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Part 3 in an occasional series
What are the benefits of America’s free trade agreement (FTAs)? With debate over the renewal of Trade Promotion Authority (TPA) now underway in Washington, the Chamber is publishing this series of blog posts examining the benefits of the trade agreements that TPA makes possible. Here is the full report on the benefits of America’s free trade agreements.
The relationship between employment and trade is a complex one. While support for trade liberalization among economists is overwhelming, most economists believe that the principal effect of freer trade on jobs—particularly in a period of low unemployment—is to gradually alter the mix of jobs available by creating more high-skill, high-wage jobs and fewer low-skill, low-wage jobs.
There is abundant evidence that jobs tied to trade tend to pay better than others. According to Commerce Department research, manufacturing jobs tied to exports pay wages that are typically 18% higher than those that aren’t, so the shift in the mix of U.S. jobs toward more export-oriented industries tends to represent a net gain for working Americans.
However, many economists agree that the additional demand created by trade agreements can create jobs if the economy is operating below full employment. With high unemployment today—and very high underemployment—the U.S. economy is unlikely to achieve full employment (generally defined as an unemployment rate of 5%) anytime soon.
To provide a serious economic analysis of the relationship between FTAs and job creation, the U.S. Chamber of Commerce commissioned a study in 2010 entitled Opening Markets, Creating Jobs: Estimated U.S. Employment Effects of Trade with FTA Partners. The study examined U.S. FTAs implemented with a total of 14 countries but set aside the most recent agreements for which data remain insufficient.
The study employed a computable general equilibrium economic model used by economists worldwide known as the Global Trade Analysis Project (GTAP). This model, developed in the early 1990s, is now maintained—and constantly enhanced—by a consortium of more than 30 U.S. and international organizations, including the U.S. International Trade Commission, the World Trade Organization, the World Bank, and half a dozen U.S. government agencies. The study was prepared by Dr. Joseph Francois, an individual member of the GTAP consortium, and Laura M. Baughman, president of The Trade Partnership.
The results of this comprehensive study are impressive: The increased trade brought about by these FTAs boosted U.S. output by more than $300 billion and in turn supported 5.4 million U.S. jobs. No other budget neutral initiative undertaken by the U.S. government has generated jobs on a scale comparable to these FTAs, with the exception of the multilateral trade liberalization begun in 1947.
A simple review of history is also helpful in rebutting critics who claim FTAs have led to the net loss of U.S. jobs. For instance, one study by a labor-backed group contends that 60.8% of 682,000 U.S. jobs claimed to have been “lost or displaced” due to trade with Mexico were in manufacturing industries. However, Bureau of Labor Statistics data refute this claim: U.S. manufacturers added more than 800,000 net jobs in the four years after NAFTA entered into force.
In addition, the U.S. unemployment rate was markedly lower in the years immediately after NAFTA came into force, according to data from the Bureau of Labor Statistics. In the period 1994-2007, the U.S. unemployment rate averaged 5.1%. This compares with an average rate of 7.1% during a period of similar length just before NAFTA entered into force (1982–1993). While the 2007–2009 recession caused U.S. unemployment to rise sharply, no one has suggested it had anything to do with NAFTA.
The principal rationale for FTAs is to unleash new flows of mutually beneficial trade between Americans and the citizens of these 20 countries—and do so in a way that is fundamentally fair. With regard to employment and in other ways, these FTAs have been a dramatic success for the United States—as they have been for our FTA partners.
Next time: Trade Agreements and Manufacturing