Obama Discusses “Free Trade” With Journal Gazette
Posted by Jeff Pruitt - 3/22/08 @ 1:31 pm - Filed Under 2008 National Elections, Featured, National Politics, State Politics
There’s nothing more frustrating than reading a story on NAFTA that doesn’t accurately describe what has happened since its enactment. So after reading Sylvia Smith’s story in this morning’s JG I was certainly frustrated. She briefly interviewed Barack Obama and he mentioned that we need to look at revisiting our trade policies to make sure they are fair to the United States. Smith then added a few statistics to her story that I don’t feel tell the full picture. I have some charts below that will make NAFTA’s effect on Indiana crystal clear.
I also want to point out that we do not have ANY “free trade” agreements. At the end of this post I have included testimony from the Senate floor where Senator Byron Dorgan illustrates why this is so. His examples will probably be eye-opening to those that haven’t seen them before and you’ll understand why our trade deficit has ballooned and why these agreements are unfair to the United States.
From Smith’s article:
Since NAFTA went into effect, Indiana exports have grown steadily, from $11 billion in 1996 to $22.6 billion in 2006.
To that I would say - so what? Isolating exports without imports means you’re simply not analyzing trade. The Economic Policy Institute has done the most comprehensive study since NAFTA was enacted. Their analysis states:
First, growing trade deficits with Mexico and Canada have displaced production that supported roughly 660,000 (manufacturing only) and 1.0 million (total) U.S. jobs since the agreement took effect in 1994. Export growth since 1994 supported an additional 1 million U.S. jobs, while imports displaced domestic production that would support 2 million jobs.
Second, average wages in U.S. jobs that compete with U.S. imports from Mexico pay 1% to 5% more than jobs in industries that export to Mexico. Therefore, even if U.S. exports to and imports from Mexico had grown equally, the United States would have experienced downward pressure on wages.
In other words not only have we lost jobs from NAFTA but the ones we’re replacing them with are lower-paying - more on this and how it relates to Indiana later. Smith adds another statistic that I believe is misleading:
Indiana has lost 113,000 manufacturing jobs since 1998, when such jobs made up 23 percent of all the non-farm jobs in the state. Today, manufacturing accounts for 18 percent of the jobs Hoosiers hold. During the decade, the state saw a net gain of 100,000 jobs, according to federal employment statistics.
These jobs are not mutually exclusive. Just because we’ve lost jobs in one area doesn’t mean we can’t gain in another. The problem is the net job loss for the state of Indiana is, according to the EPI study, the 2nd largest in the nation behind only Michigan.
But I think the real point here is that we’re creating jobs at a slower pace than the rest of the country. Here’s a chart I created from Bureau of Labor Statistics data showing that Indiana is severely lagging the US average over the same timespan Sylvia Smith references in her story:
And to make matters worse, the jobs we are creating are lower paying than those of the rest of the country. To illustrate this point I created another chart from US Census data showing the Indiana median household income compared to the US average. You can see that back in 1998 Indiana wages were actually higher than the national median but we’ve been in decline ever since.
I don’t think Obama is being protectionist when he claims we need to revisit our trade policies - in actuality I think he’s being prudent. I’ll let the testimony of free trade champion Senator Byron Dorgan explain why that’s so. These examples are simply devastating to anyone claiming we have “free trade” policies:
Every time I come to the floor, I cite the example of the Korean auto market. I know the Korean automobile industry chokes on it because I have gotten several letters from them now. I use this as an example of fair trade because there is just such a lopsided trade imbalance with Korea when it comes to cars. Last year Korea shipped 620,000 Korean cars to the United States. Do you know how many American cars we were able to sell in Korea? We sold 2,800.
Let me say that again. Korea shipped us 620,000 Korean automobiles and we were able to sell 2,800 U.S. automobiles in Korea. Do you know why? Because the Koreans don’t want to buy U.S. automobiles–I am talking about the Korean Government. They don’t want Koreans to purchase U.S. automobiles, and they put a series of obstacles up against us selling cars in Korea. Fair? Of course it is not fair. Is there somebody going to do something about that? No. Our trade negotiators are not interested in solving problems–only in negotiating new agreements.
There is the unfair trade involving wheat from Canada, that comes here from a monopoly called the Canadian Wheat Board that would be illegal in this country, taking money out of the pockets of our family farmers, and nothing is being done about it. How about Brazilian sugar that undermines our sugar program? The sugar is shipped to Canada, where it is packed into molasses. The
molasses are shipped to the United States, where the sugar is taken out, and the molasses are shipped back to Canada. This is just a blatantly unfair trade practice, yet nobody is doing anything about it.Or let’s talk about barriers to U.S. exports of high-fructose corn syrup to Mexico. The Mexicans said they would let it into their country. But they will not.
