October 28, 2016
Alan Reynolds had a column insisting that the U.S. need not fear trade agreements impact on the United States labor market. The context is an argument that the presidential candidates are wrong to oppose the Trans-Pacific Partnership. The piece argues that trade agreements have not led to increased trade deficits and that imports from China really have not had much impact on the manufacturing sector in the U.S. His argument doesn’t quite fit the data.
The piece lays out the basic argument in its subhead:
“If trade agreements are so lousy, why are our largest deficits with countries that lack a U.S. trade deal?”
It then notes that the United States largest trade deficits are with China and Japan and that we have trade deals with neither. This might be a good rhetorical point at the Wall Street Journal, but it has nothing to do with the issue at hand. The question is the direction of change following an agreement. While the data on this point is not entirely conclusive, there is evidence that deficits have generally increased with countries following the implementation of trade deals.
To take some prominent examples, the U.S. went from a modest trade surplus with Mexico in 1993, before NAFTA went into effect, to a deficit of more than $60 billion in 2015. It went from a trade deficit of $13.2 billion with South Korea in 2011, the year before a trade deal went into effect, to a deficit of $28.3 billion in 2015.
It is also important to note that the composition of trade is likely to shift against U.S. manufacturing as a result of trade deals. These deals are quite explicitly designed to increase payments from other countries for licensing fees and royalties to U.S. pharmaceutical, entertainment, and software companies. The more these countries are forced to pay Pfizer for drugs and Disney for Mickey Mouse, the less money they have to spend on U.S. manufactured goods. In other words, the gains for these companies from trade deals imply larger trade deficits in other areas like manufactured goods.
The piece also trivializes the importance of China’s entry into the World Trade Organization (WTO) arguing that China actually reduced its tariffs far more than the United States. It also argued that China’s imports exploded, not its exports, following its entry to the WTO. Both of these arguments are highly misleading.
The importance of China’s entry to the WTO is that it ended uncertainty about the tariff status of its exports to the United States. Prior to its entry, China’s most favored nation status had to be re-approved on a regular basis. Entry to the WTO made this status permanent. Recent research shows that this had a large effect on investment and trade patterns.
The issue of the percentage change in imports and exports is misleading since China exports more than it imports. The relevant question is what happened to its balance of trade. This story in unambiguous. China went from a relatively modest trade surplus of 1.7 percent of GDP in 2000 to just less than 10.0 percent in 2007. This impact was magnified by the fact that its economy more than doubled in size over this seven year period.
Most of the rise in this deficit was with the United States. It was a major factor in the U.S. trade deficit which peaked at just under 6.0 percent of GDP in 2005 and 2006 (@ $1.1 trillion in today’s economy).
In short, Reynolds does not have much of a case in arguing that trade agreements have not affected the U.S. trade deficit. The rise in this deficit has been the major factor in the “secular stagnation” that has prevented the U.S. economy from returning to full employment following the 2008-2009 recession, and required a housing bubble to get us close to full employment in the preceding business cycle.
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