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Richmans' Trade and Taxes Blog
Trade Agreements Have Been an Economic Disaster for the USA
When the U.S. began negotiating the General Agreement on Tariffs and Trade (GATT) in 1947, it was the world’s leading creditor. By the time the ninth round of negotiations was concluded in 1994, it had become the world’s leading debtor nation, millions of well-paid manufacturing workers lost their jobs, and the U.S. suffered two recessions in less than ten years, in 2000-01 and 2008-09. No wonder the malaise that led to what is clearly a popular revolt in the 2016 primaries. If there is a single statistic that shows the cause of the malaise—and surely it has many causes all associated with government intervention in the economy!—it is the growth of our international trade deficit in the following table.
The table shows that U.S. Gross National Product, GDP, the total output of goods and services, which equals C+I+G+(X-M), ie., total private consumption expenditures, C, plus gross private domestic investment expenditures, I, plus government consumption and investment expenditures, G, plus exports minus imports (X-M). It shows the GDP for selected years 1960 to 2015. It shows that the U.S. had a trade surplus of $4 billion in 1960, which made a contribution to GDP of 0.74 percent, less than one percent but at least positive. As a result of GATT trade agreements from 1947 to 1994 and subsequent agreements with China, Korea, and Mexico, the U.S. experienced growing trade deficits which exploded after 1994.
In 1980 the trade deficit was $13 billion or about 0.45 percent of GDP, less than one-half of one percent. As a result of the successive GATT trade agreements, it grew enormously reaching $376 billion in the year 2000, diminishing GDP by 3.7 percent and contributing to the 2000-01 recession. The U.S. trade deficit grew to a record level reaching $723 billion in 2008 diminishing GDP by a record 4.9 percent and helping to precipitate the Great Recession of 2008-09. As a result of the Great Recession, the trade deficit fell, recovering to $530 billion in 2015, reducing GDP by about 3 percent. In other words, had our trade been in balance in 2015, our GDP would have been $18.5 trillion instead of $17.9 trillion.
Gross Domestic Product (Billions of dollars)
(Source: US Bureau of Economic Analysis)
The Bureau of Economic Analysis of the Department of Commerce published the GDP figures so these facts could not have escaped the thousands of economists who saw nothing to worry about because they were the result of “free trade”, a dominant ideology in economics that is not science at all. Economics as a science teaches that countries often engage in mercantilist practices, imposing barriers on imports and subsidies to exports and manipulating their exchange rates, actions that the late Lord Keynes called “beggar-one’s-neighbor” policies. Japan, Germany, China, and South Korea are examples of countries that have benefited at the expense of the United States. Why did U.S.economists ignore the evidence? Did they not know that according to economics as a science only balanced trade assures the benefits of trade to trading partners even when one or both practice “beggar-one’s-neighbor” policies. Shame on the economics profession.
Millions of American workers lost high-paid manufacturing jobs and the current stagnation of the American economy owe their condition to the failure of free trade as an ideology. The U.S. began its decline from being by far the leading manufacturing nation to now being closely followed by China. Our leaders, Republican and Democratic, did nothing about the deficits believing that increased trade, balanced or not, was good for all the trading partners embracing the slogan “free trade” believing that free trade was an economics principle. No, economics shows that balanced trade is always advantageous to all trade partners and free trade is only an appropriate policy when 1) the trading partners use the same currency, 2. labor and capital are free to move freely between trading partners, and 3) no trading partner employs mercantilist practices, such a tariffs, subsidies to exports, or engages in exchange rate manipulation. For all practical purposes, such conditions only exist between the States of the USA by constitutional prohibitions of the states employing mercantilist practices against one another.
During the process, the U.S. ceded much of its sovereignty, the clearest evidence of which was the fine levied by the World Trade Organization (WTO) on the U.S. for requiring the country of origin to be named on meat products imported into the U.S. U.S. citizens were not entitled to know where the products they were buying were being made. Congress conceded that its labeling requirement violated WTO rules and repealed the labeling law. Did no one in the Clinton administration read the treaty? Or did they agree to the U.S. loss of sovereignty?
The Congress of the U.S., learning nothing from the trade deficits of the preceding several decades gave fast-track authority to the President to negotiate the pending Trans Pacific Partnership, a multi-state trade agreement that originally provided that an international organization created by the treaty could mandate compliance with international agreements including global warming but it was eliminated from the final draft when Pres. Obama realized that Congress would never approve a trade treaty with such a provision.
In addition, all the trade agreements offer an incentive for American manufacturers to move their production abroad since the U.S. cannot discriminate against products made in the countries participating in the trade agreements even if they are produced by American companies. According to a 2013 paper by Yale economist Peter K. Schott and Federal Reserve researcher Justin R. Pierce, eliminating the possibility that the U.S. might apply tariffs on their products encourages U.S. businesses to move abroad. So we are not surprised that Apple, Hewlett-Packard, IBM, Campbell Soup, Boeing, General Motors, and hundreds of others have moved all or part of their production overseas.
In a 2013 study, MIT economist David H. Autor and his co-authors found that the imports that accompany trade deficits resulted in higher unemployment rates, lowered labor force participation rates, reduced wages in local labor markets, and increased government spending on entitlements such as unemployment, disability, retirement and healthcare payments.
No wonder Republican and Democratic voters are rejecting their party leaders’ choices for the Presidential nomination and voting for outsiders.
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