by Fran Smith
November 29, 2007

Good afternoon.  I’d like to welcome you to this event on “Free Trade Agreements: Issues and Outlook.”  I’m Frances Smith, adjunct fellow, trade and agriculture, at the Competitive Enterprise Institute.

My remarks will provide an overview of some of the issues the pending free trade agreements are facing. Then the other panelists, leading off with Claude Barfield, will provide their own views and insights.

This panel will be discussing the value of these FTAs.  I’ll be focusing on why it has been so difficult to gain support for these pacts and the ways in which the shift to bilateral agreements has contributed to these problems.

Trade has surfaced as one of the most contentious issues in the policy arena over the past 8-10 years – internationally and domestically.  We probably all remember the World Trade Organization’s Seattle meeting in December of 1999, where anti-globalization and anti-trade demonstrators took over the streets.  I was there and, yes, I was tear-gassed on my way to a seminar.

There’s also an increased dissonance in the trade debates since then.  Most intellectuals, economists and media continue to support open trade as being in the best interests of the public in both rich and poor countries.  However, their well-reasoned arguments supported by data have not been able to sway the increasingly widespread view that trade harms the economy and destroys jobs. 

NBC News and the Wall Street Journal recently polled adults about their views on trade by asking which of the two statements they agreed with – I’ve synopsized them here:

1)         Foreign trade has been good for the U.S. economy.

2)         Foreign trade has been bad for the U.S. economy.

Of the respondents, 60 percent said that foreign trade has been bad for the U.S. economy, with only 30 percent saying trade has been good.  I’ll repeat those numbers – 60 percent said “bad”; 30 percent said “good.”

Those figures, however, shouldn’t be surprising.  Increasingly, presidential aspirants, policymakers and pundits have been propagating the myth that trade is responsible for just about every U.S. job loss in the past decade.  Ed Gresser of the Progressive Policy Institute in his new book, “Freedom from Want,” provides a strong defense of the liberal vision of free and open trade:  In his book’s introduction he also offers a wry synopsis of trade critics’ laments:

“This newly created global economy leaves workers jobless at home and mistreated abroad, as factories escape to poorer countries in which they cut wages and ignore environmental law. Global economic institutions enforce inhumane and profit-obsessed rules, which . . . permit powerful new competitors to erode American industrial power. . . . the American government has failed to act. But the people understand. One day their government will have to listen.”

Indeed, increased trade can affect jobs – by destroying some jobs and creating others.  There is constant churning in the labor market, and the jobs created by trade are more likely to demand higher skills and provide higher pay.  This past May, Federal Reserve Chairman Ben Bernanke eloquently made these and other points about jobs and trade in a speech in Montana.

Chairman Bernanke noted that over the past decade there have been 16 million annual job losses, mostly due to factors other than trade. But those have been more than offset by the creation of about 17 million jobs per year. He also pointed out that imports’ share of the GDP quadrupled between 1965 and 2006. Yet employment more than doubled during that period.

I would like to point to two recent studies on the relationship of trade to jobs – from two very different parts of the political spectrum. 

The first I’ll mention is a recent study published by the Progressive Policy Institute by prominent labor economist Stephen J. Rose.

In the study, Rose points out that trade growth has not led to the loss of middle-class jobs. He states the following thesis that he supports with strong data:

It is very common to think that trade—particularly a high level of imports—leads to middle-class job loss. However, over the last 60 plus years middle-class jobs have generally become more plentiful . . . Simply put, the alarmists across the political spectrum are wrong when it comes to the theory that trade leads to a loss of middle-class jobs.

Dan Griswold, of the libertarian Cato Institute, has recently published a study showing that increased trade is not responsible for a lower standard of living for many Americans. Citing good hard data to counter protectionist opinions, Griswold points out that the economy has 16.5 million more people working than it did ten years ago. 

Although there has been about a 3.3 million job loss in manufacturing over the past decade, Griswold notes that there has been a net gain of 11.6 million jobs in sectors with higher average wages than in manufacturing.  And many of those manufacturing jobs have disappeared not because of trade, but because of technological advances and productivity improvements.

