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The Future of Trade Deals

Vectorized NAFTA logo by Nicoguaro – CC BY 3.0

Last week, to take some of the sting off his impeachment, Donald Trump was celebrating his trade deals as evidence of the great success of his presidency. Specially, he has touted his revised NAFTA, which the Democratic leadership agreed to, and his first round trade agreement with China. Neither deal is likely to have a noticeable impact on the U.S. economy, but this does provide a good opportunity to think about the shape of future trade agreements.

First of all, it is worth noting some positives in the new NAFTA. Congressional Democrats forced Trump to include some serious language on labor rights in Mexico. While it remains to be seen how enforceable these will prove to be, they are definitely stronger than the provisions in the original NAFTA.

It will also help that Mexico’s current president, Lopez Obrador, is its most labor friendly leader in more than half century. In most cases, Obrador will likely be happy to improve labor standards in Mexico in accordance with the agreement.

While provisions that can improve the living standards of Mexican workers should be seen as good, this is unlikely to make much difference in terms of the number of manufacturing jobs going from the U.S. to Mexico. Even if the labor provisions of the deal are fully enforced, wages will still be far lower in Mexico than in the United States.

This point can be made more generally. Promoting respect for labor standards and the right of workers to organize in developing countries is a good thing. Where possible, we should try to help support democratic rights and rising living standards, but given the large gaps in productivity between the United States and developing countries, respect for workers’ rights will not eliminate the large differences in wages.

The one positive aspect of this picture for U.S. workers is that most of the jobs that are likely to be transferred to developing countries have already moved. This is the story of the plunge in manufacturing employment in the last decade. While there was relatively little change in manufacturing employment from 1970 to 2000 (even though manufacturing employment fell as a share of total employment), employment in manufacturing fell by 3.4 million, or 20 percent, between December of 2000 and December of 2007. That is before the beginning of the Great Recession.

This plunge in manufacturing employment coincided with the explosion of the trade deficit from 3.0 percent of GDP to almost 6.0 percent of GDP. (The economists who blame this job loss on technology have to explain why technology cost relatively few manufacturing jobs from 1970 to 2000 and why technology hasn’t prevented manufacturing jobs from increasing modestly since 2010. But I suppose stories that please a powerful constituency don’t have to fit the facts.) The period from 2000 to 2007 was even worse for union jobs in manufacturing, which fell by almost 40 percent over this period.

But the manufacturing jobs that remain are generally much less vulnerable to wage competition. In some cases, this is due to high transportation costs. For example, in the case of food manufacturing, employment has actually risen by more than 10 percent since 1990. This is because it would be very expensive to take various agricultural products produced in the United States, ship them to countries with low cost labor, and then ship the finished product back to the United States.

By contrast, we’ve lost almost 80 percent of the jobs in textile mills since 1990 and more than 90 percent of the jobs in apparel. It is not very expensive to ship clothes from China, Bangladesh, and elsewhere. U.S. workers in manufacturing will continue to see wage pressure as a result of competition with low paid workers in the developing world, but we are unlikely to see another big tide of job loss for the simple reason that so many of these jobs are already gone.

The loss of relatively high paid jobs in manufacturing has substantially reduced the historic wage premium enjoyed by workers in manufacturing. In 1990, the average hourly wage for production and non-supervisory workers in manufacturing was close to 6.0 percent higher than for the private sector as a whole. Now it is more than 6.0 percent lower. Manufacturing workers are still more likely to get health care insurance and other benefits than non-manufacturing workers, so there is still some compensation premium, but it clearly much less than in prior decades.[1]

It is also worth noting that insofar as reductions in the trade deficit allow us to regain manufacturing jobs, the new ones will generally be of much lower quality than the ones that we lost. A big part of this story is that the unionization rate in manufacturing is continuing to fall. Since 2010 we have added more than 1.6 million jobs in manufacturing, however the number of union members in manufacturing has fallen by close to 100,000. At 9.0 percent, the unionization rate in manufacturing is still slightly higher than the average for the private sector as a whole, but it can hardly be seen as a stronghold of unionization.

The fact that we have already lost so many manufacturing jobs due to trade, and that the wages of the remaining jobs have taken such a large hit, means that manufacturing is a less important factor in future trade deals. To put it simply, the capitalists have won. They have access to cheap labor throughout the world. Any increased access from future trade deals will only have a marginal impact.

