Politics meets facts on free-trade deals in Michigan

By Chad Selweski | Bridge Magazine

In his bid to win over blue-collar voters in Michigan and elsewhere, Republican Donald Trump has declared that the pending U.S. international trade deal with Asian nations would amount to “a rape of our country.”

In that same vein, Democrat Bernie Sanders’s surprise win in the March presidential primary vote in Michigan was largely credited to his message that free-trade agreements had “decimated” the state’s economy.

And Democratic presidential nominee Hillary Clinton, in response to that stinging loss in Michigan, co-opted portions of the Vermont senator’s platform by asserting that all U.S. trade pacts deserve to be viewed skeptically, rather than engaging in “trade for trade’s sake.”

But do the political attacks match the reality of the impact free-trade agreements have had on the U.S. and Michigan economies?

In the arena of presidential politics, a populist message that rails against free trade as a job-killer has been a sure winner this election season — as Sanders showed in winning Michigan. In the world of economics, however, policies that remove tariffs and other trade barriers, creating a more level playing field, are generally recognized as a net gain for the economy.

Donald Trump to address Detroit Economic Club on Monday

Many Michiganders may not realize that Michigan is a major player in global economic competition, ranking sixth among the 50 states in employment supported by exports to foreign countries, at 270,240 jobs. Michigan also placed third in the number of new export-related jobs created (63,000) since the 2008-09 recession.

In the two-way street of exports vs. imports, Michigan appears to be doing well.

While other top states such as California and Texas enjoy geographical advantages for shipping products overseas, Michigan stands at No. 2 for exported manufactured goods (over $53 billion last year) among states without an ocean port, behind only Illinois, according to the U.S. Census Bureau’s economic calculations.

Rhetoric can be ‘dangerous’

To be clear, it is nearly impossible to measure with precision the economic impact of any free trade agreement on an individual state. The connection between trade deals and stagnant U.S. wages can also be hard to quantify, especially for the still-controversial NAFTA pact the U.S. undertook with Mexico and Canada in 1994.

But among the original 20 presidential candidates in 2016, Republicans and Democrats, heart-wrenching anecdotes about U.S. workers who lost jobs to globalization generated a visercal response that sometimes overwhelmed any attempt to explain the nuances of employment data, or the benefits that residents in Michigan and elsewhere reap from international trade.

“I think the rhetoric on trade in the presidential campaign has been often misleading, and sometimes dangerous,” said Charles Ballard, an economist at Michigan State University. “Virtually all of the attention has been focused on one aspect of trade, which is that imports compete with domestic production.

“…Much of the ‘debate’ in the (presidential) campaign makes it sound as if import competition is the only thing that comes with trade, and it ignores the value of exports and lower prices.”

Nationwide, 11.7 million workers rely on the export business for their paycheck, a 20 percent jump since 2009, according to figures compiled by the U.S. Department of Commerce’s International Trade Association. Some of that increase is attributed to post-NAFTA free-trade agreements with 14 countries signed during the George W. Bush and Obama administrations.

In Michigan, exports to international free-trade partners have grown by nearly a third since 2005, according to federal data with more than 70 percent of Michigan exports in 2015 going to these trading partners.

On the other side of the ledger, U.S. job losses over the past two decades, including 5 million in manufacturing, are undeniable. But how much of that decrease is due to trade policies and free trade agreements is debatable, according to economists in Michigan and nationally. They point out that U.S. manufacturing jobs, as a percentage of the nation’s workforce, have been on the decline for 50 years, well before NAFTA.

And as America has moved toward freer trade, with 20 free trade agreements now in place, Michigan’s economy has benefited in ways beyond the products it exports.

Unemployment in the state, in part due to the domestic auto industry’s record surge, has fallen precipitously from a peak in June 2009 of 14.9 percent down to under 5 percent in every month of 2016. The U.S. Bureau of Labor Statistics reports that Michigan has gained manufacturing jobs for six consecutive years, about 165,000 overall.

Trade a huuge issue

As Republican nominee Donald Trump travels state to state for votes this fall, and fiery populist surrogates such as Sanders and Sen. Elizabeth Warren of Massachusetts beat the drums for Clinton, Michigan will enjoy the spotlight as a key prize on the road to the White House.

The rhetorical template in the battle for Michigan can be found in exit polls taken last March during Michigan’s primary. Surveys found that three-fifths of voters, Republican and Democrat, agreed that free trade hurts the American economy. It’s a sentiment that portends a fall campaign likely dominated by trade debate.

