The chances of the Obama Administration scoring any kind of major policy victory this year took a big hit when it became clear that there would be a bipartisan movement to torpedo his Trans-Pacific Partnership trade agreement if it didn’t include protections against currency manipulation.
At first, it looked like the opponents of TPP had the evidence on their side. After all, Americans, and their elected officials, have been focusing on wage stagnation. After all, free trade efforts have not been helped by the fact that the proliferation of free trade agreements has coincided with a decades-long stagnation in wage growth.
Opponents of the Trans-Pacific Partnership are now zeroing on currency manipulation, arguing for stronger protections to prevent trading partners from artificially driving down the dollar value of their currencies to give their exporters an advantage. In a recent study, economist Robert E. Scott estimated that the U.S. has lost hundreds of thousands of jobs to places like Mexico and South Korea due to a lack of protection against currency manipulation.
Those who argue against free trade agreements often point to the fact that the nation’s flagship deal, the North American Free Trade Agreement, coincided with a huge increase in America’s trade deficit with Mexico in particular. Before NAFTA was signed, the U.S. had a slight trade surplus with Mexico and a $30 billion trade deficit with Canada. Today, the trade deficit with those two nations totals more than $180 billion.
But in a new report from the centrist think tank Third Way, authors Jim Kessler and Gabe Horwitz argue that while NAFTA may not have “lived up to its promise” of boosting the U.S. economy, trade negotiators have become more adept at including higher labor and environmental standards in the many trade deals that followed NAFTA. The result, according to Kessler and Horwitz, is that the vast majority of trade deals signed into law by Congress in the 21st century have shrunk, rather than increased, the trade deficit and therefore have helped create jobs. They write:
While some 20th Century trade deals didn’t always live up to their promise, deals in the 21st Century have generally been negotiated with higher standards making them a better proxy for the likely impact of new deals like the Trans-Pacific Partnership. In this paper, we analyzed all of the U.S. trade agreements that went into effect since the turn of the century—with 17 countries in all since 2000. Because the U.S. has such a consistent and overwhelming trade surplus in services, in this paper we looked only at whether these deals improved the U.S. balance of trade in goods. Our analysis found the following: nearly all recent trade deals have improved our balance of trade in goods, and in the aggregate the gains have been substantial.
They find that trade deals with 13 of 17 countries since the year 2000 have led to a decrease in the trade deficit, and that in the aggregate, “the balance of trade for goods improved after implementation by an average of $30.2 billion per year in 2014 dollars.”
Such evidence could help convince wavering Congressmen to support TPP, a trade agreement that would cover 40% of the global economy and is a pillar in the President’s plan to bolster America’s influence in Asia. But disagreement over the effects of trade agreements, with supporters pointing to post-2000 deals and detractors pointing to deals with places like Mexico and Korea—which seem to have been bad deals for U.S. workers—shows the limitations of using economics as a policy guide.
The global economy is a very complex engine and it’s difficult to isolate the effects of any policy, even one as big as a free trade agreement. It’s quite possible that U.S. companies would be investing more abroad and wages would be stagnant here at home even if the U.S. didn’t sign such trade treaties with other countries. Economics is a science that performs natural experiments with no control groups. Hard evidence is tough to come by.
