Krugman Slams Korea FTA
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Administration's Korea FTA Numbers Need a Factcheck

Obama's Friday announcement of the tiny changes to the Korea FTA tried to portray the deal as a winner for the U.S. economy and American workers:

I am very pleased that the United States and South Korea have reached agreement on a landmark trade deal that is expected to increase annual exports of American goods by up to $11 billion and support at least 70,000 American jobs. 

A "factsheet" accompanying the announcement reveals that the U.S. International Trade Commission's (USITC) study on the Korea FTA was the apparent source of these figures:

With the U.S. International Trade Commission (ITC) estimating that the tariff cuts alone in the U.S.-Korea trade agreement will increase exports of American goods by $10 billion to $11 billion, advancing this agreement will secure the tens of thousands of American jobs supported by those exports...

A New York Times article published today reveals the real story on these numbers:

But the pact is likely to result in little if any net job creation in the short run, according to the government’s own analysis....

In fact, the effect of the agreement on aggregate output and employment in the United States “would likely be negligible,” according to a federal study, largely because the United States economy is so much larger than that of South Korea. Indeed, the study found, the country’s overall trade deficit with the rest of the world is likely to grow slightly as a result of the agreement.

Back in August we debunked the administration's Korea FTA stats, but the Obama administration has continued to tout these bogus figures. Regarding the alleged $11 billion rise in exports, the crux of the issue is that the factsheet is quoting the wrong section of the USITC report (the administration is citing Table 2.2 on page 2-8 of the report). The USITC study predicts that U.S. exports will increase by only about $4.8-5.3 billion, as Table 2.3 on page 2-14 of the report indicates. In addition, the study predicts that U.S. imports will increase by $5.1-5.7 billion due to the Korea FTA. This large increase in imports completely wipes out the benefits of the increase in exports and turns the predicted effect into a net negative.

The $10-11 billion figure that the administration is citing is merely the change in the U.S. bilateral exports to Korea itself, which tells only part of the story. As the USITC study acknowledges, bilateral tariff reductions induce significant "trade diversion" effects, which means that implementation of the Korea FTA will “rob” from the volume of U.S. exports that currently go to third countries and shift those exports to Korea, leading to little net increase in U.S. exports. The diversion occurs because many exporters of U.S. goods will stop exporting their goods to other countries like Germany and instead start exporting to Korea, just because the tariff that they face for exporting to Korea is lower than the tariff that they face when trying to export elsewhere. The shift in the destination of exports alone does not increase U.S. economic output or employment. Only net export gains matter for American workers.

This distinction between the USITC's projections for U.S. exports to the world vs. U.S. exports to Korea is not splitting hairs in the least.  In fact, a National Bureau of Economic Research working paper that analyzed changes in trade flows due to NAFTA found a small increase in U.S. economic welfare due to NAFTA-induced changes in bilateral trade flows with Canada and Mexico, but this positive welfare effect was completely wiped out and transformed into a net negative due to "too much trade diversion," i.e. shifts of U.S. export flows from non-NAFTA countries to NAFTA countries. 

Our own back-of-the envelope calculations suggest that 50% of the increase in U.S. exports to Korea, as predicted by the USITC, represents U.S. exports that currently flow to third countries being diverted to Korea due to the bilateral tariff reductions.

On the jobs figure touted by the Obama administration, the crux of the issue is that their calculation only considers the job creation induced by exports and ignores all of the jobs that will be destroyed due to increased imports. The USITC predicts that the Korea FTA will lead to an increase in the U.S. goods trade deficit. This increased deficit will lead to a net loss of U.S. jobs, not the 70,000 jobs gained as alleged by the administration.

Unfortunately, the administration's errors in discussing the USITC's study on the Korea FTA were being repeated by news reports in the immediate aftermath of the Friday announcement, misinforming the public. Though at least one outlet, the International Business Times, got it right, noting that Public Citizen "pointed out that Bush-era International Trade Commission studies showed the Korea deal will increase America's trade deficit."

As Paul Krugman said, Korea FTA proponents are flat-out wrong about the economic impact of the FTA. In fact, the FTA will likely destroy jobs, increase the trade deficit, and hinder the U.S. economic recovery.  Now that the Obama administration has taken ownership of the NAFTA-style Korea FTA without substantive fixes, it should expect more job loss in the next few years and voter rage in November 2012.

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