Trump is already tapping into the electorate’s globalization anxiety here and in other key Rust Belt swing states such as Pennsylvania and Ohio. At last month’s Republican National Convention, Trump confidently predicted “millions of Democrats” will cross over to vote for him in November, particularly anti-trade Sanders supporters.

As a result, union leaders and pro-labor Democratic officials remain nervous about Trump’s exploitation of the trade issue ‒ even as pro-business Republican leaders are spooked by Trump’s brash reversal of GOP orthodoxy that holds breaking down foreign trade barriers as a plus.

Clinton, meanwhile, signalled her shift months ago by declaring her opposition to the Trans-Pacific Partnership (TPP), the pending trade deal with 12 Asian and Pacific Rim countries that Trump had equated with rape. As U.S. Secretary of State, Clinton publicly praised the 5,500-page TPP as the “gold standard” of free trade, a pact that would be good for American workers and will “strengthen the position of the United States in Asia.”

One day after he was chosen as Clinton’s running mate, Virginia Sen. Tim Kaine, previously a stalwart on free trade, announced that he now opposes the TPP. The Democratic Party platform introduced at the party’s recent Philadelphia convention largely sides with the Sanders approach on trade matters.

Fighting a lost battle

As the campaign transitions toward the Nov. 8 general election, voters can expect to see countless “photo-ops” by Trump and Clinton in front of vacant factories without any detailed explanation of why those jobs disappeared, a tactic employed by Sanders in the primary.

It’s a connection that makes some economists squirm.

Donald Grimes, a research specialist at the University of Michigan’s Institute for Research on Labor, Employment, and the Economy, said trade practices with other nations, with the exception of China, have had a relatively minor impact on factory closings in the U.S.

New technologies, automation and robotics, general increases in efficiency, and major advances in logistics have all contributed to an increase in industrial productivity and a simultaneous reduction in manufacturing employment.

In the big picture, the overall U.S. trade deficit for goods and services has stabilized at about $500 billion in the past five years – a 30 percent improvement in the nation’s trade balance from the pre-recession levels of a decade ago.

Globalization, meanwhile, has become an economic reality and those working-class voters who point to trade restrictions as a way to “Make America Great again” are too late, Grimes said.

“I think people are being misguided,” he said. “You can’t look into the rearview mirror. Those jobs are gone. You can’t change history. In some sense, it’s an old story. People should have been concerned about the trade deficit back in the late 1990s and early 2000s. We’re fighting the last battle.”

Most Michigan export activity occurs in southeast Michigan and, not surprisingly, most of our products shipped overseas are connected with the auto industry, with other export categories including machinery, chemicals, computer and electronic products and electrical equipment.

Free-trade agreements remain especially lucrative for key elements of the farming community. Despite a drop in 2015, American crop exports have more than doubled since 2000, according to the U.S. Department of Agriculture.

In Michigan, the agriculture industry exports roughly one-third of its products a year, generating nearly $3.2 billion, according to the state. Our biggest trading partner: Canada, which receives 60 percent of the state’s agricultural exports, with Mexico placing second.

NAFTA’s complicated legacy

Recent U.S. trade agreements with countries ranging from Australia to Singapore to the Dominican Republic have yielded surpluses for the U.S., but the national discussion on global competition this election year inevitably turns to NAFTA, the North American Free Trade Agreement, signed into law in 1993 by President Bill Clinton.

Trump calls NAFTA the “worst trade deal in U.S. history.” Hillary Clinton favored the NAFTA accord with Canada and Mexico as First Lady in the 1990s, but in the 2008 Democratic primary race against then-candidate Barack Obama she declared that the pact was “a mistake” – a position she has stuck to since.

But NAFTA’s legacy after 22 years is more nuanced than the portrait drawn by 2016 candidates – both in Michigan and nationally. The pact dramatically boosted cross-border sales of goods among the three countries. Though it did not deliver the influx of new U.S. jobs predicted by then-President Bill Clinton.

Some pro-labor advocates claim NAFTA cost the U.S. up to 800,000 jobs. Here’s a job loss calculator offered by Public Citizen, the consumer watchdog organization founded by Ralph Nader. But the Congressional Research Service concluded last year that the net loss was, at the most, negligible.

That doesn’t mean there has been no pain, far from it.

Gary Clyde Hufbauer, with the nonprofit Peterson Institute for International Economics, wrote in June that when NAFTA was first implemented plenty of mainstream economists warned Congress that U.S. workers would be displaced, but that the upside of “open trade exceeds by at least 10 times what it would cost to meaningfully assist workers who lose their jobs to import competition.”

