A quietly released, 390-page magnum opus by the International Trade Commission (ITC) in June struggled to find any economic benefits to the 35 years of trade agreements the US signed. The report summarized dozens of academic research on the impacts of free trade agreements (FTA) were on the U.S. economy. From environmental impacts to labor and minority workers, the report relies on literature going back to the early 2000s and the overall takeaway is that very little growth or job creation resulted. Any economic benefits went to large multinationals. Numerous harms were reported among blue-collar workers and even the environment.
The distributional impacts – impacts on income inequality – also were mostly negative. Big FTAs were good for white-collar workers, bad for blue-collar workers. This was especially true for workers without a college education. This is significant because even discounting for part-time teenage employees in high school, most of America’s labor force only has a high school diploma, according to the Economic Policy Institute.
FTAs were also good for stateless corporations like General Motors, said the ITC, but bad for small to mid-sized businesses who used to supply those companies with tooling and other equipment and were then suddenly through into a competition with Mexico or other lower-paid, weaker regulated economies as if they were the 51st state.
All told, the national GDP rose by a laughably small 0.5% between 1985 and 2017, with real income rising a measly 0.6%. Still, the wage increases went almost entirely to white-collar labor, further exacerbating racial and income inequality.
Imports rose by a factor of more than 2 to 1 more than exports. This means domestic production was displaced while tens of thousands of workers were laid off in the automotive and other important manufacturing sectors.
Although some of the literature used in the report dates back to 2002, the studies were conducted at the peak of the neoliberal consensus on economic globalization. This was arguably the high-water mark for free trade evangelism and should be considered a good rearview look into what these deals achieved, did not achieve; how they can be improved upon; and who was impacted by them, for better or for worse.
From NAFTA to KORUS
Looking back on the creation of NAFTA up to 2016, when the new NAFTA was being discussed, the ITC report highlighted studies that showed the U.S. saw an increase in trade flow by 58.2%. Some more recent studies put it as high as 78.6% thanks to cheaper goods sourced from Mexico.
When NAFTA cut tariffs on imports, there was little to no difference in prices from Mexico. They stayed the same. It was the tariff cuts that were “immediately and fully realized by U.S. importers” who essentially got a price break on Mexico-sourced goods.
Some agricultural sectors were dealt a mighty blow.
Before the NAFTA deal, Mexico’s sugar exports to the U.S. were subject to a tariff-rate quota, which limited imports to about 4% of total U.S. sugar imports from fiscal year 2007. NAFTA created a side agreement for sugar that would change tariffs by 2008. Once those tariffs changed, Mexico was 70% of U.S. sugar imports by 2013.
This was the only case study highlighted by the ITC in its NAFTA portion of the June report. It is likely that other segments of the economy saw similar, radical declines.
The impacts of the U.S.-Korea Free Trade Agreement (KORUS), signed in 2007 and implemented in 2012, saw the trade deficit go from $16.6 billion to $25 billion last year.
According to the Global Trade Analysis Project, there were output losses in 34 of 57 U.S. sectors, including three advanced manufacturing sectors—auto parts, machinery, and electronic equipment—which each saw output reductions of more than $175 million.
From that same 2018 report: “The U.S. is projected to incur a loss of gross output (sales revenue) in several major manufacturing sectors that are heavily concentrated in geographic areas that have been promised a return of jobs by the Trump Administration.”
CPA has done research in this area and last year testified at the ITC on its own evaluation of KORUS which found that that one trade deal led to a $4 billion decline in U.S. GDP and the loss of 194,000 jobs.
A recent Commerce Department study designed to equip then-President Trump with the reason to impose tariffs on auto parts stated, “significant import penetration over the course of the past three decades has severely weakened the US automotive industry.” Trump never imposed those tariffs.
KORUS helped pull some supply out of China. Half of the U.S. imports that were diverted to Korea originally were supplied by China and 14% were originally supplied by Mexico. The primary categories of goods that were diverted to Korea were apparel and other textiles, as well as electronics and auto parts.
