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Free Trade vs. Protectionism – NAFTA, TPP, TTIP & BIT

The debate about free trade versus protective tariffs (taxes) has raged for centuries. However, it has become especially virulent as industrialized countries lose an increasing amount of jobs to emerging nations. Free traders, worried about the possibility of new tariffs to protect native industries, predict a trade apocalypse. Reported by TIME, Robert Zoellick, president of the World Bank, claimed, “If we start to trigger a round of protectionism, as you saw in the 1930s, it could deepen the world crisis.”

Proponents of free trade – including many economists – claim that the benefits of lower prices far outweigh the costs of lower incomes and displaced workers. Professor of Economics Alan Binder, writing in the Library of Economics and Liberty, claims that a country’s wage level depends not upon its trade policy, but its productivity: “As long as American workers remain more skilled and better educated, work with more capital, and use superior technology, they will continue to earn higher wages than their Chinese counterparts.”

Opponents of free trade disagree. Senator Bernie Sanders of Vermont has consistently voted against trade agreements, including the North American Free Trade Agreement (NAFTA). He argues that trade agreements have encouraged corporations that seek low-income labor and fewer regulations to close factories and ship jobs overseas. According to the senator on Fox News, “Over the years, we [America] have lost millions of decent-paying jobs. These trade agreements have forced wages down in America so the average worker in America today is working longer hours for lower wages.”

Understanding the history of tariffs and free trade, especially in the United States, is necessary to evaluate the effects of NAFTA and the proposed Trans-Pacific Partnership (TPP). Two other major trade agreements are also being discussed – The Transatlantic Trade and Investment Partnership (TTIP) and the China Bilateral Investment Treaty (BIT) – which could have global ramifications as well.

Tariffs and Free Trade in the 20th Century

By the end of World War I, advocates of high tariffs recognized that tariffs weren’t the most important source of government revenues and so adopted an alternative argument. There was the widespread belief that tariffs benefited the wealthy while raising the cost of goods for other Americans. As a consequence, protectionists justified tariffs primarily as a way to promote employment for citizens of their country. This argument coincided with a growing concern that inexpensive foreign goods would destroy domestic manufacturers and lead to widespread unemployment.

After World War I, economic nationalism and protectionism dominated world trade with countries creating new taxes on foreign goods to protect native industries and maintain full employment of their citizens. As the global economy shrank, countries retreated behind the new tariffs and trade blocks to protect native industries until after World War II.

From the early 1900s until the Great Depression, America’s economy flourished even as the country turned isolationist. In 1922, Congress passed the Fordney-McCumber Tariff (which raised taxes on imports) to help farmers and factory workers find work. In 1930, the controversial Smoot-Hawley Tariff Act was passed, stimulating an increase of widespread punitive tariffs around the world. But Smoot-Hawley did not have the desired effect of ultimately protecting American business; according to the Foundation for Economic Education, it was a significant factor in the subsequent global economic collapse.

Expansion of Free Trade

To aid in economic recovery from the Great Depression, the controversial Reciprocal Trade Agreements Act was passed in 1934 . It gave the president power to negotiate bilateral trade agreements with other countries, with Congressional approval. As the country recovered, sentiment toward free trade changed. In 1947, 23 nations signed the General Agreement on Tariffs and Trade (GATT), leading to a substantial reduction in tariffs worldwide. The World Trade Organization (WTO) replaced GATT in 1995 and currently has 162 member nations.

Subsequent trade acts under President Richard Nixon and their extension in 2002 under President George W. Bush gave the president the power to “fast track” approval of trade agreements with a simple Congressional up or down vote. Since its passage, the fast track process has been used only 16 times – generally for controversial trade pacts. However, the power to fast track a trade agreement expired at the end of 2007 due to a rising populist concern that foreign companies were taking American jobs.

North American Free Trade Agreement (NAFTA)

flags of the north american free trade agreement nafta countries canada united states mexico

The North American Free-Trade Agreement is one such fast-track agreement, and was a controversial issue in the 1992 presidential campaign. Negotiations for the agreement had begun in 1990 under President George H.W. Bush, who was given fast-track authority in 1991, later extended through 1993. While government proponents of the agreement – including presidential candidates George H.W. Bush and Bill Clinton – predicted that NAFTA would lead to a trade surplus with Mexico and hundreds of thousands of new jobs, third-party candidate Ross Perot vehemently disagreed. He claimed its passage would result in a “giant sucking sound going south,” with money pouring out of the U.S. into Mexico.