This means that the free flow of goods, which has long been at the center of trade deals, will be of much less consequence in future trade deals. Instead, the focus will be on setting up rules governing commerce in services. In most cases these rules will involve standardization, but in ways that have nothing to do with “free” trade.

Before going into what is in these deals it is worth saying a bit about what is not likely to be in future trade deals. Doctors in the United States get paid on average roughly twice as much as their counterparts in other wealthy countries. If we could bring their pay to the levels in countries like Germany and Canada, we would save close to $100 billion a year ($700 per family) in lower payments to doctors.

But we are not likely to see efforts to standardize licensing requirements for doctors, dentists, and other highly paid professionals for the simple reason that these professionals are extremely powerful, unlike auto workers and textile workers. While politicians were happy to push trade deals that reduced the pay of manufacturing workers for the benefit of their employers, this is not the case with doctors and other highly paid professionals. Therefore, we can expect future trade deals to ignore the enormous potential gains from standardizing licensing requirements, just like past deals.

Instead, we can expect future trade deals to focus on other ways to redistribute income upward, always in the name of advancing “free trade.” The most obvious is longer and stronger patent and copyright protection. These protections have been a central part of “free trade” deals since NAFTA.  (Congressional Democrats scored a victory in negotiating the revised NAFTA by forcing Trump to remove provisions that would have locked in longer protection from competition for biological drugs.)

We can expect that presidents of either party (Bernie Sanders and Elizabeth Warren likely being exceptions) will use future trade deals to make patents, copyrights, and related protections stronger. While this is routinely sold as being in the national interest, that is an absurd lie. We are continually told that China is stealing “our” intellectual property. The vast majority of us have not had any intellectual property stolen by China. Boeing, Microsoft, and other large corporations may believe that China’s government is not showing proper respect for their patents and copyrights, but this is not a problem that need concern the rest of us.

In fact, most of us would benefit from going in the opposite direction, by having technology more freely available. This is especially true in the case of biomedical research and clean technologies. I have written about this elsewhere (see Rigged, chapter 5 [it’s free]), but the basic point is straightforward.

An important part of the upward redistribution of the last four decades has been the result of making patents and copyrights longer and stronger. This transferred income from the people who don’t benefit from these forms of protection to the people who do. If we want to reverse this upward redistribution, or at least not make it worse, we should look to make these government-granted monopolies weaker. When our government uses trade deals to make them stronger, it is not acting in the national interest but only in the interest of those who gain from these forms of protection.

The other major area where new trade deals are likely to be directly at odds with the national interest is by putting in place rules that obstruct efforts to regulate the Internet. There is a whole range of Internet concerns on issues such as privacy, ownership of data, and the spreading of false information that have been raised in the United States and elsewhere.

The revised NAFTA will make it more difficult to impose new regulations in any of these areas. Of special concern is that the deal locks in, and applies to our trading partners, Section 230 of the Communications Decency Act. This protects Internet intermediaries, like Facebook, from facing the same sort of liability for knowingly spreading false information that print and broadcast outlets face.

This means, for example, that if someone alleges that a person falsely committed a horrible crime, Facebook has no responsibility to remove the allegation, even if it can be shown to be false. Since the intention of the administration and Congress is to treat the revised NAFTA as a model for other trade deals, this special treatment of Internet intermediaries is a very bad story.

Here too it is hard to make the case of any national interest being served by locking in the current structure of regulation of the Internet, even though it is likely to make Mark Zuckerberg and Google shareholders very happy.

In short, as we look to the future of trade agreements we must recognize that the concept of “free trade” has little relevance, except as part of a sales pitch. The deals will be about creating structures of regulation that are at least as likely to be obstructing trade as fostering it. And, as has been the case in the past, the over-riding goal will be to redistribute ever more income upward.

Notes.

[1] Mishel (2018) found a 13 percent compensation premium for the years 2010 to 2016, but the ratio of the manufacturing wage to private sector average has been falling consistently, both in these years and subsequently. The premium would almost certainly be considerably less today.

This essay first appeared on Dean Baker’s Patreon page.)

More articles by:

Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

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