Every pound of beef going from this country to Japan has a 38.5-percent tariff, every single pound of American beef. We ought to get more T-bones into Japan. Our negotiators thought it was a triumph to get Japanese tariffs on U.S. beef reduced to 38.5-percent. Is that a success? I don’t think so.
Wheat flour–try to sell wheat flour to the European Union. There is a 78-percent tariff on wheat flour to the European Union, so our farmers can’t get wheat flour into the European Union. In fact, we can’t get U.S. beef into the European Union because it is produced with hormones. The European press has the Europeans thinking we produce cows with two heads.
For the first 25 years after the Second World War, our trade was all foreign policy. It didn’t have anything to do with economic policy. We could tie one hand behind our back and beat anybody in the world. We were the best, the strongest, and the fact is, we could out-trade anybody under any set of circumstances. So for 25 years our trade policy was foreign policy. But the second 25 years after the Second World War things are different. Our competitors are shrewd and tough competitors–Japan, Europe, Canada, China, and others. The fact is they have grown to be shrewd, tough international competitors, and our trade policy can’t be foreign policy anymore.
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8 Responses to “Obama Discusses “Free Trade” With Journal Gazette”
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While I agree that Sylvia’s story fails to tell the whole story, your statistics fail to address the whole NAFTA picture. Trade imbalance and job loss would have occurred with or without NAFTA. Indiana has lost jobs to Mexico, not because of NAFTA, but because of the low cost of labor in Mexico. You cited an imbalance of trade between the US and Korean Auto industry. Let’s look at the cost of labor in the U.S. Auto Industry. This came from a January 2007 issue of Fortune Magazine:
http://money.cnn.com/2007/01/26/news/companies/pluggedin_taylor_ford.fortune/index.htm
“Health care is the biggest chunk, for instance spends $1,635 per vehicle on health care for active and retired workers in the U.S. Toyota pays nothing for retired workers - it has very few – andonly$215 for active ones.
Other labor costs add to the bill. Contract issues like work rules, line relief and holiday pay amount to $630 per vehicle - costs that the Japanese don’t have. And paying UAW members for not working when plants are shut costs another $350 per vehicle.”
As long as our labor market is this out of touch with its competition Indiana is going to lose jobs. NAFTA may have greased the skids and made it easier for the imbalance to occur, but one must question if our manufacturing can compete with its current Union work rules and inflated costs of labor. We could reverse NAFTA today and it would neither bring jobs back nor stem the flow of jobs out of Indiana. Indiana’s only hope in sustaining a manufacturing base is manufacturing something that is not automotive and can not be made with unskilled labor.
It is time we went with UFT, unilateral free trade, with the Americas. We don’t need NAFTA to tell us how to trade.
Jon,
The reason there’s an imbalance with Korea is not because of labor costs, competitive advantage, etc. It’s because the Korean government puts up protectionist obstacles for the importation of our cars - period. And I don’t say that to dismiss the premise of your comment; I’m merely pointing out that for that single example it really doesn’t matter.
I don’t agree with this. If we balanced our trade by issuing import certificates (another post for another day) we would certainly bring jobs back to this country and back to Indiana in the process. Of course somewhere around 30% of our trade deficit is in oil imports so until we deal with that there’s no hope of fixing it.
And that brings me to the point we are in whole agreement:
We could do that by focusing on green technology and energy efficient manufacturing. As a country we are going to limit our importation of foreign oil at some point in the future - sooner rather than later. Indiana should be moving to lead that charge and position itself in the green marketplace.
Right now it appears we’re putting all of our eggs in the ethanol basket which is a losing technology in my opinion (again, another post for another day). Not that we shouldn’t be involved in the ethanol craze but we should look to diversify as well.
I really think this needs to be a coordinated effort by our government representatives. Leadership from the next governor and current mayors coupled with some help from our local Congressmen could put us on the right track…
I dare say the U.S. will not likely ever have a competitive advantage in the global automotive market. Not without rethinking and recreating the paradigm in which our labor market exists. I would be all for quid-pro-quo trade agreements that put up import barriers for those countries who do the same with our exports. The greatest weapon we have is access to our market, yet we fail to use it.
Green technology and energy efficient manufacturing will inevitably come, summoned, not by the environmental left, but by corporations as they are drawn to it in a free market attempt to reduce operational costs. If Indiana is ever going to recapture its manufacturing base it must turn toward more diverse industry which will include a labor force that is more highly skilled than that of our parents generation. Warsaw is a prime example of a community that has been able to build its economy around non-automotive and to some degree non-union labor.
Obama and Clinton (and I am supporting Clinton as you know) both talk about revisiting NAFTA, but last year when the U.S. - Peru Free Trade Agreement was put to a vote, both failed to vote on its passage. It was signed into law on December 14, 2007.
