I've got a long and kinda nerdy post today, but hopefully you'll find it fun. (9/16 update here: Chamber responds!)
The U.S. Chamber of Commerce released a memo yesterday that attempted to project a possible trajectory for U.S. exports if pending trade pacts with Colombia, Panama and South Korea were approved. Extrapolating from the U.S. export growth rate under a select 10 other so-called “free trade agreements” (FTAs) implemented under President Bush’s tenure, the Chamber estimated that annual exports to Colombia, Panama and South Korea could total $101 billion without the FTAs, and $143 billion with the FTAs, by the year 2012. The difference between the two figures – $42.6 billion – would constitute an export “premium,” in the Chamber’s wording. John Murphy, the Chamber’s vice president for international affairs, went so far as to call this “a $42 billion economic stimulus that’s almost free.”
There are several problems with the Chamber’s report and framing. First, the Chamber’s calculation is incomplete and highly misleading. As with past Chamber and Bush administration estimates (PDF), U.S. export performance in Canada, Israel, Jordan and Mexico – FTA partners all – is curiously excluded. This is curious because these four countries account for 83 percent of all U.S. exports to FTA markets. Instead, the Chamber’s calculation only includes a select 10 FTAs negotiated with mostly poorer countries under the Bush administration.
The graph and table posted here shows that once these four FTA partners are reinserted into the calculation, U.S. export growth in FTA markets since 2003 (8 percent) is not only lower that the select 10 Chamber estimates (24 percent), but is lower than U.S. export performance in non-FTA markets (14 percent). In other words, U.S. export growth in non-FTA markets was nearly twice that of FTA markets, and the U.S. export growth rate to all FTA countries is only a third that of the Chamber’s select 10 FTA countries. I present to you (fanfare please!): the FTA export penalty.
Additionally, in its memo, the Chamber chose to compare the average annual export growth in their select 10 FTA countries to a figure for U.S. export growth to the world as a whole. There are several problems with this decision. There is an “apples and oranges” problem, in that the averages are calculated for the “select 10” countries only in post-implementation years (which could either be 2004, 2005, 2006 or 2007, depending on the country), while the world average is calculated for the 2003-08 period as a whole. While there is a certain appeal to this approach, it means that the countries are not being compared under identical global economic circumstances. There is also the problem that, to isolate the “FTA effect,” one should compare U.S. export performance in FTA countries to that in non-FTA countries, not to the world as a whole (which includes the FTA countries, and thus skews the measurement.) Finally, it should be noted that these averages are not trade-weighted, meaning that large changes in exports to countries with which the United States has relatively trivial amounts of trade – such as Morocco and Bahrain – drive the average sharply upward.
Second, when the correct numbers are used, the Chamber’s methodology shows an “FTA export penalty” of $20.1 billion. In its memo, the Chamber attempts to take averages from past U.S. export growth performance in highly selective years and countries, and extrapolate from these how much exports to Colombia, Panama and South Korea might increase if they grew at these historic rates. The Chamber’s “baseline scenario” is how much exports to these three countries would grow by the year 2012 if they simply followed the 2003-08 U.S. export growth to the world as a whole. Their “FTA scenario” is how much exports to these three countries would grow by 2012 if they instead followed a 25 percent export growth rate (which is the Chamber’s “conservative” rounding down of their unusually calculated average to the select 10 FTA countries.)
In our corrected projections, we utilize the non-FTA U.S. export growth rate as the “baseline scenario”, and that of the full 14 FTA countries as the “FTA scenario.” It turns out that, under this exercise, U.S. annual exports to Colombia, Panama, and South Korea in the “FTA scenario” would be $20.1 billion lower by 2012, relative to the “baseline scenario.”
One could object that this conclusion – that FTAs would reduce exports relative to a non-FTA scenario – is ridiculous. However, an extreme example might show that the notion that exports or export growth rates might actually decrease after an FTA is not so insane. Imagine that the U.S. government signed an FTA reducing tariffs with a country in the midst of a natural disaster, civil war, and/or economic depression. Or even simply Antarctica or another remote location. The level of (or growth in) demand for U.S. exports within such a country would be very low, despite the fact that no tariffs were charged. Or at the other extreme, a country that imposed tariffs of 30 percent on U.S exports – but where GDP was growing at 40 percent a year – could nevertheless demand a healthy amount of U.S. exports. This reasoning indicates that rapid economic growth in other nations is of greater importance to our exports than the existence of an FTA. If the Chamber is interested in seeing rapid U.S. export growth, it should be more concerned with how to put more money in the hands of foreign consumers, which may have little or nothing to do with promoting trade pacts. (And, to the extent that FTAs may encourage countries to specialize in lower-wage export industries, an FTA might actually work against U.S. export expansion.)