The problem, Hufbauer noted, was Congress offered workers only “token” assistance after the pact was signed, which he said has helped to fuel the current backlash against trade liberalization.

Even so, political arguments that NAFTA allowed Mexico to “steal” jobs from the U.S. ignore other economic factors. While the Mexican auto industry enjoyed a boon after NAFTA took effect, Bridge has noted in past reporting that this was partially due to trade agreements the Mexican government signed with 40 other countries and an aggressive push to land new factories from American, European and Japanese automakers.

Moreover, trade liberalization with Mexico was already underway prior to NAFTA, and U.S. “transplants” – production facilities established south of the border by the Detroit Three automakers – first arrived in 1980. The trend has increased since then, with $24 billion in Mexican investments planned or implemented by domestic and foreign automakers over the past several years.

Still, the number of auto jobs located in the U.S remains about the same as in 1997 when the U.S. and Michigan economy was strong.

Trump hits China, ignores Canada

Today, Mexican economic activity represents about 10 percent of the overall U.S. trade deficit. Imported goods from China, plus oil and petroleum products from the Middle East, make up much of the rest of U.S. imbalance.

On the national stage, the political potency of the China trade issue is glaring, and Trump has aggressively, and effectively, pounced on it, warning that China is “sucking the blood right out of our country.” Chinese investment in U.S. businesses and factories reached a record level of $18.4 billion in the first half of 2016, higher than all of last year.

In Michigan, however, China’s role as a trading partner is small compared with Canada and Mexico.

Paul Traub, a business economist for the Federal Reserve Bank of Chicago’s Detroit branch, said workers struggle to comprehend changes in international trade that have accelerated rapidly over the past two decades, though the cycle has existed for two centuries. China’s role as an exporting behemoth, he added, may have already peaked.
“Americans are having a hard time getting their head around this issue. They want to know, ‘What is our role in the world economy? Where do we fit in?” Traub said. “This is the full cycle. We did to Great Britain what China did to us and what’s being done to China now.”

While Trump has said he intends to renegotiate NAFTA with both Mexico and Canada, he has saved most of his vitriol for our southern neighbor. Yet, Canada, not Mexico or China, is the largest trading partner of 36 states, including Michigan.

Canada, with nearly 30 percent of its workers unionized, and an extensive government safety net to protect the poor, doesn’t fit the picture of a bogeyman in the trade debate.

Post-NAFTA successes on trade

Third Way, a centrist research group in Washington, released a study in April that concluded U.S. free trade agreements implemented from 2001 to 2012 are far more beneficial to the United States economy than NAFTA. Overall, 14 of the 17 post-NAFTA agreements produced net gains for the United States, generating a collective trade surplus of $85 billion, the group found.

Here in Michigan, shipment of goods to Chile, Australia and Honduras more than doubled since free trade agreements were established with those nations in the mid-2000’s.

“Just as the quality of automobiles or computers has vastly improved since 1994, so have our trade deals,” the Third Way report found.

“Modern deals…have improved as a result of the lessons we learned from NAFTA. These new deals have strong labor standards that benefit U.S. workers, while NAFTA did not. These new deals have environmental protections in the agreements, while NAFTA did not. Enforcement measures have been strengthened as has access to foreign markets. We’ve come a very long way since NAFTA.”

At the Federal Reserve, Traub and others increasingly give credence to the idea that the shifting sands of international trade, with China’s rapidly rising wages and its declines in manufacturing employment, are making America’s skilled workforce highly competitive again.

More importantly, they say, the emergence of “reshoring” — the decision by major firms to relocate facilities back to the U.S. — could boost Michigan’s manufacturing-based economy, and tamp down fear-mongering about trade deals with China.

“I really hope we don’t throw out the baby with the bathwater and abandon all of the benefits that have been brought by increased trade,” said Ballard, the MSU economist. “If we do, we risk a global depression.”

Michigan trade numbers

Michigan has one of the largest foreign export economies in the nation:

  • Michigan exported $53.2 billion in goods in 2015, up by a third worldwide over the past decade.
  • Michigan ranks No. 6 in the nation in export-related jobs (270,240) among the 50 states and ranks third in the biggest gains in export-related jobs (63,000) since 2009.
  • Michigan experienced a 32-percent increase in exports to U.S. free-trade partners in the past 10 years.
  • 14,843 Michigan companies export goods, and those firms employ 270,927 people.

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