The relationship between employment and trade is a complex one. Anti-trade activists have long blamed trade for job losses in ways widely criticized by mainstream economists, whose support for trade liberalization continues to be overwhelming.
Today, these activists warn that the Trans-Pacific Partnership (TPP), a trade agreement now under negotiation among the United States and 11 other Asia-Pacific nations, would destroy American jobs.
What are the facts?
Most economists believe the principal effect of freer trade on jobs — particularly in a period of low unemployment — is to alter gradually the mix of jobs available by creating more high-skill, high-wage jobs and fewer low-skill, low-wage jobs.
Indeed, there is abundant evidence that jobs tied to trade tend to pay better than those that aren’t. According to Commerce Department research, manufacturing jobs tied to exports pay wages that average 18% higher than those that are not.
The same is generally true for services. It is increasingly common for business services in such fields as architecture, engineering, project management, software, and insurance to be traded internationally. According to research by J. Bradford Jensen of the Peterson Institute for International Economics, these services sectors pay wages that average 20% higher than the U.S. average.
So, for both manufacturing and services, a shift in the mix of U.S. jobs toward more export-oriented industries represents a net gain in Americans’ take-home pay.
Further, the substantial increase in foreign investment in the United States that has followed new trade agreements has also fostered the creation of high-skill, high-wage jobs. According to research by the Organization for International Investment, U.S. affiliates of foreign-headquartered companies pay wages that average one-third higher than the U.S. average.
What specifically would the TPP mean for U.S. employment? The most widely cited study of its potential economic impact, entitled The Trans-Pacific Partnership and Asia-Pacific Integration: A Quantitative Assessment, was prepared by Peter A. Petri, Michael G. Plummer, and Fan Zhai of the Peterson Institute for International Economics. Petri summarized their findings thus:
Overall, we estimate that $77 billion per year would be added to US real incomes by 2025. (Such estimates could be wrong by one-third or more in either direction.) Expecting normal US employment then, we do not calculate any increase in the number of people at work. But by 2025 around 650,000 more people, close to ½ percent of the labor force, can be expected to work in export-related jobs and correspondingly fewer in less productive import-competing jobs because of the TPP.
Note the assumption of “normal” or full employment, which, as economists use the term, means that the increase in U.S. real incomes would come in the form of higher wages as workers shifted over time to higher paying, export-related jobs. Indeed, economic models generally include “normal” employment as a basic assumption despite the fact that the real unemployment rate has been above the normal unemployment rate for approximately two-thirds of the past four decades (see here).
However, if unemployment is high, the impact of rising trade across the U.S. economy might be different. Politico examined the issue with Petri:
“The crux is that a trade agreement can generate both jobs and income gains,” Petri said, explaining some combination would be the most likely result. In the short term, when there’s high unemployment, trade deals generate jobs. But when employment rises back to normal levels over the longer term, they lead to higher incomes.
In their study, Petri and his colleagues estimated that the TPP will lead to 40,000 to 50,000 U.S. job shifts per year — a relatively small number given that the U.S. hiring rate reaches as high as 6 million per month. A preponderance of these new hires in export-related jobs would pay more than the import-competing jobs where layoffs would be concentrated. Petri and his colleagues calculate that overall welfare gains to the U.S. economy should equal $459,000 per job shift.
Additional TPP-related benefits would be expected: The agreement’s enhanced intellectual property protections, for example, will support additional jobs related to digital commerce, software, movies, television, and other activities, and these jobs tend to pay higher-than-average wages.
The record of America’s current trade agreements also attests to these benefits. 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. trade agreements implemented with a total of 14 countries.
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 results of this comprehensive study are impressive. The increased trade brought about by these trade agreements boosted U.S. output by more than $300 billion and in turn supported 5.4 million U.S. jobs.
A simple review of history is also helpful in rebutting critics who claim that trade agreements have led to the net loss of U.S. jobs. For instance, one study by a labor-backed group contends that more than 60% 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 (BLS) data refute this claim: U.S. manufacturers added more than 800,000 net jobs in the four years after the North American Free Trade Agreement (NAFTA) entered into force.
Taking a longer view, the United States has indeed lost approximately 5 million manufacturing jobs over the past 25 years, but offshoring cannot be the explanation: Economic data from the Federal Reserve Bank of St. Louis shows that U.S. real manufacturing output increased by approximately 80% during this period.
Rather, most of these jobs have been lost to a country called “productivity.” Technological change, robotics, automation, and widespread use of information technologies have enabled firms to boost output substantially even as some have cut payrolls.
In this context, what do America’s companies — which are among the most productive in the world — most need if they are to create more jobs? They need a workforce with the appropriate skills and education. They need a policy environment that isn’t biased against job creation (for instance, by taxing enterprises based on head count or payroll). Above all, they need more customers, and that means better access to foreign markets.
Returning to the sector of the U.S. economy most open to trade, American manufacturers last year contributed $2.09 trillion to the economy, according to the latest data, while U.S. exports of manufactured goods topped $1.4 trillion. It doesn’t take a math whiz to see that U.S. businesses depend on export markets.
Trade isn’t a panacea, but it is clearly making a positive difference for American workers by providing good jobs, higher wages and new opportunities. Tearing down the barriers that close foreign markets to U.S.-made goods and services — as the TPP promises to do — will only help.