Obviously, some job losses and job insecurity in parts of the country have contributed to stronger anti-trade, protectionist sentiments.  Indeed, it is devastating to lose one’s job, whatever the cause.  Yet many politicians take a protectionist posture, instead of focusing on ways to soften those blows – through greater portability of health insurance, pensions, for example – or an emphasis on private job training and education.

Besides the misperceptions about trade hurting the economy and jobs, other issues have fueled the anti-trade flames. 

Free trade advocates seem to have lost their footing with the breakdown of the World Trade Organization’s Doha Development Round negotiations. 

Most trade advocates support the multilateral WTO system as superior to bilateral and regional trade pacts.  In the WTO its 151 member countries – rich and poor -- can negotiate more equally. Developing countries, by banding together, can curb rich countries from imposing non-trade related protectionist rules on members.  Through moral suasion – and sometimes the threat of a WTO challenge -- they can also move developed countries toward providing greater market access. 

In the U.S., the focus on bilateral free trade agreements (FTAs) in the last seven years has both strengthened the anti-trade, anti-globalization forces and weakened the involvement of many groups that would support more open trade. Jagdish Bhagwati has pointed out that bilaterals can weaken support for trade liberalization by using up political capital to get them passed.

There are other reasons why bilaterals have contributed to the anti-trade sentiment. When a trade agreement is fairly narrow in its focus and impact – when broad-based gains are not apparent – special interests that perceive themselves to be negatively affected by specific provisions fill the void.  With strong proponents of an FTA missing from the debate, special interests, be they economic or ideological interests, come to the forefront.  They have a specific cause that their members or constituents can rally behind; they can gain greater financial support for their cause; they can thus coordinate significant media campaigns; and they can then exercise their clout with policymakers in a field largely vacated by free trade champions.

The Central America-Dominican Republic Free Trade Agreement, for example, galvanized not only labor unions and environmental groups, but also the powerful sugar producers, who charged that the minuscule increase in sugar imports allowed under CAFTA-DR would destroy their industry.  Labor unions, fired up about increased competition, called for stringent labor standards to be included in the pacts – otherwise there would be a “race to the bottom.”  Environmental groups, sensing the trade agreement’s vulnerability, pressed for expanded environmental provisions.  The House vote on CAFTA was 217-215.  The House vote was in strong contrast to that of the 1993 NAFTA vote 234-200.  That NAFTA vote came under a Democratic president who was a strong proponent of trade.

While indeed labor and environmental issues are important, their inclusion in trade agreements has created serious problems.

Such lopsided debates on recent FTAs have amplified the anti-trade voices and have muted supporters of more open trade.

The pending FTAs are a case in point.  In the House of Representatives, the anti-trade forces have gotten even stronger, with many new members elected in 2006 as vocal opponents of more open trade.  In the House, the Peru FTA passed by a vote of 285-132.  That seems like a strong vote.  However, the Peru FTA was the first pact to include enforceable labor and environmental provisions that were demanded by the Democratic leadership through the Bipartisan Trade Deal this past summer.

The Senate is expected to vote on the Peru FTA next week, and the protectionist forces are heavily campaigning against it by calling it the “Peru-NAFTA.”

The fate of the other pending FTAs is unclear – the Colombia, Panama, and South Korea FTAs all face serious challenges for various reasons.  All countries are strong allies of the U.S. and are strategically important.  These countries negotiated the trade agreements in good faith and then agreed to renegotiate them after the Bipartisan Trade Deal.

The Peru, Panama, and Colombia FTAs will provide surety for their access to the important U.S. market, while opening up their markets to U.S. products and services.  The Korea FTA is a landmark economic agreement with one of the U.S.’s important trading partners.

If the U.S. turns its back on these friends and trading partners by voting down the trade pacts, there’s likely to be a backlash in those countries and a loss of U.S. credibility in those regions and other parts of the world. 

Let me summarize these thoughts and where they are leading. We face a basic problem as free trade advocates – just because we’re right, do we have to lose?

We must find more creative ways to market the benefits of trade to most Americans.  For if we fail to find ways to communicate those benefits to the citizenry, aren’t we likely to find more and more of the intellectual community and the media abandoning their support and joining the populist sentiments that I noted in the Wall Street Journal poll earlier.

These challenges motivated the decision for the panel today.

Our panelists will be addressing some of these issues relating to the pending FTAs.