Moreover, the purpose of FTAs is not primarily to increase gross or net exports. While U.S. trade with Canada and Mexico under NAFTA has produced large, persistent, bilateral trade deficits, U.S. trade with Central America under the few years of CAFTA has (thus far) produced small, bilateral trade surpluses, which have hardly put a dent in our overall trade deficit. While previous U.S. presidents bear the brunt of the political liability for NAFTA, the Bush administration does not therefore deserve credit simply for having picked mostly small, economically moribund countries with which to negotiate similar FTAs.
The real purpose of FTAs, as the Bush administration has admitted in moments of candor, is to serve as delivery mechanisms for deregulation at home and abroad. The public debate is not well served when participants on any side of the debate cling to movements in bilateral trade balances as evidence for a position in favor or against FTAs. In general, it is unlikely and difficult to prove that FTAs cause movements in trade balances. At the same time, because advocates of FTAs have consistently painted FTAs as a solution to domestic U.S. economic problems, it is worth scrutinizing bilateral trade balances while FTAs have been in place, just to test the hypothesis. As this memo has shown, the claim fails.
Setting aside this objection, exports are unlikely to provide the needed economic stimulus in any case. To see why, it is worth considering some basic national income accounting. The lion’s share of the U.S. economy is taken up by private consumption – 71 percent. Because of the current labor and housing market disasters (and credit cards and other forms of credit are drying up), policymakers cannot rely on consumers to pull the U.S. economy out of recession. Two other elements of national income (also known as Gross Domestic Product, or GDP) are business investment and net government spending, which constitute 14 and 18 percent respectively. Net exports – the difference between what we export and import – constitute a negative five percent of the economy. So, currently, other sectors of the economy have to “work harder” to compensate for losses in the net export sector. No economists are predicting that the trade deficit will turn to balance or surplus in the near term, which means sectors other than net exports will have to take up the slack.
In fact, the Chamber’s export-only analysis disregards the Bush administration’s own conclusions about the import side of the trade balance sheet. In an October 2006 speech to a Korean audience, then-Deputy USTR Karan Bhatia said that it was a myth that “The U.S. will get the bulk of the benefits of the FTA. If history is any judge, it may well not turn out to be true that the U.S. will get the bulk of the benefits, if measured by increased exports… the history of our FTAs is that bilateral trade surpluses of our trading partners go up.”
The U.S. trade deficit with FTA countries as of 2007 was $186 billion, just over a quarter of the total U.S. trade deficit. Just as increased export revenues can boost GDP, increased trade deficits can drain GDP. Because imports have surpassed exports in every year since 1975, policymakers and economists rarely look to the export sector for stimulus. (It’s worth noting that the U.S. International Trade Commission (USITC) – the government’s official, non-partisan source for trade projections – estimates that the U.S. global trade deficit will increase slightly under the FTA with Colombia, and decrease slightly under the FTA with Korea. Because U.S. trade with Panama is so small and concentrated in a few sectors, the USITC did not even attempt to estimate changes to the U.S. trade balance under the proposed FTA.)
Finally, a boost in export revenues that can only be fully felt in 2012 – even assuming this were to occur, as the Chamber alleges – would not help the U.S. economy out of its current predicament.
In conclusion, given still substantial U.S. trade deficits, exports are highly unlikely to be a meaningful channel of domestic economic recovery. Given that FTAs may actually have a mildly penalizing effect on U.S. export growth rates, U.S. policymakers would be wise to cease in further promotion of FTAs and instead focus scarce legislative time on anti-recessionary measures both domestically and internationally.
(Careful observers will note that our underlying numbers vary slightly from the Chamber’s numbers. We use the U.S. International Trade Commission’s “domestic exports” measure, which excludes transshipped exports. We have also adjusted for inflation using the latest Congressional Budget Office’s CPI-U-RS estimates. The Chamber appears to use information provided by a separate agency, and does not state their inflation adjustments. The conclusions about the direction and rough magnitude of the trends should be comparable using the USITC or other government datasets.)