Saturday, March 01, 2008

What's the Problem with NAFTA?

The article linked above talks about how the current Democratic candidates are trying to throw NAFTA under the bus. One of the better things to come out of the Clinton administration was the bipartisan understanding that free trade is beneficial for the country as a whole. It is a shame that this understanding doesn't appear to be accepted by the population as a whole.

Here is how Obama talks about NAFTA:
His rhetoric is increasingly heated. In a "major economic address" in Janesville, Wisconsin, on February 13, Obama said that "decades of trade deals like NAFTA" included "protections for corporations and their profits," but none for "our workers," who have "seen factories shut their doors and millions of jobs disappear." In Youngstown, Ohio, on February 18, Obama said "NAFTA didn't put food on the table." On February 24, in Lorain, Ohio, he said "one million jobs have been lost because of NAFTA, including nearly 50,000 jobs" in the Buckeye State.

That "one million jobs" figure should not be overlooked. It has become Obama's mantra. It is, upon close inspection, the most specific piece of evidence to which he can point when he claims that NAFTA has been "devastating." And it is almost certainly bunkum.

The figure comes from the folks at the left-wing Economic Policy Institute. In a 2006 "briefing paper" entitled "Revisiting NAFTA: Still Not Working for North America's Workers," the institute's director of international programs, economist Robert Scott, wrote that "growing trade deficits with Mexico and Canada have displaced production" that would have supported "1.0 million (total) U.S. jobs since the agreement took effect in 1994." The jobs number is a hypothetical, in other words. And a silly one at that. Scott assumed that the trade deficit between the United States, Canada, and Mexico would have remained frozen at 1993 levels had it not been for NAFTA. In Scott's view NAFTA is solely responsible for the trade deficit between the three countries. And the trade deficit has been solely responsible for job loss. Nothing else has mattered.

Economists call this a "partial equilibrium" analysis. By assuming that everything else stays the same except for imports, you can plug numbers into U.S. Commerce Department models and see how many jobs those imports--had they been produced in domestic factories--might have sustained. Whatever its uses as an analytical tool, however, it is not a good picture of the real economy. Most economists agree that other factors--the business cycle, productivity gains, monetary policy--affect unemployment much more than trade. And most economists point to several other studies that show NAFTA contributing small but real job gains to the United States.

But here is the key line: "The manufacturing sector has lost jobs, but it is producing more goods than it was in 1993."

Manufacturing jobs may be down, but manufacturing activity is not.

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