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In 1992, independent presidential candidate Ross Perot predicted that the North American Free Trade Agreement would produce a “giant sucking sound” of U.S. jobs fleeing to low-wage Mexico.
A quarter-century later, another billionaire businessman, Republican presidential front-runner Donald Trump is picking up where Perot left off by bashing NAFTA and other trade agreements as bad deals for America and its workers. “I think NAFTA has been a disaster. I think our current deals are a disaster,” Trump told CNN last year.
Recently, he has been joined in his attacks by Democratic candidate Bernie Sanders, whose message resonates in states, such as Michigan, that have lost manufacturing jobs to foreign trading partners ranging from Mexico to China. “Our disastrous trade policies for the past 30 or 40 years have had a horrendous impact on the lives of millions of working Americans,” Sanders tweeted on March 16.
The Economic Policy Institute, a liberal think tank partly funded by unions, estimated that more than 850,000 jobs have been lost due to NAFTA since the agreement was enacted in 1994. During that time, the U.S. trade deficit with Mexico swung from a $1.7 billion U.S. surplus in 1993 to a $61.4 billion deficit in 2012, according to the Council on Foreign Relations.
A fair assessment of the impact of free trade requires more than counting the number of lost U.S. jobs, economists say. Opening U.S. borders to imports also lowers prices for consumers and creates jobs for Americans who distribute or sell imports. Trade also fuels economic growth in developing nations, which increases demand for U.S. exports and creates new manufacturing and service jobs in the United States.
“Free trade is a beautiful thing for consumers,” said Mauro Guillen, a professor at the University of Pennsylvania’s Wharton School. “The problem, of course, is people aren’t just consumers. They need to work and make a living.”
Guillen doesn’t dispute the validity of 850,000 jobs lost because of NAFTA, but said they likely would have disappeared even without that deal. “They would have been gone somewhere else. Auto, textiles, toys, consumer electronics, auto parts — they’re also made in Asia.”
“The most important element of trade is who wins and loses,” adds Robert Scott, EPI’s director of trade and manufacturing policy. “Exports support domestic jobs. Imports displace jobs.”
Here is a rundown on the impact of trade agreements:
Trade deficit with China
Normal trade relations with China signed by President Clinton in 2000 and China’s membership in the World Trade Organization in 2001 fueled the Asian country’s emergence as a powerhouse exporter of manufactured goods. As a result, the U.S. trade deficit with China has grown from $83.8 billion in 2000 to $365.7 billion in 2015. About 3.5 million jobs were lost due to the trade deficit with China, EPI’s Scott said.
Job loss ripple effect
As manufacturing jobs fade, so do service jobs that support them, such as accounting and legal services, Scott said. “Those services used to be counted as manufacturing jobs,” he said. “The truth is each manufacturing job supports two additional jobs in the economy.”
In all, about 70,000 factories have closed and 5 million jobs were lost in manufacturing since 2000 due to trade with Europe, China and other Asian countries that are now part of the 12-nation Trans-Pacific Partnership agreement, a trade agreement among 12 Pacific Rim countries, that’s awaiting congressional approval, Scott said.
Expanded trade also has suppressed wages, said Josh Bivens, EPI’s research and policy director. Annual wages for full-time American workers without a four-year college degree fell roughly $1,800 in 2011 due to free trade, Bivens wrote in January 2015.
Imports help to keep prices low, a benefit as wages rise slowly. Middle-class consumers gain “an estimated 29% of their purchasing power from trade,” according to the Council of Economic Advisers. “This is especially important for middle-class consumers who spend a larger share of their disposable income on heavily traded food and clothing items.”
More export-created jobs
U.S. companies need more designers and R&D engineers as demand for their products grows in foreign markets. In turn, their suppliers hire more workers. American companies benefit from heightened competition from foreign players in their sectors. About one in four manufacturing jobs are supported by exports, according to the Office of the U.S. Trade Representative. And exports supported 6.2 million jobs in 2013, it said.
In 2014, U.S. manufacturing exports reached a record $1.4 trillion and all exports rose by nearly 50% from 2009 to 2014, the Obama administration said.
Higher foreign demand for U.S. goods and services
Raising living standards of trading partners means foreign consumers gain buying power to purchase U.S. goods and services, and they spend more when they travel, as evidenced by Chinese tourists flocking to the USA. “The U.S. as a country that’s promoting free trade is a good thing,” Wharton’s Guillen said.
He said European, Japanese and Korean companies have moved manufacturing facilities to Mexico to be closer to their most important customer, the U.S. “They’re in better position to offer you better prices,” Guillen said. “Distance is important.”
More than 500,000 American jobs “are supported by imports of clothes and toys from China alone,” according to policy analysts Bryan Riley and Anthony Kim of the Heritage Foundation, a conservative think tank.. “No credible economic study has ever documented net U.S. job losses resulting from imports. Trade — like technology — destroys some jobs but creates others,” they wrote in a report posted on Heritage’s site.
Less Mexican immigration
NAFTA’s role in boosting the Mexican economy has benefited the U.S. by reversing the flood of Mexicans streaming across the border, often illegally. Mexicans can find more good-paying jobs at home, such as in the auto industry, which has overtaken Japan in the number of vehicles exported to the U.S. By 2020, Mexico will account for about a quarter of all auto vehicles produced in North America, according to IHS Automotive.
“In the last couple of years, immigration by Mexicans (to the U.S.) has been negative,” Guillen said, noting that the number of Mexicans returning home now exceeds those entering the U.S. “NAFTA has been successful in helping Mexico develop enough to slow that down.”