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Richmans' Trade and Taxes Blog
U.S. Trade Agreements Have Been an Economic Disaster for American Workers
In 1947, the U.S. began negotiations to seek an international General Agreement on Tariffs and Trade (GATT). There were eight rounds of negotiation from 1947 to 1994. The Tokyo round which began in 1973 and lasted for more than six years was attended by 102 nations. The last round began in Uruguay in September, 1986 and 123 nations participated and ended with the creation of the World Trade Organization (WTO) in 1995. GATT marked the beginning of the end of the USA as the world’s leading industrial power.
GATT was followed by the granting of “most favored nation” status to China in 2000. In a 2012 article by Justin R. Pierce, a Federal Reserve Board researcher, and Yale economist Peter K. Schott, found a link between the sharp drop in U.S. manufacturing employment after 2001 and the elimination of trade policy uncertainty resulting from the U.S. granting of permanent normal trade relations to China.
When one examines the history of the US trade balance, it appears that until the end of the Tokyo round which lasted from 1973 to 1979, the US ran small trade surpluses with the rest of the world. The US trade surplus in 1981 was $3.1 billion. In 1983, the US experienced a trade deficit of $35.1 billion. By the end of the Uruguay round, 1983-1994, and the creation of the WTO in 1995,.the U.S. trade deficit had grown to $105.3 billion.
Congress passed the North American Free Trade Agreement Implementation Act in 1993. The U.S. trade deficit grew steadily, reaching $405 billion in 2000 and peaked at $804 billion in 2006,no doubt contributing to the Great Recession of 2008-09. Pres. Clinton, when he signed the NAFTA bill, stated that "NAFTA means jobs. American jobs, and good-paying American jobs. If I didn't believe that, I wouldn't support this agreement." He may have believed that but he was wrong.The US goods trade deficit with NAFTA was $94.6 billion in 2010 and accounted for 26.8% of the overall U.S. goods trade deficit. Much of this growth has been due to increased trade between the United States and Mexico, where the trade balance—the difference between exports and imports—swung from a $1.7 billion U.S. surplus in 1993 to a $61.4 billion deficit in 2012.
Given the near certainty that the U.S would never impose new tariffs, U.S. manufacturers began to move their factories and out-source production overseas and to import their foreign-made products to the U.S. duty-free. American and other foreign producers who relocated the production of their products abroad have converted China into a leading manufacturing power, producing nearly all the high-tech products like i-phones, cell-phones, computers, television sets, etc.as well as mass-produced products like shoes, clothing, housewares, light manufactures, etc., etc. consumed in the U.S., causing manufacturing to decline and the loss of millions of jobs.
Why didn’t U.S. corporations move their factories abroad before the era of trade liberalization? Because of the uncertainty that their exports to the US would be duty-free. American firms open factories abroad to produce products to be consumed in the countries they invest in but also in the expectation of being able to sell their products in the U.S., the world’s biggest consumer market, duty-free. The US trade deficits have been exacerbated by the imports from American companies producing their products abroad and exporting them to the U.S.
“While trade with China is a prime suspect in the overall loss of U.S. manufacturing jobs in recent decades,” says Schott, “what’s interesting about the change in policy we study is that it did not affect the level of tariffs the U.S. applied to Chinese imports. Rather, it eliminated uncertainty about those tariffs.” Before 2000, Chinese imports into the United States enjoyed the same low tariffs that the U.S. applies to other countries with which it has “normal trade relations” (NTR). In China’s case, however, this NTR status was subject to politically contentious annual renewals. With the October 2000 change in policy, China’s NTR status became permanent. The impact on U.S. manufacturing employment is quite large. “According to our estimates, employment growth in the average industry was 30% lower between 2001 and 2007 than it would have been had the decline in uncertainty not occurred,” says Schott.
A world free trade regime is only possible if countries retain the ability to impose single-country variable tariffs which countries can use to compel balanced trade, as described in our book Balanced Trade (Lexington, 2014) . Of course, if a country’s total trade is in balance, it should not impose single-country variable tariffs. The right to impose single-country variable tariffs is all a country needs to prevent other countries from employing mercantilist practices to achieve a trade surplus. The need for the World Trade Organization, principally financed by U.S. taxpayers and totally ineffective, would be eliminated.
Clearly U.S. trade policy since 1947 has been a disaster for the U.S. economy and for American workers in particular.
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