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Do trade deficits destroy jobs? Yes. All economists acknowledge this. The real question is whether trade deficits create more jobs than they destroy. Liberal economists think they do. I—and the preponderance of raw data—disagree. Take the North American Free Trade Agreement (NAFTA) for example.
In 1993, President Bill Clinton promised that NAFTA would create “a million [American] jobs in the first five years.” He also said NAFTA’s “side agreements” would “make it harder than it is today for businesses to relocate solely because of very low [Mexican] wages or lax environmental laws.”
Clinton was wrong.
America’s trade deficit with Mexico—which was unequivocally caused by NAFTA—displaces a net 840,000 American manufacturing jobs. How? Offshoring. Before NAFTA, tariffs protected American industries from asymmetrical Mexican competition by normalizing price externalities. That is, they raised the cost of Mexican goods to account for the fact that American goods were more expensive largely because American businesses were subject to higher labor, environmental, and quality standards. Tariffs basically penalized companies who moved abroad to avoid American laws. This regime resulted in balanced bilateral trade—America actually ran a modest trade surplus with Mexico in 1992.
NAFTA eliminated market barriers, forcing American workers to compete directly with far-cheaper Mexican workers. This created a powerful incentive to move American factories to Mexico—and move they did.
Lori Wallach, director of Public Citizen’s Global Trade Watch, estimates that NAFTA redistributed a net 840,000 American manufacturing jobs to Mexico. Meanwhile, the Economic Policy Institute estimated in 2013 that NAFTA displaced a net 700,000 American jobs. Finally, U.S. Trade Representative Robert Lighthizer noted in a press release that NAFTA cost America 700,000 jobs. Remember, these are net figures: they include the jobs NAFTA creates by boosting American exports.
Not only does NAFTA displace at least 700,000 American manufacturing jobs, it also displaces a large number of service jobs. This is because manufacturing is an anchor industry upon which predicate industries depend. A factory is like an oil field or a mine; it brings wealth into a community and supports an ancillary service sector that otherwise would not exist. Hairdressers and accountants need factory workers and miners more than the reverse.
This concept is well understood. In fact, the Bureau of Economic Analysis estimates that each dollar of manufacturing output supports $1.48 in spinoff service output. Thus, one factory job supports roughly 1.5 other jobs. This multiplier effect is real, and not subject to Henry Hazlitt’s popular “broken windows fallacy” critique for the simple fact that factories don’t redistribute wealth, they generate it. Accounting for this means NAFTA likely costs America a net 1.7 million jobs.
The geographic concentration of unemployment in America’s industrial heartland—now known as the rustbelt—magnified the problems. Factory closures impoverished whole towns overnight, flooding the labor market with job-seekers. This tidal wave of unemployment reduced wages for transient employees and stagnated the wages of those with permanent positions.
The failure of NAFTA cannot be overstated: millions of Americans lost their jobs permanently, and millions more saw their wages stagnate or decline.
Unfortunately NAFTA itself is not the problem—the problem is free trade between asymmetrical markets. Whenever America trades with a poorer country the inevitable trade deficit destroys more American jobs than it creates, simply because labor-intensive industries are the most-likely to move abroad. After all, they have the most to gain from lower wages.
Some economists do acknowledge this, but then suggest that this is good because it makes America’s economy more efficient. Maybe. But the economy doesn’t exist in a vacuum: people who lose their jobs are more likely to vote for social welfare programs that benefit them. This is what happened in the Midwest: once the Republican’s heartland, the region now votes reliably Democrat. My question: were the gains from free trade worth decades of socialist governments? I doubt it.