NAFTA entered into force January 1, 1994, between the countries of Canada, Mexico, and the United States. The purpose of the agreement was to eliminate all tariffs between the three countries within 10 years, excluding some U.S. exports to Mexico to be phased-out over 15 years.

The agreement also contained two side agreements negotiated by President Clinton’s trade representative Mickey Kantor regarding the following:

  • Labor Rights and Conditions. This agreement was an attempt to appease the AFL-CIO (a traditional Democratic Party supporter) and their concerns that the agreement would lead to similar agreements with other low-wage countries and loss of jobs in America. While the intentions behind the labor pact were good, the outcome was disappointing. According to Rebecca Van Horn, writing in the International Labor Rights Forum 12 years after NAFTA’s passage, the agreement has been ineffective since “labor rights violations abound, an immigration system remains broken, and the link between the welfare of workers abroad and workers at home goes unexamined.”
  • Environmental Protections. Worried that Mexico would become a haven for industrial polluters, environmentalists opposed NAFTA and filed a suit to require the Clinton administration to file an environmental impact statement before submitting the agreement to Congress for approval. If upheld, the strategy would have killed the treaty. As a consequence, trade sanctions on Mexico were added, in case they violated the environmental provisions. While coupling environmental concerns to free trade was innovative at the time, the enforcement agency created by the agreement – the Commission for Environmental Cooperation (CEC) – was grossly underfunded and lacked enforcement authority over the parties. An independent study of the CEC in 2012 concluded that it appears to be “moderately effective at promoting environmental cooperation to improve domestic environmental programs,” but has been unable to enforce environmental laws or integrate trade and environment as originally hoped.

Economic Effects

According to U.S. Census figures, United States exports and imports to Mexico in 1994 totaled $50.8 million and $49.5 million, respectively, creating a positive trade balance of less than $2 million. By 2015, exports had risen to $235.7 million with imports of $296.4 million, creating a trade deficit of $60.7 million. In the 21 years since the passage of NAFTA, the cumulative trade deficit with Mexico has been almost $820 million.

The Census Bureau reported exports and imports to Canada in 1995 of $127,226 million and $144,369.9 million, respectively. While annual exports to Canada had more than doubled by 2015 ($280,609 million), imports increased at the same rate ($296,155.6 million). The cumulative trade deficit with Canada was more than $870 million in the period 1995 to 2015.

In spite of intentions to produce a trade surplus, Ross Perot’s prediction of money funneling south (and north) out of the states is supported by the numbers.

But whether or not NAFTA has been beneficial to the country depends on upon your choice of expert analyses:

  • Economist Robert Scott of the left-leaning Economic Policy Institute claims that trade deficits with Mexico totaled $97.2 billion and cost 682,900 jobs in the period from its passage to 2010. Scott also argues that the new jobs that replaced the lost jobs paid less, estimating American workers lost $7.6 billion in wages in 2004 alone. Scott’s colleague, Jeff Faux, writing in The Huffington Post, claims that NAFTA and other trade agreements favor corporations eager to produce “in countries where labor is cheap, environment and public health regulations weak, and governments easily bribable.”
  • In his personal blog, professor of economics Brad DeLong at the University of California claims that NAFTA has resulted in a loss of only 350,000 jobs – a small number of the 140 million total U.S. jobs. He estimates that 700,000 new jobs to make exports to Mexico would have resulted if monetary and fiscal policy had been unchanged. DeLong also notes that Mexico has benefited from an increase of 1.5 million jobs that indirectly helps America. In any event, the U.S. Chamber of Commerce claims that trade with Canada and Mexico supports nearly 14 million U.S. jobs, including almost five million new jobs.

Both sides recognize that job losses have occurred since the passage of NAFTA, but disagree on its cause. Many on the left blame trade agreements or corporate boards and officers who outsource jobs overseas. According to James Moreland of Economy in Crisis, “The capitalist market in the United States makes it nearly impossible for any successful company to avoid the lure of cutting American industrial jobs and shipping the work abroad.”

Trans-Pacific Partnership (TPP)

Despite the growing opposition to NAFTA for its contribution to American job losses, talks began under President George W. Bush in February 2008 to join the Pacific Four (New Zealand, Chile, Singapore, and Brunei) trade agreement talks. President Obama continued the effort that subsequently included Australia, Peru, Vietnam, Malaysia, NAFTA members Canada and Mexico, and Japan. The Trans-Pacific Partnership, the trade agreement negotiated between the 12 Pacific Rim countries, was signed by the parties in early 2016. China is noticeably missing from the alliance. The agreement is not yet in force, having to pass Congress first and other countries’ legislative bodies.