With NAFTA trade flows mostly going to Mexico, the U.S. saw declines in emissions of greenhouse gas pollutants because “imports supplanted domestic production of some goods”, according to a 2017 study.
The reason for the reduction in greenhouse gas pollutants like sulfur dioxide was because U.S. companies began to import “relatively dirty” intermediate goods instead of producing them domestically.
Overall, the author of the 2017 study estimates that NAFTA reduced U.S. emissions of particulate matter by about 1.7% per year and sulfur dioxide by about 3.1% per year, but on average has found that NAFTA simply allowed the U.S. to export its pollution to Mexico.
Global emissions increased overall in North America. The results indicate that the effect of offshoring energy-intensive, and potentially environmentally strenuous labor to emerging markets has no positive impact on the environment. Economies continue to grow, requiring fossil fuel and other chemical pollutants. Mexico’s environmental rules are not in line with U.S. regulations. Air quality in Mexico is considered “moderately unsafe”, while the U.S. and Canada are considered safe. U.S. CO2 levels have decreased. Mexico’s has increased.
U.S. trade agreements began to address environmental concerns in the 1990s. Environmental provisions in FTAs are meant to improve environmental conditions in U.S. trading partners and ensure U.S. producers that comply with stronger U.S. environmental regulations are not placed at a greater competitive disadvantage than they would be without those provisions. Manufacturing in the U.S. would not be more harmful than the environment, and in fact, may be much less harmful than it is to produce in Mexico, and surely less strenuous on the environment than manufacturing in India and China.
Effects on Individuals
The impacts of trade on different types of individuals, regions, and firms are well established in academic studies. But the literature that estimates the effects of specific trade agreements across different groups is still relatively new.
Researchers in 2016 did a study looking at the effects of NAFTA on different demographic subgroups and found that the free trade deal reduced wage growth from 1990 to 2000 for blue-collar workers in U.S. industries and localities that had previously been protected from Mexican imports. There was an 8% reduction in wage growth for blue-collar workers in NAFTA-vulnerable locations, including workers in non-tradeable service sectors who might appear to be immune to trade shocks. There was a 17% reduction for the subgroup of high school graduates and drop-outs if they were in vulnerable industries. Effects were statistically insignificant for college-educated workers.
Two years later, the same researchers estimated the wage effects of NAFTA also led to lower blue-collar wage growth for women, when compared to men, and even lower for married women, when compared to single women across most education levels.
Wage growth was 33 percentage points lower than similar blue-collar workers who were in industries that originally had no tariff protection.
A 2020 study out of the University of Kentucky found that “tariff liberalization led to larger manufacturing employment declines among women than men. The study also found that NAFTA led to a larger increase in unemployment among nonwhite workers than white workers. Among other effects, it found that the tariff reductions associated with NAFTA led to reductions in employment in the South and parts of Midwestern United States, and led to an increase in manufacturing unemployment and labor force nonparticipation among workers aged 35–65.”
This branch of literature on distributional impacts is still developing, and there are likely other instances where trade agreements have disparate effects on different socioeconomic groups, the ITC said.
CPA is currently conducting its own economic research on this subject and created an index that tracks Black and Hispanic wage growth over time. It is consistently below their peers due to their dependence on city service sector and government work, as opposed to manufacturing labor outside of the city center.
Big Get Bigger. Midsized and Small Vanish.
The largest firms have been the beneficiaries of free trade deals. The larger the OEM, the better.
From the report:
[Deeper free trade agreements] are also associated with higher sales for larger firms. The authors propose that this result reflects two market effects that affect firm profitability. The first is that liberalization leads to more competition as some costs of tariffs are removed—the new competition leads to lower prices and profits. And the second effect is that the more productive firms increase their sales, which increases demand for labor and puts upward pressure on wages in the countries in which multinationals operate. The two outcomes are more impactful on the profits of smaller, less productive firms and cause them to either contract or leave a market. Hence, larger firms reap a larger share of the benefits from liberalization.”
