(Update of a blog post from March 14, 2014).
March 15th was the third anniversary of the U.S.-Korea Free Trade Agreement (KORUS). President Obama said that the agreement would support 70,000 U.S. jobs. This claim was supported by a White House fact sheet that claimed that the KORUS agreement would “increase exports of American goods by $10 to $11 billion…” and that they would “support 70,000 American jobs from increased goods exports alone.” Things are not turning out as predicted. Far from supporting jobs, growing goods trade deficits with Korea have eliminated more than 75,000 jobs between 2011 and 2014.
[Reposted from the Economic Policy Institute blog | Robert Scott | March 30, 2015]
Expanding exports alone is not enough to ensure that trade adds jobs to the economy. Increases in U.S. exports tend to create jobs in the United States, but increases in imports lead to job loss—by destroying existing jobs and preventing new job creation—as imports displace goods that otherwise would have been made in the United States by domestic workers. Thus, it is changes in trade balances—the net of exports and imports—that determine the number of jobs created or displaced by trade and investment deals like KORUS.
In the first three years after KORUS took effect, U.S. domestic exports to Korea increased by only $0.8 billion, an increase of 1.8%, as shown in the figure below. Imports from Korea increased $12.6 billion, an increase of 22.5%. As a result, the U.S.trade deficit with Korea increased $11.8 billion between 2011 and 2014, an increase of 80.4%, nearly doubling in just three years.
U.S. goods exports to the rest-of-the-world (ROW) increased 9.1 percent in the same period and ROW imports increased only 5.9 percent, so our trade balance with the rest of the world improved in this period. In other words, the U.S. trade deficit and job displacement with Korea increased despite an overall improvement in U.S. trade with the ROW. It’s impossible to avoid the conclusion that the KORUS trade and investment deal increased U.S. trade deficits and job displacement.
Although rising exports to Korea supported some U.S. jobs in this period, the rapid growth of Korean imports has eliminated many more U.S. jobs. Using the trade and employment multipliers implied in the White House KORUS fact sheet, I estimate that the growth in the U.S. trade deficit with Korea between 2011 and 2014 has cost more than 75,000 U.S. jobs. Most of those jobs lost were in manufacturing (the growth of the manufacturing trade deficit was responsible for 79.3 percent of the growth in the total U.S.-Korea trade deficit). In addition, the U.S. trade surplus in agriculture and primary commodities declined by $1.2 billion in this period, also contributing to growing trade-related job losses.
Trade deals do more than cut tariffs, they promote foreign direct investment (FDI) and a surge in outsourcing by U.S. and foreign multinational companies (MNCs). FDI leads to growing trade deficits and job losses. U.S. multinationals were responsible for more than one quarter (28.9 percent) of the U.S. trade deficit in 2012. Foreign multinationals operating in the United States (companies like Kia and Hyundai) were responsible for nearly half (45.7 percent) of the U.S. goods trade deficit in that same year. Taken together, U.S. and foreign MNCs operating here were responsible for nearly three-fourths (74.6 percent) of the total U.S. goods trade deficit in 2012.
U.S. domestic exports of motor vehicles and parts to Korea increased $624 million between 2011 and 2014, but U.S. imports from Korea in this sector increased $7.7 billion in the same period. As a result, the trade deficit in vehicles and parts increased $7.1 billion in the first three years that KORUS was in effect. The growth of the vehicles and parts deficit was responsible for 75.2 percent of the increase in the U.S.-Korea manufacturing trade deficit, and nearly three-fifths (59.6 percent) of the increase in the total U.S. Korea trade deficit between 2011 and 2014.
Alarmingly, the KORUS agreement has not taken full effect and still retains some important U.S. tariffs that protect our domestic auto industry. When they expire in 2021, our trade deficit with Korea will undoubtedly worsen.
The administration is nearing completion of negotiations for the proposed Trans-Pacific Partnership (TPP) with 11 other nations in the Asia-Pacific region, including Malaysia, Vietnam, and Japan. Congress is expected to introduce fast-track, or trade promotion authority to facilitate its consideration of the TPP, without amendments, in the near future. The United States has also encouraged South Korea join the TPP. China has also expressed interest in joining the TPP talks. The United States trade deficit with the 11 other proposed members of the TTP has more than doubled since 1997, to $265.1 billion in 2014.
Many members of the proposed TTP trade and investment deal have long histories of currency manipulation, dumping, and other unfair trade practices that have dramatically increased U.S. trade deficits and job losses, and the agreement could sharply curtail the ability of the United States to challenge these practices. The TPP would significantly increase the threat that rapidly growing trade deficits and job losses in the United States would be locked in.
KORUS was the template for TPP. It is a broken model. If completed and approved by Congress, this trade and investment deal will only result in more outsourcing by US and foreign MNCs, rising trade deficits, even more trade-related job losses and downward pressure on U.S. wages. A multi-nation trade deal modeled on KORUS is a direct threat to the heart of U.S. manufacturing employment and domestic production. The United States should stop negotiating new trade deals and fix the ones we have.