Both of them need to stop talking about opposing these types of agreements and put up or shut up about the issue. Skipping the vote was just a way to be able to say that they didn’t vote in favor of it.
In fact, the other three senators running at that time - Dodd, Biden, and McCain - all abstained from the vote as well. Could it be no one wanted to have that albatross around his or her neck?
Jeff, I came across this post as the result of a Google Blogs Alert.
I would like to offer an entirely different perspective on the root cause of our trade deficit, which goes well beyond NAFTA. I have recently published a book titled “Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America.” To make a long story short, this new economic theory links population density and per capita consumption. As population density rises beyond some optimum level, per capita consumption begins to decline. This happens because as people are forced to crowd together and conserve space, it becomes ever more impractical to own many products. Falling per capita consumption, in the face of rising productivity (which always rises), inevitably yields rising unemployment and poverty.
This new theory has huge ramifications for U.S. policy toward population (especially immigration policy) and trade. The implications for population policy are obvious, but why trade? It’s because these effects of an excessive population density - unemployment and poverty - are actually imported when we attempt to trade freely in manufactured goods with nations much more densely populated than our own. In such a situation, the two economies combine. The work of manufacturing is spread evenly across the combined labor force. But, while the more densely populated nation gets free access to our healthy market, all we get in return is access (if we get access at all) to a market that is emaciated by over-crowding and low per capita consumption. The result is an automatic, irreversible trade deficit and loss of jobs.
One need look no further than our own trade data for proof of this relationship. Doing an in-depth analysis of our 2006 data, I found that, of the top twenty per capita trade deficits in manufactured goods (the deficit divided by the population of the nation in question), eighteen were with nations much more densely populated than the U.S. Even more revealing, if the nations of the world are divided in half around the median population density, with the half that is less densely populated than the median, the U.S. had a trade surplus in manufactured goods of $17 billion. With the more densely populated half of nations, we had a trade deficit of $480 billion!
Someone suggested above that it is the low cost of labor in Mexico that draws jobs away from the U.S. Well, there’s no denying that there is an element of truth in that, but it doesn’t tell the whole story. If cost were the driving force, then why is that, of our top twenty per capita trade deficits in manufactured goods, thirteen are with nations with per capita purchasing power parity of at least $20,000 per year? Our per capita deficits with Japan and Germany are significantly larger than with Mexico, yet both are very wealthy counries. Tops on the list is Ireland, another wealthy country, with a per capita trade deficit that is 25 times higher than our deficit with China. What do they all have in common? All are much more densely populated than the U.S.
It was also suggested above that we need to cut costs and invest in new technology to compete. After decades of improving quality, cutting costs, increasing productivity and even relying on a falling dollar, we see that our deficit continues to grow. These things won’t work because they don’t address the root cause of our deficit - the gross disparity in population density between the U.S. and so many of our trading “partners.”
Someone else mentioned the huge imbalance of auto exports to Korea vs. imports from Korea. Here is a perfect example of my theory at work. I’ll concede that Korea has barriers in place but, even if they didn’t, the situation would be little changed. Per capita consumption of vehicles in Korea, both in terms of number and size, is just a fraction of that in the U.S. Why? Are they too poor to afford cars? Heck no, they are a very wealthy country! The problem is that their extreme population density - 15 times more densely populated than the U.S. - makes it impossible for many people to own cars. So they get our market and we get the unemployment and poverty that they’d otherwise experience.
The only effective strategy that can restore a balance of trade is a tariff structure on manufactured goods that is indexed to the population density of our trading partners. While free trade in natural resources and free trade between nations of approximately equal population densities is indeed beneficial, free trade with nations that are much more densely populated is a sure-fire loser. The result is a cumulative trade deficit since 1975 (our last year with a trade surplus) of nearly $9 trillion. Imagine what an economic stimulus it would be if we had that $9 trillion back!
If interested in learning more about this new theory, please visit my web site at OpenWindowPublishingCo.com where you can read the preface for free, join in my blog discussion and, of course, purchase the book if you like. (It’s also available at Amazon.com.) Forgive me if this sounds a little spammish, but I don’t know how else to inject this new dimension into the trade policy debate without drawing attention to the book.
Keep up the good work of raising concern about this vital issue!
Pete Murphy
Author, Five Short Blasts
The reason why per capita consumption goes down when population density goes up is because people are better able to share resources. Economies of scale comes into play, big time. A person living in the country is more likely to buy an SUV, while someone in a large city would could use mass transportation. It could be considered good for people’s overall quality of life if they like living in the city.
If countries with dense populations compete better, we should consider getting ourselves a denser population. This would solve the housing crisis, by the way. So you all need to either have more kids or support a more open immigration policy.
[...] 2006. I can’t believe she’s still rehashing this bogus statistic. As I pointed out in my last post on this topic looking at exports without looking at imports is futile. Without including both inputs and outputs [...]