Bill Owens: What Is Really Going On In The Trade World?

Sep 23, 2016

The presidential candidates have sent a spark into the free-trade wood pile.  Think softwood lumber—as “in the weeds” as it gets.

We have had consistent movement towards reduced trade barriers and reduced tariffs, commencing with the General Agreement on Tariffs and Trade (GATT) in 1948, continuing through trade barrier reductions under the World Trade Organization agreements in January 1, 1995.

Most recently, the Brexit vote, Donald Trump’s statements that he will renegotiate our trade deals, rip up NAFTA, and won’t agree to TTIP or TPP, combined with Mrs. Clinton’s somewhat ambivalent stand on new trade deals, the recent German protests coupled with the recent EU decision to require Ireland to collect taxes in excess of $14 billion from Apple, would cause any reasonable person to ask, “What will happen next?”

Virtually every day there are scores of articles attacking free trade—NAFTA, TPP, TTIP and other trade-related agreements.  Most of the articles are agenda-driven and lack any substantial analysis, such as Nelson Balido’s “Four Points about NAFTA that are getting lost in the election,” dated August 29, 2016, at Fox News Latino.[1]  One of the more thoughtful analyses I’ve read is “NAFTA’s Impact on the U.S. Economy: What Are the Facts?”[2] (Knowledge @Warton Sept. 6, 2016) which credibly addresses these complex issues.  The authors postulate that “most studies conclude that NAFTA has had only a modest positive impact on U.S. GDP.”  The authors also assert that about 15,000 “net” jobs are lost annually, but that there is a net GDP gain of $450,000 for each job lost. But who benefits from that $450,000? Not the wage earners.  The authors also enumerate many of the factors responsible for job loss in the US, including those addressed in this article, such as the growing use of robots, China’s cheap labor, China’s currency manipulation, etc.  They conclude that NAFTA has been good for the economy and US corporations, but they don’t demonstrate how individual wage earners were benefited, or whether those wage earners have secured equal or better paying jobs for those they lost.  There is also a regional variation: a portion of the area I represented in Congress and live in—northeastern New York, along the Canadian border—has been one that has benefited.

A sample of trade imbalances with the US produces some surprising and not so surprising results using 2015/2016 data: Canada, -$15.5 billion; China, -$367.1 billion; Germany, -$74.8 billion; Japan, -$68.9 billion; Republic of Korea, -$28.3 billion; the Russian Federation, -$9.2 billion; Saudi Arabia, -$2.3 billion; United Kingdom, -$1.8 billion; Euro area, -$155.5 billion.    It is well known that China regularly manipulates its currency for the benefit of its exports, which, at least in part, explains why China has such a positive balance of payments (shows as a negative for the US above).  We also have to factor in China’s enormous labor surplus, which allows China’s manufacturing sector to operate at a lower level of productivity, but still retain lower overall production costs. 

There has been much written about the fact that there is a concentration of wealth among one percent of the population, whether you are talking about the United States or Europe. Wages have been stagnant for the middle class, and the recoveries from the 2000 bubble and the 2008 crisis have largely resulted in the continuing concentration of wealth in the one percent.  This week the US government reported a growth in income of five percent, which surprised most analysts.  Was it a blip or further evidence of a real economic recovery?

There is very little doubt that trade is beneficial to the global economy, and to individual nations.  It also may well have a significant impact on foreign policy decisions. Russia’s actions in the Crimea resulted in the imposition of sanctions, and the economic impact of those sanctions on Russia has been dramatic, if not devastating.  This has to be, at least in part, due to the fact that Russia sells significant commodities into the world market. The absence of those sales due to sanctions creates pressure that could not otherwise be brought to bear (excuse the pun) against the Russians. 

The analysis required to determine whether or not a trade agreement is functioning for the majority of the citizens of a particular jurisdiction is a complicated and complex process.  One might argue that, even though the US lost jobs as the apparent result of NAFTA, there were other causes, such as increased technology (robotics) in US manufacturing, or the off-shoring of jobs to China because of currency manipulation and a surplus of inexpensive labor.  Was the movement of jobs to Mexico and China simply coincidental with the signing of NAFTA, or is NAFTA actually a cause of that movement?  My view is that NAFTA was probably a minor player in that process. 

Brexit, German protests and to an extent the rise of Donald Trump, reflect the frustration of the middle class.  The British may have other reasons as well for resenting the EU in terms of how it impacts other than trade-related issues. I would suggest the recent decision regarding Apple is likely only to stoke the anti-EU fervor even further.

Ultimately the US will continue to lose jobs to lower-wage countries. The question is, what is the plan to replace those jobs?  Please curb the urge to speak in hyperbole and provide a real plan.  I haven’t heard one as yet.

[1], August 29, 2016

[2], September 6, 2016.

Mr. Owens is a former member of Congress representing the New York 21st and a Senior Advisor to Dentons.

 The views expressed by commentators are solely those of the authors. They do not necessarily reflect the views of this station or its management.