Like NAFTA, the agreement includes the reduction and elimination of tariffs between the signatories (the member countries to the agreement). The agreement purports to protect intellectual property, establish new labor rights, protect the environment, and reduce income inequality among the nations. Reminiscent of NAFTA’s controversial passage, opponents and proponents have made similar arguments for TPP that accompanied the earlier trade agreement.

The signatories of the agreement in addition to the United States (and their respective trade volumes with the United States in 2015) according to U.S. Census data are as follows:

us trade volumes

Economic Benefits

The benefits resulting from TPP’s passage projected by the Office of the U.S. Trade Representative include:

  • Elimination of 18,000 tariffs now affecting U.S. exports to other countries in the partnership
  • New jobs averaging 5,800 per billion dollars of exports with pay up to 18% higher than non-export jobs
  • Enforceable labor and environmental protections, requirements for foreign-owned government businesses to compete fairly, and rules to keep the Internet free and open

Proponents of TPP

In The Diplomat, K. William Watson, a policy analyst with the Cato Institute, asserts that “free trade is universally good. The value of free trade agreements is how they lower protectionist trade barriers that divert the gains of economic exchange to a narrow group of politically connected rent-seekers [those who seek economic gain through the political process without benefit to others].” According to the Office of the U.S. Trade Representative, more than half of American CEOs would hire more U.S. workers if they could sell more exports.

The proponents of the agreement include the U.S. Coalition for TPP. Described as a broad-based group of U.S. companies and associations representing the principal sectors of the U.S. economy, the group works closely with the U.S. Chamber of Commerce. Other business groups advocating the passage of TPP include the National Association of Manufacturers, Business Roundtable, National Small Business Association, and American Farm Bureau Federation.

According to Techdirt, Big Pharma, Hollywood, and Wall Street (three of the biggest lobbying industries in Washington, D.C. ) are advocates of the partnership because they will receive additional protection from competition from foreign competitors.

Opposition to the Agreement

Nobel Prize winner Paul Krugman, generally for free trade, wrote in The New York Times that the TPP increases the ability of certain corporations to assert control over intellectual property, creating “legal monopolies.” He also states, “What’s good for Big Pharma is by no means always good for America.” While the Federal Government refers to the TPP as a new high-standard trade agreement that levels the playing field for American workers and American businesses, opposition to its passage is widespread:

  • Electronic Frontier Foundation. The EFF, a nonprofit organization defending civil liberties in the digital world, claims TPP is “a secretive, multinational trade agreement that threatens to extend restrictive intellectual property laws across the globe.”
  • Public Citizen. A nonprofit, nonpartisan organization founded in 1971, Public Citizen argues that the agreement satisfies 500 official trade advisors representing corporate interests to the detriment of the public interest and that the pact will “promote job offshoring and push down U.S. wages.”
  • AFL-CIO. The federation of 56 labor unions representing 12.5 million workers asserts that TPP is modeled after NAFTA, “a free trade agreement that boosts global corporate profits while leaving working families behind.”
  • Democratic Congress Members. According to The Economist, Congressional opposition to the passage of TPP has stiffened. “Our constituents did not send us to Washington to ship their jobs overseas,” stated three House Democrats: George Miller of California, Louise Slaughter of New York, and Rosa DeLauro of Connecticut.

The Cato Institute, a conservative think tank, notes that prominent economists are divided about the TPP, even though they are advocates of free trade. While favoring free trade, Daniel T. Griswold of the Cato Institute opposes connecting labor and environmental restrictions on partners. He notes that Republicans have rejected the use of sanctions in trade agreements, while Democrats have warned that they will not vote for treaties without such penalties.

Likelihood of TPP Passage

As the political environment has become more populist, the probability of TPP passage dims, at least during President Obama’s term. The two presumed 2016 presidential candidates – Donald Trump and Hillary Clinton – have publicly opposed passage of the agreement, reflecting the public’s distrust of the agreement consequences.

According to Bloomberg Politics, “Opposition to free trade is a unifying concept even in a deeply divided electorate with two-thirds of Americans favoring more restrictions on imported goods instead of fewer.” The article calls the result “a stunning rejection of what was a postwar [WWII] cornerstone of American economic and foreign policies .”

In an interview with Agri-Pulse, Senate Majority Leader Mitch McConnell said, “The political environment to pass a trade bill is worse than any time in the time I have been in the Senate…It looks bleak for this year [to have a vote].”

