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December 07, 2010

Krugman Slams Korea FTA

In a blog post yesterday, renowned economist Dr. Paul Krugman slammed the advocates of the Korea FTA who are claiming that the FTA will hasten the economic recovery and create jobs:

One thing I’m hearing, now that all hope of useful fiscal policy is gone, is the idea that trade can be a driver of recovery - that stuff like the South Korea trade agreement can serve as a form of macro policy.

Um, no

Our macro problem is insufficient spending on U.S.-produced goods and services....

Trade agreements raise [exports] - but they also lead to higher [imports].

Krugman notes - and we have pointed out previously - that U.S. GDP growth is dragged down by the trade deficit. When U.S. consumers spend money on imported goods rather than domestically-produced goods, there is less output from U.S.-based producers, factories shut down, and workers lose their jobs. Since studies have predicted that the Korea FTA will lead to an increase in the deficit, implementation of the Korea FTA will likely stunt the economic recovery and destroy American jobs.

Krugman further argues:

If you want a trade policy that helps employment, it has to be a policy that induces other countries to run bigger deficits or smaller surpluses. A countervailing duty on Chinese exports would be job-creating; a deal with South Korea, not. If you want the Korea deal, fine; but don’t claim virtues for it that it doesn’t possess.

If anyone is qualified to assess the value of a particular trade policy, it is Dr. Krugman. In 2008, he received the Nobel Prize in economics for his groundbreaking work in trade theory. The Obama administration ought to lend an ear to Krugman to hear his views on trade. Unfortunately, it seems that the administration has been listening to the advice of the U.S. Chamber of Commerce to approve the Korea FTA without substantial changes, which will allow its corporate members to offshore even more jobs.

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