July 22, 2014
In his Financial Times column Adam Posen gets out the old trade magic story, throwing away conventional economics to make bizarre arguments about trade’s wondrous impact on the U.S. economy. Among other things, he tells readers:
“Econometric studies have established that when US companies invest abroad, the net result is increased employment, stronger demand and more investment at home. This makes sense, since it should on average be the more competitive businesses that have the resources and opportunities to expand abroad, and investing should increase their productivity. This conclusion applies specifically to US companies that have invested in Mexico. Recent research has found that, on average, for every 100 jobs US manufacturers created in Mexican manufacturing, they added nearly 250 jobs at their larger US home operations, and increased their US research and development spending by 3 per cent.”
Hmmm, maybe we should subsidize the export of jobs. If we could export another 4 million jobs to Mexico, we could add 10 million here and close the employment gap. I doubt you will get many people, especially those familiar with economics, to agree that anything like this makes sense.
In fact econometric studies have shown that, consistent with economic theory, trade has been a source of downward pressure on the wages of the 70 percent of the workforce that lacks a college education. The basic story is that we put our manufacturing workers in direct competition with low paid workers in the developing world while protecting our doctors, lawyers, and other highly paid professionals. The predicted and actual result is lower pay for the vast majority of U.S. workers.
In additional to the negative impact of current trade patterns on wages, there is also the simple problem of the massive loss of demand due to the trade deficit. We currently import $500 billion a year more than we export. This is $500 billion that is creating demand in Canada, the European Union, Mexico, and elsewhere, rather than in the United States. Is there some story as to how domestic consumption or investment is somehow larger because of this trade deficit? If so, it would be worth a Nobel Prize if someone could lay it out with a straight face.
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. That would give workers enough bargaining power to secure real wages. So yes, trade is a big deal.
It is also worth noting that the “trade” deals currently on the table, the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Pact, have little to do with trade. Both are primarily about putting in place a pro-corporate regulatory structure that would almost certainly not pass in Congress through the normal process or in any other democratically elected parliament. It will also include increased protectionism in the form of stronger patent and copyright protections. These will have the effect of raising prices, slowing growth, and costing jobs.
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