Writings and observations

NAFTA and the job markets


Two of Donald Trump’s bumper sticker claims on domestic policy read “Dump NAFTA,” and “Bring Back the Jobs.” To the roar of thunderous applause, Trump promises to bring back all the jobs lost to foreign sources. He will do this, he says, by doing away with NAFTA and imposing a punitive tariff on the import of anything in a jeopardized industry.

If we peel away the bumper sticker labels, there is no substance to any of these claims, although all are greeted with wild applause and boisterous enthusiasm every time Trump trots them out at a rally.

Unfortunately, to get to the bottom of Trump’s bull bleep requires us to travel out into the weeds. But hang on, it’s not as bad as it looks.

Let’s take a deeper look at NAFTA first.

The North American Free Trade Agreement was controversial when it first appeared during the term of Reagan, when it was substantially worked out during the term of Bush I, and when it was finally adopted in 1993 during the Clinton administration. It is controversial today. Yet, according to the University of Pennsylvania’s Wharton School of Business in a study published in 2014, and to the Council of Foreign Relations in a more recent study released in 2016, most economists believe that, on balance, the United States economy has benefited from the agreement. This means we are better off today with NAFTA than we would have been without it, notwithstanding the loss of some jobs.

Canada and Mexico are currently our first and third largest trading partners (China is second). United States’ trade with our two North American partners increased from $293 billion in 1993 to over $1.1 trillion in 2016. This is made up of both imports and exports – both of which soared under NAFTA. Our partners largely benefits as much and as broadly as we do from the influence of NAFTA. Tinkering with any part of NAFTA from our side of the line would immediately affect our partners’ as well, which all economists tell us would then ripple around the world. Economists are uniform in the opinion that dumping NAFTA, or changing materially its no-tariffs provisions, would bring about catastrophic turmoil to the international markets, probably leading to a worldwide recession, and maybe to a world-wide depression.

The greatest opposition to NAFTA, and to free trade generally, comes from the argument that unrestrained foreign competition hurts U.S. employment. In the long run and in general, this has not been borne out by actual experience. It is true that pockets of production jobs have been lost to foreign resources, some to Mexico and some to other countries, notably in the Orient. These losses generally have been in low technology, labor intensive production jobs, including automobile assembly, steel production and the garment industry. However, despite, these job losses, U.S. production in general manufacturing across the board continues to increase. For example, in the 13 years prior to the adoption of NAFTA domestic manufacturing output increased 42%; in the first 13 year period after NAFTA, with many companies taking advantage of outsourcing manufacturing to the maquiladoras, domestic manufacturing output increased by 60%. The domestic economy fell into upheaval in 2008, and the specific impact of NAFTA became impossible to extract, but overall domestic manufacturing output today has returned to record levels. There is a significant difference in that the greatest manufacturing growth today tends towards high technology, computer controlled processes, and away from the labor intensive processes that are being outsourced to other countries, but nevertheless, production has never been stronger.

Not all the jobs lost to outsourcing overseas were due to NAFTA or the absence of tariffs. In almost all areas of labor intensive production, pressure was already on domestic producers to find ways to remain competitive. Improvements in basic technology and the increased availability of reliable electric power in foreign lands made quality manufacturing to U.S. standards feasible. Steel production, for example, was already on its way out when NAFTA was first adopted. The auto industry was fighting to stay competitive with Japanese and European competition. The garment industry was changing dramatically to feed the huge demands of consumers for lower cost wearing apparel. Further, most of the major manufacturers in these fields were attempting to compete in the world markets, with exports in many cases as strong as domestic consumption. While elimination of tariffs may have sped up the implementation of cost savings through outsourcing, most of these jobs were destined to be outsourced eventually anyway.

While the job loss in specific industries and specific locations was and is dramatic, from an overall picture, employment overall and in general increased after the adoption of NAFTA. Again according to figures comparing the first 13 years after NAFTA, employment overall increased from 110.8 million in 1993 to 137.6 million 2007, an increase of 24%. U.S. unemployment averaged 7.1% unemployment during the 13 year period prior to NAFTA, as compared to 5.1% for the first 13 years after. From 1979 to 1992 the annual, real hourly compensation rose at an annual rate of 0.7% per annum for a total increase of 11% over the entire period; after the approval of NAFTA, between 1993 and 2007, real wages rose 1.5% per annum, for a total of 23.6% overall.

After 2007, the world-wide economic upheaval makes isolation of economic factors due to NAFTA extremely difficult to extract. However, with all the other economic variables in play, what is apparent is that with technology improvements and cost differentials, these labor intensive manufacturing processes that have been lost through outsourcing are not going to return. Penalty tariffs will serve only to curb demand for foreign goods, but would not stimulate domestic production if such could only be accomplished by production at the higher labor costs prevalent in the U.S., with the good so produced priced accordingly. It might protect the inelastic domestic markets, assuming no alternatives, but if those producers are constrained to production at U.S. costs, they would then be unable to compete in world markets. The intermediate term impact would be lessening of both imports and exports, with, the eventual result being a decline in all markets. There would be no winner under such scenario, only losers first among the consumers, and then to the domestic producers cut out of the world markets, then in markets themselves, and eventually the economy as a whole.

The point here is that these jobs are not coming back. Nothing Trump has said, and no program he can point to has any hope of causing jobs in the heavy manufacturing or labor intensive processes that have been outsourced to lower cost resources overseas and in Mexico to be returned to the U.S. None. Zero. The only impact of Trump’s blockading tariffs will be an immediate steep price increase to the consumer. This will strangle the import markets, on most new cars and trucks, ready-made clothing, electronic gear of all kinds, etc. which in turn will impact the export trade, which will bring down foreign trade generally. If the tariffs are pervasive enough, they will likely bring down the entire economy.

What it comes down to is a question of balance. Most economists believe that the overall gains that increased trade brings to the U.S. economy far outweigh the detraction of some jobs lost. A 2014 study released by the CFR found that about 15,000 net jobs per year are lost to outsourcing for competitive reasons, but that for each job lost, the economy gains roughly $450,000 in the form of higher productivity and lower consumer prices. By any measure, the balance is significantly in favor of free trade.

This is not to say that the loss of jobs in the areas directly affected was and is not a dramatic and disastrous consequence for those directly involved, and that there is nothing to be done. It is to argue that the solution is not to attempt to wind the clock backwards, to promise a return to punitive tariffs, and to promise to re-establish jobs since lost. Trumps’ promises in this area are baseless, fundamentally flawed and destined to fail.

The solution has to be in the area of reintegrating the pockets of blight into the general economy by means of education, retraining, and perhaps relocation of the labor pool, and by the introduction of new economic resources into the areas of blight to replace the facilities that have been outsourced. Government involvement lies in retraining and reeducation of the labor pool, in local incentive programs to encourage new economic development, and perhaps in stimulus projects like rebuilding infrastructure to ignite employment. And certainly, of course, by recasting the tax code to eliminate any premiums or tax benefits that may operate to reward domestic companies for shifting jobs elsewhere.

What it needs most, however, is for Trump to stick a sock in it.

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