Impact on Labor
Except for Mexico, researchers found that signing an FTA with the United States appears to improve labor law enforcement through additional inspection resources and activities. In the case of Mexico, the North American Agreement on Labor Cooperation on Mexico’s labor laws enforcement found no evidence that labor provisions in the trade deal had an impact on Mexico’s enforcement of labor laws.
Note that this is prior to the USMCA.
In 2014, the Government Accountability Office looked at four U.S. trade agreements to see which have taken steps to implement the labor provisions and other initiatives to strengthen labor rights that do not put the U.S. at a disadvantage.
It found “persistent labor rights challenges, such as limited enforcement capacity, subcontracting to avoid direct employment, and violence against union leaders in Colombia and Guatemala.” Guatemala is a part of the U.S. textiles and apparel supply chain.
Citing a 2004 study, the ITC said that labor provisions are good leverage during the course of negotiations as Washington can then influence partner countries to improve working conditions and domestic labor laws before signing an agreement.
Right now, General Motors is in the middle of a fight with unions at one of its truck assembly lines. While this may very well be remedied sooner rather than later, labor provisions were an integral part of the new NAFTA and yet labor is still dealing with these issues. If this issue is not resolved, GM is saying it may be forced to pay a 25% tariff on trucks leaving that particular assembly line. Mexico-made pickups are allowed into the U.S. duty-free, unlike Korean-made pickup trucks.
Worth noting, for years the U.S. truck industry was protected by 25% tariffs. They vanished under NAFTA. This is a further headwind for American automobile manufacturers. Dodge Ram moved a lot of its production out of Michigan and into Mexico because of the tariff cut.
“The distributional effects of trade agreements are not fully accounted for in most models,” said ITC Chairman Jason Kearns. “I am encouraged that we are beginning to tackle the unequal economic outcomes of trade agreements across gender and other dimensions in this study.”
In his 2018 report, “What do Trade Agreements Really Do?” economist Dani Rodrik said, “It’s as if we give $51 to Adam, only to leave David $50 poorer.” Rodrik thinks the ratio of the redistribution of manufacturing supply chains to efficiency gains caused by trade policy and regulation could be as high as $50 of redistribution for every $1 of aggregate gain. Most of this is because, beyond regulations, which can be seen as protectionist measures, U.S. tariffs are already so low thanks to its default tariff rate that a free trade deal mostly serves multinational OEMs looking for cheaper supply chains to maximize profits.
The ITC report shows that this has come at the expense of blue-collar workers, manufacturers, some women, Blacks, Hispanics and those with no- or lackluster college degrees. It has also done nothing to protect the environment as offshoring manufacturing has led to the creation of so-called “global pollution chains” as opposed to the mainstream view of “global value chains”.
International agreements produce economic consequences that are far more ambiguous than the notion that lowering tariffs is good for all because consumers will pay less. For the most part, the consumer that is paying less is a multinational, be it Walmart or Ford. If the lower price point gets transferred to consumers at the expense of high quality jobs, and a strong blue collar labor market, then the positive (consumer price) is trumped by the negative (job loss, economic dead zones).
“Economists’ default perceptions about what trade agreements actually do (and do not do) has likely slowed the development of alternative tools,” says Kearns in the closing argument of the ITC report. “The broader profession has been slow to realize, for example, that not all labor or environmental provisions are created equal. The absence of strong and enforceable provisions in these areas has a significant impact on trade and can impact the U.S. economy in other ways. Under NAFTA, the ever-present threat of offshoring production to Mexico in the absence of enforceable labor provisions combined with tariff reductions on Mexican imports likely weakened U.S. manufacturing workers’ ability to bargain for higher wages. As labor and environmental provisions themselves evolve, it will be increasingly untenable to ignore what these provisions actually obligate FTA members to do, in addition to how well these provisions are enforced. Finally, too often, economic analysis of provisions in our trade agreements focuses too narrowly on the quantifiable expansion in trade, as if trade expansion is an end in itself, rather than a means to achieve the broader objectives articulated in our trade agreements, such as higher standards of living. While the impacts of trade agreements on things like living standards are harder to measure, doing so should be our goal.”