for new infrastructure facilities.

Creating millions of jobs in the United States, and especially, good jobs in manufacturing and construction, would raise US wages and begin to reverse the growing US income inequality that has held back the economy for the past 30 years.

The president can continue the fight for fast-track and the TPP, raising corporate profits while putting good manufacturing jobs and wages at risk. Or he can take action to create jobs and reduce inequality. He can’t do both.