The Senate Finance Committee held a hearing today to discuss creating a NAFTA-like free trade agreement with Panama. As with every political issue, it has its opponents. But given the specifics concerning the U.S.'s current trade situation with Panama, this agreement seems like kind of a no-brainer.
The age-old protectionist argument against free-trade agreements was given by Thea Mei Lee, policy director of the AFL-CIO, at the hearing:
As long as we continue to run trade deficits on the order of five percent of GDP, the arguments that we need more trade liberalization to succeed in the global economy ring hollow - especially to our members, who have seen too many jobs go offshore while their wages and benefits stagnate.
Really? Because fellow panelists James Owens, Chairman and CEO, of Caterpillar and Mr. Sam Carney, President-Elect of the National Pork Producers Council who represent manufacturing and farming - the two industries supposedly hit hardest from free trade - both testified in favor of the agreement. They support the agreement because it will better facilitate the export of their products, produced by the hands of U.S. workers, to Panama.
Committee chairman Senator Max Baucus (D-Mont.) also supports the agreement. He did a good job of explaining why a free trade agreement with Panama in particular will benefit the U.S. and its workers:
The Panama agreement also provides new opportunities for American farmers, ranchers, and businesses. Panama already exports most of its goods to the United States duty-free under our trade preference programs. This trade agreement will level the playing field. It would provide the same duty-free treatment to our industrial and agriculture exports to Panama.
This agreement will, for example, immediately eliminate all duties on more than half of our agricultural exports to Panama. That includes high-quality American beef from states like Montana.This agreement will also immediately eliminate tariffs on 80 percent of U.S. industrial exports to Panama.
The agreement provides U.S. manufacturers and farmers the opportunity to be more competitive when exporting goods to Panama. In other words, it would create U.S. jobs, not destroy them. Meanwhile, Panama will gain very little from the agreement, other than more U.S. imports, as most of its exports to the U.S. are already duty free.
That's why the National Association for Manufacturers also supports the agreement. I spoke to Frank Vargo, one of their trade experts, who is very frustrated that some people are convinced that free trade agreements cause the loss of U.S. jobs. He was kind enough to provide the following graph, based on Bureau of Labor Statistics, which shows manufacturing jobs falling before and growing after NAFTA was put into place.
He also says that the U.S.'s massive trade deficit (which the AFL-CIO complained about above) is mostly due to trade with non-free trade agreement countries like China and Japan. Of that deficit, the portion resulting from free trade partners is a small part, according to Vargo.
One big question mark in the free trade discussion is where the Obama administration stands. While its position is clear on many issues, trade is not one of them. But if today's committee hearing creates some momentum to get a Panama free-trade agreement through Congress, we may find out where the president stands soon enough.
As long as we continue to run budget deficits over 10% of GDP, we'd better be sucking up to the rest of the world with as much enthusiasm as we can manage.
Daniel -
I can't tell if you're interested in telling balanced stories (this post and the credit card post certainly seem to be little more than recitation of talking points for industry), but you might want to interview more people than just the National Association of Manufacturers if you want to get the full story.
For example, NAFTA was signed into law in December 1993 and took effect January 1, 1994, so NAM's chart needs the line moved over a year. When you do that, it makes it clear that the temporary upswing was just due to the broader economic recovery of the nineties. I notice that the chart ends in 1998 before showing the decline in manufacturing employment that began with permanent normalized trade relations with China and continues to this day.
Also, I looked up the balance of trade statistics on the Census webpage, and our trade deficit with Mexico is bigger than our trade deficit with Japan.
Finally, I'm not clear on the distinction between countries with whom we have free trade agreements and countries that are members of the WTO and have Most Favored Nation or PNTR or whatever status with us.
I don't have an axe to grind, and I'm not even particularly sympathetic to the AFL-CIO position, but you might at least double-check the information you get from trade associations before you publish it on here.
BrendanKS: Frank Vargo of the NAM provided the following responses to your criticisms. I hope this is helpful:
Challenging data and alleged facts is a great thing. I wish more people would do that. For one thing, the more closely people look at data and question it, the stronger will be the support for the free trade agreement policy we espouse.
ISSUE 1:
“For example, NAFTA was signed into law in December 1993 and took effect January 1, 1994, so NAM's chart needs the line moved over a year. When you do that, it makes it clear that the temporary upswing was just due to the broader economic recovery of the nineties.”
Answer:
The line is positioned correctly. The year 1993 was the last year NAFTA was not in effect. NAFTA went into effect Jan. 1, 1994, as you correctly noted. Thus the data for 1994, which reflect the full year of 1994 not just January, are the first data for the period in which NAFTA was in effect.
Certainly, the economy was in an upswing at that time, and I do not attribute all of the increase in jobs to NAFTA. I can tell you, though, that if the data had been reversed, you would have seen trade detractors pointing to it as proof positive that NAFTA was a failure. A carefully done Congressional Budget Office study done some years ago at the request of Congress suggested that the NAFTA jobs effect was positive, but relatively small. I would not quarrel with that. The point to the illustration is that those who say NAFTA cost us jobs have nothing to hang their hats on from the data.
ISSUE 2:
“I notice that the chart ends in 1998 before showing the decline in manufacturing employment that began with permanent normalized trade relations with China and continues to this day.”
