CPA Economic Analysis: International Trade Has Depressed US Economy Since 1982

December 21, 2016


The Obama Administration and pro-free-trade hawks like Sen. Orrin Hatch continue to preach the virtues of free trade deals like the Trans-Pacific Pact even though both presidential candidates and US voters made it clear they don’t want “deals” that facilitate the loss of thousands of jobs.

[Marc Fasteau and Jeff Ferry| December 09, 2016 |Huffington Post]

A careful look at one of the Obama Administration’s best-known economic documents in favor of free trade is revealing: the study that the Administration claims supports free trade actually found that since 1982 the impact of free trade on the US economy was negative, not positive. Free trade has actually reduced economic growth since 1982!

The core argument of the 2015 paper from the President’s Council of Economic Advisors, The Economic Benefits of U.S. Trade, is that lower tariffs lead to greater scale of production both at home and overseas, and that leads to lower costs for all consumers, in all trading partners. The CEA’s estimates come from a paper by three economists, Scott Bradford, Paul Grieco, and Gary Hufbauer, entitled The Payoff to America from Global Integration, published by the Peterson Institute of International Economics. As in many papers by economists, these authors don’t actually measure individual tariffs or price reductions, they estimate the effects across the entire U.S. economy by looking at statistical relationships like how tariff reductions have historically led to increases in the volume of goods sold in individual industrial sectors, using a method they call “sifting and sorting”. After examining the period 1947-2002, here is their key conclusion:

“The result is a total estimate of 7.3 percent of GDP. This equates to $800 billion of GDP, an increase in annual per capita income of $2,800, and an increase in average annual household income of $7,100.” (Bradford, Grieco, Hufbauer, pgs. 83, 86)

If true, that $7,100 increase in family income would be highly significant, given that median annual family income in 2002 was around $40,000. However, when you take a closer look at these economists’ statistics, you discover something odd: all the productivity gains came in the years 1947 to 1982. Productivity gains between 1982 and 2002, according to their own data (see Table 2.4, pg. 82 of their study) were exactly zero. Well not exactly. In fact, productivity gains delivered between 1947 and 1982 totaled $634 billion. Productivity gains between 1982 and 2002 totaled negative $1 billion.

Why should this be? Why should U.S. productivity gains from international trade have started at 1% of GDP each year in 1947-52 (a large benefit) and then simply disappeared into thin air by 1982? There are several possible explanations. The first involves the competitive position of leading nations in the post-WWII years. In those years, free trade was a brilliant strategic move for the U.S. economy. We had world-leading large companies like Boeing and General Motors, and soon after Xerox and IBM, while Germany and Japan lay in ruins, and Britain and France lacked the resources to build factories or catch up quickly in R&D. When a company like IBM expanded its market and sold mainframe computers in every corner of the world, the productivity of its chip-making facilities in upstate New York skyrocketed, to the benefit of IBM workers, shareholders, and computer purchasers. By 1982, the US was far from dominant in the most important industries. U.S. companies like GM, and soon even IBM, were under attack from foreign producers. So any further cut in tariffs would be unlikely to benefit overall US productivity. Furthermore, by 1982, average tariffs were already so low (around 4% according to the Bradford paper) that further reductions were both hard to achieve and delivered little impact even when achieved.

Macroeconomic Effects And Long-Term Growth Effects

It’s also important to note that the studies by the CEA and the Peterson team look at only one aspect of international trade. That’s the impact of trade on relative prices, i.e., how the price of traded goods changes with increased trade. There are actually three other aspects of trade that can be more important than price changes.

The first is the macroeconomic impact of the trade deficit. A trade deficit indicates that US consumers and businesses are buying more goods and services from abroad than foreigners are buying here. That has a contractionary effect on the economy because it reduces demand for American products, GDP and employment.. The US has been running a growing trade deficit since 1975, which reached $531 billion last year.

The second is the unemployment created by the negative impact of trade policy on certain industries. Economists have shown that many workers made unemployed by import competition often don’t find new jobs for many years, and some never do. Both of these effects are left out of the CEA/Bradford, Hufbauer analysis. Including them would make the analysis more realistic and increase the negative impact of trade on growth well beyond the levels shown in the Hufbauer paper.

Finally, the third factor by which international trade should be evaluated is its long-term growth effects. Some industries are more profitable than others, and some grow faster than others. The concept of “globalization” is all about achieving lower costs by moving industries to the lowest-cost region. However, as Ralph Gomory and William Baumol demonstrated in their insightful book Global Trade and Conflicting National Interests, many modern industries have such large economies of scale that a very small number of nations (sometimes as few as just one) can dominate an industry, effectively making it impossible for other nations to compete. If the US enters a trade pact which encourages the migration of its well-paid, high-growth, knowledge-intensive industries to its trading partners, leaving it with low-growth, poorly-paid industries, or high-value industries that can only employ a very small number of people (like financial services), then ultimately long-term economic growth and the living standards of the mass of the people will suffer. Unfortunately, the US is now in exactly that situation. We are running a $91 billion a year and growing trade deficit in Advanced Technology Products. These are the knowledge intensive, high value industries of the future and the US is losing ground fast.

In the long term, economic success is much more about choosing the right industries and building well-managed, high productivity companies in those industries than it is about seizing a one-time cost saving by shifting production of valuable industries to a low-cost foreign locale.

This is not an argument ”against trade”. Trade is essential to the US economy. It is an argument against “free trade” that is really a cloak for some nations to increase their domination of important industries and for US special interests to increase their profits without regard for the broader national welfare. Long term, broadly shared economic growth must be our nation’s first priority. Trade policy should serve this objective.

(Written with Jeff Ferry, Research director at the Coalition for a Prosperous America)

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