In an interview with The Hill, U.S. Chamber of Commerce President Tom Donohue agreed, noting, “In a tough economy, in an election year, nobody is in favor of trade.” According to Donohue, “There are four or five people that are running that are in the Republican caucus that would be at risk, perhaps, if they voted for it right now, today.”

Transatlantic Trade and Investment Partnership (TTIP)

ttip flags of united states and european union

Talks for a formal trade agreement are also active between the United States and the European Union. They began officially in February 2013 after years of preliminary conversations. Together, the U.S. and E.U. are the largest trading partners of most other countries, and account for one-third of world trade. If enacted, the agreement would be the most extensive regional trade agreement in history.

Negotiators were expected to conclude the agreement by 2019 or 2020, followed by an endorsement by the European Parliament and subsequent ratification by each of the 28 members of the Union. However, the withdrawal of the United Kingdom has threatened the future of the E.U. with unknown consequences for all parties. According to Reuters, talks will continue as scheduled, but it is unlikely that anything will be accomplished before 2018.

China Bilateral Investment Treaty (BIT)

On October 9, 2000, President Bill Clinton granted China permanent normal trade relations with the U.S., thereby accommodating China’s entry into the WTO. In his March 9, 2000 speech at Johns Hopkins University, President Clinton said, “And of course, it [entry into the WTO] will advance our own economic interests. Economically, this agreement is the equivalent of a one-way street. It requires China to open its markets – with a fifth of the world’s population, potentially the biggest markets in the world – to both our products and services in unprecedented new ways…For the first time, our companies will be able to sell and distribute products in China made by workers here in America without being forced to relocate manufacturing to China, sell through the Chinese government, or transfer valuable technology – for the first time. We’ll be able to export products without exporting jobs.”

Clinton was not the only supporter of the strategy. According to Manufacturing & Technology News, business groups such as the U.S.-China Business Council and the Business Coalition for U.S.-China Trade (as well as think tanks such as the Cato Institute) were vocal supporters of China’s admission into the WTO.

Former Trade Representative Robert Lighthizer said the U.S. misjudged China, stating, “They assumed that acceding to the WTO would cause China to become more and more Western in its behavior.” Instead, China considered the WTO to be “a vehicle to do what they want to do and get access to other people’s markets.”

A study appearing in the Journal of Labor Economics found that American job losses directly attributable to Chinese import competition were 2 million to 2.4 million from 1999 to 2011. In addition, an indeterminate amount of other indirect job losses resulted as high-wage manufacturing workers lost jobs and significant purchasing power.

With the failure of the WTO to open Chinese markets, discussions between the U.S. and China for a trade agreement began in 2008. The BIT will provide investment access to each country – Chinese investments in America and American investments in China – if passed. According to Marney Cheek, a partner specializing in international trade in the law firm of Covington & Burling, an equitable agreement would be good for both parties if it contains protections against expropriation without compensation, discrimination or other arbitrary treatment, and free movement of investment-related capital in and out of the country in which the investment was made. While both America and China have indicated a desire to go forward, the uncertainty surrounding the world trade is likely to delay any final agreement until 2020 or beyond.

Final Word

While free trade is theoretically positive for a country’s economy, its supposed benefits – new jobs and higher wages – have been elusive. Writing in the Scholars Strategy Network, economist John Miller disputes free trade benefits and claims that “during the rise to economic prowess, every one of today’s developed countries relied heavily on government policies [mercantilism] that managed and controlled its involvement in international commerce.” He cites Great Britain’s use of trade restrictions prior to 1900 and the use of high tariffs by the United States after the Civil War, as well as the modern example of China. It is difficult to find a single American trade deal that delivered the job benefits to Americans as promised by their sponsors.

Business leaders, academicians, and politicians are focused on problems such as America’s growing debt, widespread loss of high-paying manufacturing jobs to offshore competition, and the widening income disparity of the haves and the have-nots. Until the relationship between free trade and employment is understood, trade agreements will remain controversial.

Have you been affected by NAFTA? Should America’s leader pursue new trade agreements?

Michael Lewis
Michael R. Lewis is a retired corporate executive and entrepreneur. During his 40+ year career, Lewis created and sold ten different companies ranging from oil exploration to healthcare software. He has also been a Registered Investment Adviser with the SEC, a Principal of one of the larger management consulting firms in the country, and a Senior Vice President of the largest not-for-profit health insurer in the United States. Mike's articles on personal investments, business management, and the economy are available on several online publications. He's a father and grandfather, who also writes non-fiction and biographical pieces about growing up in the plains of West Texas - including The Storm.

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