Make a Trade for Trade

Pending FTAs with Panama, Colombia and South Korea are caught in yet another political battle.

Story Highlights:

  • The White House announced FTAs with Panama, Colombia and South Korea won’t be submitted to Congress until Republicans agree to renew the Trade Adjustment Assistance program.
  • This assumes free trade is an automatic negative for US jobs, but history shows that’s not true.
  • We’re not anti-TAA—if that’s what it takes to make trade freer, so be it.
  • But that FTAs are tied up in another political battle is disappointing, especially when the EU passed their own trade agreement with South Korea without a hitch.

How long does it take to ratify free trade agreements estimated to boost US trade activity by a few billion annually? Evidently, at least five years. In 2006 and 2007, the US inked free trade agreements with Panama, Colombia and South Korea—and Congress still hasn’t ratified them.

That may not change any time soon as the White House says these FTAs won’t be submitted to Congress until Republican lawmakers agree to renew the Trade Adjustment Assistance (TAA) program. Nearly 50 years old, the TAA extends federal support to workers whose jobs were (presumably) offshored or otherwise lost to foreign competition in order to boost labor’s support of free trade. Laid-off workers get retraining and other benefits aimed at helping them get back to work. Politically and socially, it makes sense. No one wants US workers to suffer, especially if workers in other countries benefit at their direct expense—and helping folks make these transitions as the economy evolves seems fine and well enough.

But economically, it’s a head scratcher. It assumes free trade is an inherent negative for US jobs. No doubt some labor displacements are tied to freer movement of goods and services. But free trade has actually been a net positive over time because it helps boost overall trade activity—imports and exports. We get cheaper alternatives for some goods, and our exports find new markets. And many imported goods are components of end products we export right back out, and vice versa. What’s more, it allows us to allocate time and capital more efficiently. All this leads to greater economic activity—and a natural consequence of increasing economic activity is, if history is any guide, increasing jobs at home.

Other data confirm the faulty link between free trade and vanishing jobs. In fiscal year 2010, 80.5%of the TAA’s approved applicants were from the manufacturing sector. However, over the last half century, productivity gains, not outsourcing, caused the overwhelming majority of manufacturing job losses globally. More recently, the TAA’s own data show increased petitions for benefits as unemployment rose during the recession—so much so that the agency faced a backlog of applicants. But total imports also fell roughly 35% peak to trough. Were jobs really lost to international competition? Or to the recession in general?

Most likely, the latter: Growth matters most to jobs. And as demonized as imports frequently are, a dollar imported isn’t a dollar automatically lost in US wages. Far from it! Imports must be transported, marketed, combined with other components (domestic and foreign), re-marketed, transported again and sold as end goods—globally. (Ain’t free trade grand?) Still, governments have wasted money on far less worthy things than the TAA, so if this trade-off helps make FTAs official, so be it. But embroiling FTAs in yet another political battle helps no one (except maybe a select few in Washington).

The debate is likely to be entwined with ongoing budget negotiations. Hopefully, Congress seals the deal before another five years pass. Trade’s getting freer globally, and the US could be reaping far bigger benefits than we currently are. Let’s take a cue from our more free trade-friendly European friends. The EU ratified its FTA with South Korea without much to-do—something of a shock, especially when one remembers France’s recent efforts to kill the Doha round of global trade talks. If 27 disparate member countries, each with their own trade interests, could agree on an FTA, our one country should certainly be able to pass something.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.