Answer:
First of all, we are talking about NAFTA and other free trade partners, countries with which we have negotiated free trade agreements. We have no free trade agreement with China. China is not a free trade partner and has nothing to do with our free trade policy. It is true that when China acceded to the WTO, it had to negotiate a market access agreement with us as well as with other WTO countries. Those access agreements are completely one-sided agreement in which the acceding country (China in this case) has to reduce its trade barriers as the price of joining the WTO. No U.S. tariffs or other barriers were reduced in exchange. The nature of WTO accessions is that the acceding country has to open its markets. In the case of China, I would certainly agree we have a huge trade problem. But the difficulty is that most people start with our trade difficulties with China and then impugn free trade agreements as a “failed trade policy,” which is garbage.
Second, the graph in question ends in 1998 because it is necessary to break the post-NAFTA period into three parts in order to understand what really happened. How often have you heard statements like: “Since NAFTA, we have lost 4 million jobs”? Well, that it technically a true statement, but it implies causality – which as you will see, is actually not there. There is as much causality in that statement as there is in saying, “since NAFTA 20 million American kids have come down with acne!”
It is certainly true that, starting in 2000, we lost about 4 million manufacturing jobs, but this could not have been due to NAFTA because the trade deficit with NAFTA hasn’t grown since then, other than in imported energy (NAFTA is by far our largest supplier of oil and gas). If it didn’t grow, how could NAFTA have been a major cause of our job loss? The answer is, it didn’t.
Further proof is seen in that three-quarters of our job loss occurred in 2000-2003, during which time outsourcing or import surges from NAFTA, commonly asserted by anti-trade individuals, didn’t occur. In fact, our manufactured goods imports from NAFTA fell during that time. Manufactured imports from NAFTA were smaller in 2003 than in 2000. How could a fall in imports have caused a U.S. job loss? Moreover, the truth is that by far the biggest job manufacturing job loss was from the domestic recession of 200-2003. U.S. exports also fell during that period, which was the second biggest factor in the job loss. Imports were a far away number three. (All this ignores the substantial productivity gains, which in themselves were among the largest factors in the job loss.)
It is also true that after the manufacturing recovery began in 2004, factory jobs didn’t come back. Here, the rising manufactured goods trade deficit was certainly a factor. But the point is – not with NAFTA or our other free trade partners – because the manufactured goods deficit with NAFTA and our other free trade partners didn’t grow. In fact, in 2008, we had a $21 billion trade SURPLUS with our free trade partners as a group. CAFTA was particularly notable – where our $1.5 billion deficit that was typical in the years before the CAFTA agreement went into effect has now turned into a $6 billion surplus.
Now, I am not saying the purpose of a free trade agreement is to generate a surplus – the purpose is to allow trade both ways to grow. But the facts show it is undeniable our free trade agreements are not responsible for our huge trade deficit – in fact, they are in surplus.
ISSUE 3:
“Also, I looked up the balance of trade statistics on the Census webpage, and our trade deficit with Mexico is bigger than our trade deficit with Japan.”
Answer:
That is true but irrelevant. Our trade deficit with Mexico so far this year, through March 2009, indeed shows a deficit of $9.668 billion, compared to a $9.114 billion deficit with Japan. There are two reasons for that: first, much of our deficit with Mexico is, and has been, our oil imports. Excluding energy trade, our deficit with Mexico through March was $5.540 billion, or about half our deficit with Japan.
Second, our deficit with Japan has plummeted as Japan’s exports to us have plunged. Total imports from Japan through March were off 42% from the same period of 2008 – paced by an astonishing 2/3 drop in auto exports to the United States.
ISSUE 4:
“Finally, I'm not clear on the distinction between countries with whom we have free trade agreements and countries that are members of the WTO and have Most Favored Nation or PNTR or whatever status with us.”
Answer:
Many are confused on this point, and if more people knew the distinction, we would have stronger support for a policy of more free trade agreements.
Virtually all nations of the world belong to the World Trade Organization (WTO)—about 150 countries at present, I think. By virtue of being in the WTO, a nation obtains Most Favored Nation (MFN) status, which means that imports from that nation get the same treatment when being imported by the United States (or imported by any other WTO member) as the “most-favored-nation.”
And what’s PNTR? “Permanent Normal Trade Relations” – a name devised by the Clinton Administration to describe MFN. Exactly the same thing as MFN. As the China debate was going on, some in Congress didn’t understand that MFN meant the same deal as everyone else gets. They thought it meant that China would be more favored than other nations. So the name was changed to indicate that it was just Normal Trade Relations.
Finally – free trade agreements are negotiated with individual countries or groups of countries (NAFTA, CAFTA). These agreements eliminate all tariffs on trade, provide stronger intellectual property protections than are in the WTO, provide market access for services, and do many other good things to eliminate barriers to trade.
We currently have free trade agreements with the following countries economies: NAFTA (Canada and Mexico); CAFTA (Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua); Australia, Bahrain, Chile, Israel, Jordan, Oman, Peru, and Singapore. Note carefully that we have no free trade agreement with China.
Please note that taking our free trade partners as a group, last year we had a combined manufactured goods trade balance with them that was in surplus by $21 billion. Yes, a trade SURPLUS. We need more free trade agreements – they are a way of cutting our huge deficit. The U.S. Government has a great web site on free trade agreements:
http://www.ustr.gov/Trade_Agreements/Section_Index.html
Frank Vargo
Vice President, International Economic Affairs
National Association of Manufacturers.