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March 25, 2011

The Incredible Shrinking FTA Jobs Claim

In Rep. Brady's announcement of last week's hearing on the Colombia Free Trade Agreement (FTA), he said, "According to the President’s own statements, [the pending trade agreements with Colombia, Panama, and South Korea] have the ability to create over 250,000 American jobs." Speaker Boehner's blog has also been claiming this 250,000 jobs gain figure.

But did the President ever say that the three FTAs will create 250,000 jobs? No. Rep. Brady here makes at least three errors. If you correct for one, the "jobs created" number goes down to 78,000. If you correct for two, the jobs number goes down to 39,333. If you correct for three, the job gain turns into a job loss of 3,200 jobs.

Back in November 2009, Obama gave an interview to Reuters on the eve of his trip to Asia in which he stated, "And right now we have about 9 percent of -- a 9 percent share of Asia's -- not just China, but Asia's trade overall, and it's estimated that for every 1 percent of increased share that we get, that could mean 250,000, 300,000 jobs."

Obama's statement was misinterpreted almost immediately by opponents of fair trade. In December 2009, Rep. Aaron Schock (R-IL) wrote an op-ed in The Hill in which he claimed, "Surprisingly, even President Obama agrees with me. He recently stated that increasing US exports by just one percent would create over 250,000 American jobs. According to the International Trade Commission [USITC], passage of the Colombia, Panama and South Korea free trade agreements would increase our exports by more than one percent. The inaction on these trade agreements is preventing the creation of a quarter million American jobs."

Rep. Schock completely ignored the crucial difference between increasing America's market share in Asia (a very big pie) and increasing total U.S. exports (a sizable, but smaller, pie). Going from 9 to 10 percent of the export market share in Asia would mean that total U.S. exports to the world would actually increase by three percent. When Obama talked about going from 9 to 10 percent of the market share in Asia, he was talking about increasing exports by $37.2 billion, which would have translated into 248,000 jobs using the standard exports-jobs multiplier estimated by the Commerce Department, so his estimate was apparently spot-on. Schock is instead talking about a projection of an increase in U.S. exports to the world of one percent, or $11.7 billion, which would translate into only 78,000 jobs using the standard jobs multiplier.

So, Rep. Brady is merely dusting off Rep. Schock's old talking claim that was based on shoddy math. But was Rep. Schock's claim that the USITC predicted a one percent increase in total US exports from the three FTAs accurate? No.


From Schock’s editorial it's clear that he's talking about the change in bilateral exports estimated by the USITC. The sum of the USITC's "high" bilateral exports scenario for the Korea FTA and the USITC's bilateral exports projection for the Colombia FTA is $12.0 billion, which is about one percent of U.S exports to the world. (The USITC did not even make a projection for the effect of the Panama FTA upon exports of all types of commodities since Panama is such a small economy.) However, the USITC's Korea and Colombia studies estimated that U.S. exports to the world would increase by only $5.9 billion under the FTAs (with "high" Korea scenario) since U.S. exports currently going to third countries would be diverted to Colombia and Korea. This $5.9 billion number would correspond to 39,333 jobs.

But even $5.9 billion in exports is only half the story. Just as exports create jobs in the U.S., imports destroy jobs. The USITC's Korea and Colombia studies estimated that total U.S. imports would increase by $6.4 billion under the FTAs, so the deficit would increase by $482 million under the deals. Although applying the Commerce Department's jobs multiplier to the USITC study as Rep. Brady has done isn't really legitimate due to incompatible methodologies, it is illustrative to do so to compare Rep. Brady's claim with reality. Applying the job multiplier to net exports here, the "jobs gain" turns into a loss of 3,200 jobs when imports are accounted for.

Finally, the USITC has been overly optimistic in past predictions of the effects of tariff reductions on the trade deficit. Rob Scott at the Economic Policy Institute estimates that the Colombia and Korea FTAs will cost the United States 214,000 jobs over the next seven years, based on an analysis of the historical U.S. experience with trade agreements.

When you peel away the layers of errors of fair trade opponents, it becomes clear that the Korea, Colombia, and Panama FTAs will harm American workers and worsen the unemployment situation.

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