February 12, 2015
Wow, this stuff just keeps getting worse. Apparently anything goes when the big corporations want a trade deal. Otherwise serious people will just make stuff up, because hey, the big campaign contributors want a trade deal to make themselves richer. The latest effort in creative myth-making comes from Third Way, which tells us that post-NAFTA trade deals aren’t job losers like NAFTA.
As Jim Tankersley and Lydia DePillis point out, this implicitly tells us that all those pro-NAFTA types weren’t right in telling us that NAFTA would create jobs. (Hey, when did these folks stop telling us things about trade that were not true?)
But getting to the meat of the matter, the line from Third Way is that our trade negotiators have learned from past mistakes. Now, trade agreements include labor and environmental standards and other provisions that ensure they will be job gainers. They show this by comparing U.S. trade deficits in goods with the countries with whom we have signed trade pacts in this century, in the years since the pact with the decade prior to the pact. In their analysis they find that in 13 of the 17 countries the trade deficit was smaller in the years since the pact than in the decade before the pact.
Before anyone becomes convinced that we can now count on new trade deals to reduce our trade deficit, let’s pretend that we approached this like serious people. We would want to control for overall trends in the deficit and region-specific trends (e.g. compare the pattern in Chile after the signing of the pact with the pattern with other Latin American countries).
I don’t have time to do a full analysis (no one pays us for correcting this dreck), but a very quick look shows how the deck is stacked in favor of getting the Third Way result. Most of the trade deals were signed right as the United States was reaching its peak deficit (2006) or in the years just after.
To see how this stacks the deck, the table below shows average trade deficit (in constant dollars) in the decade prior to the year of the pact and for the years since: [The data is available from Bureau of Economic Analysis, Table 1.1.6; modify the table to to show additional years]
Prior decade Years since pact
2006 $530.5 billion $488.7 billion
2007 $587.3 billion $456.7 billion
2008 $616.5 billion $439.5 billion
2009 $618.3 billion $448.8 billion
2010 $616.4 billion $446.3 billion
2011 $612.2 billion $441.9 billion
2012 $599.0 billion $436.6 billion
2013 $576.8 billion $452.6 billion
In short, this methodology would lead you to find smaller trade deficits in the years following an agreement even if the U.S. trade balance with these countries worsened compared to other countries. This ain’t serious stuff, but like they say, when pushing trade deals, truth doesn’t matter.
Addendum:
I was in a rush to get this note out yesterday, but it is worth adding two more points. First, trade deals are not supposed to be about the trade deficit. The standard argument for trade is that it will increase efficiency by allowing countries to specialize in the goods and services in which they enjoy a comparative advantage. That says nothing about a deficit or surplus. (Think it through for a moment, can both parties to a deal increase their trade surplus?) If an economy is at full employment, then there is no necessary reason to want to reduce our trade deficit. It won’t add jobs, although there could be an issue about the mix of jobs.
This gets to the second point, if we want to reduce the trade deficit the three most important factors (in no particular order) are currency values, currency values, and currency values. A 10 percentage point drop in the value of the dollar against the currencies of our trading partners swamps the impact of anything else imaginable.
Education and infrastructure are great, but find me someone who has a way to quickly increase our productivity by 10 percent through these channels and I will show you someone who doesn’t know what they are talking about. Being able to increase productivity by 10 percentage points beyond baseline growth over a decade would be an enormous accomplishment, doing it in 2-3 years is simply not possible.
Long and short, we should be concerned about trade deficit because we have no politically acceptable way (i.e. large budget deficits are not acceptable) to replace the loss of demand. But trade agreements are not the way to lower deficit. We could act to get the value of the dollar down, but we have powerful corporate interests who are not interested in going this route.
Also, the BEA table number has been corrected.
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