Brookings FTA Paper Falls Short on the Facts

Last month, the Brookings Institution published a policy brief advocating for the passage of the Korea, Colombia and Panama trade deals (or FTAs). The policy brief contains little in the way of new research, but it certainly quotes existing research in a selective way.

Like the Obama administration, the policy brief incorrectly cites the U.S. International Trade Commission's (USITC) predictions for the change in exports to Colombia under the Colombia FTA as the increase in U.S. exports ($1,060 million), rather that prediction for the change in total U.S. exports under the FTA ($654 million). Moreover, the brief does not discuss the jobs implications of the fact that U.S. imports will increase more than exports under the Korea and Colombia trade deals. Since imports will increase more than exports, net job losses will likely result.

By now, this export mistake is familiar. What is new in the Brookings policy brief is it emphasizes the USITC's predicted change in nominal GDP under the FTAs. The policy brief says that the USITC predicts the Korea FTA will boost U.S. GDP by up to $12 billion and the Colombia FTA will boost GDP by $2.5 billion. (The USITC did not give a GDP estimate for the Panama FTA since the model that they used for that study could not estimate GDP changes.)

In reality, the numbers that the policy brief quotes are actually the USITC's estimates for changes in nominal GDP, i.e. changes in GDP that take into account price changes due to the FTAs. Basically, this is the number that is not adjusted for the inflation that occurs within the model. In a footnote to its $12 billion GDP estimate for the Korea deal, the USITC explains:

GDP here is defined as nominal GDP, which takes into account both the price and quantity changes of its components. Welfare, on the other hand, summarizes the real (i.e., exclusive of price effects) value of present and deferred consumption....Increases in the prices of consumption or investment will lead to an increase in GDP, but not in welfare.

In plain English, this means that the $12 billion figure cited in the policy brief is not the change in the quantity of goods and services produced by the U.S. economy. Rather, a separate measure called welfare represents this change in the real value of the economy that actually matters to businesses. Browsing through the tables (specifically, Table 2.1) in the report reveals that the USITC's estimate of the real increase in GDP under the Korea FTA is only $1.8-2.1 billion. Real GDP under the Colombia FTA is expected to increase by $419 million.

So, the predicted increase in GDP is smaller than claimed, but there's still an increase, and therefore we benefit, right? The truth is that the small predicted real GDP gains under the FTAs will not be enjoyed equally by everyone. The big economic issue with FTAs is that some of them may boost overall GDP slightly, but the gains go almost exclusively to corporations and those Americans who already have a lot of wealth. Meanwhile, the adjustment costs fall upon the middle and working classes, leading to net losses for them. Incidentally, the USITC's model simply assumes that adjustment costs don't exist. This distributional issue in trade policy is critical. Josh Bivens at EPI estimates that trade flows have increased income inequality in the U.S. by 7 percent, costing an average household $2,000 per year.

The policy brief also repeatedly claims that the U.S. is losing market share in Asia to its competitors. It argues that the Korea FTA will reverse this "trend."  This claim has scant evidence to back it up. As we pointed out in our latest Trade-ifact, U.S. exports to the Pacific region have grown 35 percent since 2005, while overall U.S. exports to the world have grown at a slower rate, 25 percent, over the same period.  And without FTAs the United States continues to edge out competitors, increasing its market share in most of the major Asian economies since 2005, including South Korea.

In a claim about the "benefits" of the Colombia FTA, the authors of the policy brief seem uninformed about the realities of Colombia’s rural economy. They write, "[The Colombia FTA] supports U.S. goals of helping Colombia reduce cocaine production by creating alternative economic opportunities for farmers." However, the Colombian Ministry of Agriculture and Rural Affairs conducted a study of the effects of an FTA with the U.S. upon nine primary agricultural products and found that full liberalization would lead to a 35 percent decrease in employment in those sectors (see pages 162-163 of the study). The study said that with an FTA without agricultural protections, rural Colombians “would have no more than three options: migration to the cities or to other countries (especially the United States), working in drug cultivation zones, or affiliating with illegal armed groups” (pg. 180). Thus, contrary to the claims of the policy brief, all evidence indicates that the FTA would reduce agricultural opportunities for farmers, possibly increasing cocaine production.