What a fight the White House has had over free trade. Though the US Congress finally passed legislation that grants Barack Obama “fast-track” authority to complete the Trans-Pacific Partnership (TPP)—a massive, 12-nation free-trade agreement stretching from Malaysia to New Zealand to Chile—that came after weeks of rancorous debate that witnessed some of the most influential Democrats part ways with their president.
Obama has sold the TPP as key to stimulating US growth, creating American jobs and solidifying Washington’s leadership in the global economy. But some politicians aren’t buying it. Free-trade agreements (FTAs), they contend, cost Americans jobs, adding to the trials facing the middle class. “We want a better deal for America’s workers,” insisted Democratic leader Nancy Pelosi in a June 12 address to the House of Representatives.
There is, however, something the TPP’s opponents don’t understand: the US jobs that have been lost to the developing world would have moved anyway, with or without free-trade pacts, so killing off the TPP won’t help American labor.
Critics of the TPP point to the damage done to the American workforce by outsourcing and offshoring, especially of factory production. The number of people employed in manufacturing in the US has plunged to 12.3 million from nearly 19.3 million at the beginning of 1980, according to the Bureau of Labor Statistics.
Sympathetic politicians and journalists highlight the suffering of communities hit hard when the local textile mill or electronics factory closed up—a blow from which many have never recovered—and they are quick to blame FTAs, such as the North American Free Trade Agreement, or NAFTA. The TPP, which its critics deride as “NAFTA on steroids,” will only make matters worse. Economist Jeffrey Sachs complained that the TPP “would hand another gift to the multinational companies…without providing real protections for workers.”
Assessing the good, bad and ugly of FTAs is not easy. In the case of NAFTA, finalized more than two decades ago, critics contend that it cost American manufacturing jobs and depressed wages. Advocates argue that NAFTA stimulated exports, improved competitiveness and supported well-paid jobs. The truth may be somewhere in the middle—the impact of NAFTA was neither the huge gain nor the terrible pain that had been predicted by both supporters and detractors.
There is no denying, though, that free trade helps some workers and hurts others, and perhaps FTAs like NAFTA facilitate the process of shifting manufacturing out of the US by further reducing barriers to exchange. But FTAs are not the primary cause of such job losses. We know that because the biggest beneficiary of the offshoring phenomenon, China, does not have an FTA with the US (nor is China a member of the TPP). That hasn’t stopped American companies from producing everything from sneakers to smartphones in Chinese factories for sale to American consumers. The increased trade with China has likely hit the US worker much harder than NAFTA. One study figures that imports from China cost the US at least two million jobs between 1999 and 2011.
The reason boils down to cost. Certain types of manufacturing, especially consumer goods like clothing, shoes, toys and electronics, has been transferred to countries like China because US wages are too high to allow the products made to be competitive. According to government data, the average earnings of a US manufacturing worker are nearly $830 a week. Compare that to China, where the salary of a factory worker is only $403 a month, according to a recent survey conducted by the Japan External Trade Organization (JETRO).
Wages are even lower in other emerging economies: $239 a month in India, $176 in Vietnam, and $100 in Bangladesh. Statistics from the Conference Board show similarly gargantuan differences in the hourly compensation costs of manufacturing workers in the U.S. and various emerging economies.
Trade barriers between countries are just not high enough to offset this tremendous difference in wage levels, even before FTAs are in place. The unfortunate reality, then, is that some American workers—especially those with limited skills—will find it nearly impossible to compete head-to-head with Chinese or Indians willing to accept a lot less money to perform similar tasks. Some may call this “stealing” American jobs, but the only crime a Chinese or Indian worker has committed is being poor.
Unfair? Many think so, and that’s driven a backlash against the entire concept of free trade. Why not hike trade barriers to defend an American worker unjustly besieged by a flood of cheap labor from China, India and elsewhere?
Though that may sound like a nice solution, it probably won’t work. Sure, a few factory jobs might be kept on US shores. But protectionism probably won’t lead to a boom in manufacturing jobs. Since the labor costs of making blue jeans or television sets in America are much higher than in economies like China’s, the stuff produced in these factories would be more expensive. Pinched US shoppers would buy less at their local Walmart.
That not only damages American lifestyles, but also depresses demand for consumer goods—and thus the number of workers required to make them. Factory owners, meanwhile, would likely turn to automation to replace workers to keep costs down. Even more, these high-cost US factories probably wouldn’t manufacture competitively priced goods for the global marketplace. So US companies would still need to outsource to foreign firms or build factories in China and other developing nations in order to sell to customers outside the US. The upshot is that reversing free trade may protect a handful of poorly paid factory jobs, but only at huge cost—to the welfare of the US household and the competitiveness of US business.
Many people reading this analysis will probably dismiss it as free-market ideological nonsense or pro-business claptrap. But the tremendous technological change we have witnessed over the past 40 years has made global production a fact of economic life. FTAs like the TPP are designed to maximize the possible benefits from economic trends already taking place. Though NAFTA, for instance, may have spelled bad news for some workers, there are estimates that the boost to US exports from the pact may have added a significant number of jobs to the American economy overall.
None of this argument, you say, will help those hurt by free trade. True enough. The real problem, as former labor secretary Robert Reich and others have pointed out, is how policymakers are responding to the economic change spawned by globalization. Leaving Americans to slug it out with low-paid Chinese workers is a death sentence. Helping them improve their skills to overcome that competition is the only way out. The US government, however, has not invested enough in education and job training programs to aid workers laid low by globalization to reset their careers and find better paying, more stable employment.
Upgrading workers’ skills would likely give them a fighting chance. Though the number of manufacturing jobs has declined in the U.S., those that remain often demand a higher level of skill. Despite a general perception that the US “doesn’t make anything,” the country is still a huge manufacturing powerhouse. In fact, the share of manufacturing in the overall economy has remained relatively stable over the past half century.
Furthermore, there is a clear link between education and employment in the US Data from the Bureau of Labor Statistics shows that those with the least education suffer the highest rate of unemployment.
Rejecting the TPP won’t save the American worker; better programs to upgrade American skills will.