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February 27, 2017

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Making sense of global trade

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Pablo Martinez Monsivais / AP

U.S. President Barack Obama, left, talks with Second Vice President of Peru Mercedes Araoz, right, as Ambassador Michael Froman, United States trade representative looks on Saturday, Nov. 19, 2016, at a meeting with leaders of participating countries in the Trans-Pacific Partnership in Lima, Peru.

They were among the few topics discussed with equal disdain by members of both major political parties in 2016: NAFTA and TPP. President-elect Donald Trump called the Trans-Pacific Partnership the “rape of our country.” Hillary Clinton said the North American Free Trade Agreement was a “mistake,” though for years she was on record being in favor of it.

While the TPP hasn’t been ratified, studies on NAFTA’s effects abound, with researchers reaching an array of conclusions. Some say it cost the U.S. hundreds of thousands of jobs, for instance, while others say it was one of several factors that led to losses — such as changes in exchange rates, global economic growth and the normalization of U.S. trade with China in 2000.

So, what are NAFTA and TPP, and what’s with all the hate?

NAFTA

North American Free Trade Agreement Signed 1993, enacted 1994

• What it is: NAFTA is a trade agreement between the United States, Canada and Mexico. It lifted most tariffs and restrictions on trade between the three countries.

• Who championed it: Since its inception, NAFTA has received bipartisan support. First negotiated by President George H.W. Bush in 1991, it was signed into law in 1993 by President Bill Clinton and instituted in 1994. Clinton and Bush insisted the agreement would create thousands of jobs in the U.S. Then-Mexican President Carlos Salinas de Gortari saw NAFTA as a way to modernize his country’s economy.

Arguments for

• Growing an economy: The U.S. and Canada hoped that Mexico would become an ideal export hub and a place where they could make investments at low costs. This, they hoped, would give them an edge in global competitiveness.

• Incentives against illegal immigration: The U.S. and Canada believed freeing up trade would create economic growth in Mexico, which would create jobs. With more work available in Mexico, the U.S. and Canada thought its citizens would be less likely to cross over to the U.S. illegally.

Argument against

• In 1992, presidential candidate Ross Perot predicted that NAFTA would incentivize companies to take their jobs to Mexico, where labor was much cheaper.

What it did

+ Trade is up: NAFTA has mostly benefited the U.S. when strictly speaking about trade. Since the agreement took effect, U.S. trade with Canada and Mexico has more than tripled. But the surge also is due to economic growth patterns:

• when the economy experiences growth, trade increases

• when the economy experiences a slump, trade decreases

- Lost jobs: Some economists estimate that in the past two decades, about 700,000 U.S. jobs — mostly in the South and the Midwest — have been lost as imports have increased.

+/- Cheaper products, though that can mean poor quality: The price of goods is relatively cheap, benefiting consumers. But their quality cannot be guaranteed. Many products (including meat) imported by the U.S. from its NAFTA partners have been flagged.

- Lost wages:

• The Center for Economic Policy and Research found that the amount of lost wages far outweighed the benefits of cheaper goods. Simply put, cheap products are still too pricey for many laid-off American workers to afford.

• Many manufacturing workers who were able to find another job in 2012 made less than what they earned before NAFTA was enacted, according to the U.S. Bureau of Labor Statistics. Some workers took a pay cut of 20 percent or more.

+/- Trade imbalances:

In 2014, U.S. merchandise exports to Mexico totaled $240 billion, while imports from Mexico were $294 billion, a $54 billion trade deficit. This deficit is what President-elect Donald Trump referred to during his campaign. However, in private services — that is, economic activity such as travel and tourism, but not agriculture, mining, construction or manufacturing — the U.S. saw a surplus of about $12 billion with Mexico in 2013. This was not taken into account when Trump spoke about trade relations between the countries.

- Jobs were not created: While trade has increased, a rise in the number of jobs and wages in the U.S. has not materialized. That was the American vision for NAFTA — not just that the three countries would be exporting and importing more.

- Mexico has not invested in infrastructure and education as expected: The U.S. and Canada hoped that NAFTA would diminish income disparities in Mexico, but it didn’t. Simply creating a trade agreement did not amount to the developing country rising to the economic level of its NAFTA partners.

In Nevada

Since NAFTA became law, manufacturing jobs in the private sector have declined from 4.9 to 3.9 percent. Findings by the Economic Policy Institute showed that 3,700 Nevada jobs had been lost because of the trade deficit with Mexico.

+/- Mexico’s auto industry has flourished, because wages are low: From 2008 to 2015, employment in the Mexican auto industry increased by 40 percent, while U.S. auto manufacturing jobs grew by only 15 percent — largely due to the huge wage gap, even more dramatic when you factor in benefits:

• Mexican auto workers make the equivalent of $8 an hour

• For American workers at GM, wages and benefits equal $58 an hour

- Not all Mexicans have reaped benefits:

• Mexican farmers were hit hard because they could not compete with America’s subsidized agriculture industry. *Since the Great Depression, the U.S. government has used tax dollars to protect farmers from unforeseen hardships such as bad weather. Mexico does not.

• As a result, about 2 million Mexican farmers lost their jobs, driving up illegal immigration to the U.S.

TPP

Trans-Pacific Partnership, signed 2016, not yet ratified

• Why it was drafted: Members wanted to do away with numerous tariffs and loosen trade restrictions. The TPP was a test-run for a proposed trade agreement between the European Union and the U.S.

Arguments for

• Bringing more jobs to America: Japanese auto companies, including Toyota, Honda and Nissan, have bases here. Advocates assert that the deal would provide further incentive for companies to expand in the U.S.

• Stronger ties: The TPP would strengthen U.S. relations with Asian-Pacific nations.

• China is not a member: President Barack Obama argued that if the TPP were not ratified, China would have the upper hand in the market. Currently, the Chinese government is working with 15 countries on its own agreement.

• New markets: American corporations believe the TPP will give them unfettered access to middle-class consumers in Asia.

Arguments against

• Cheap labor costs mean more jobs shipped overseas: Companies that choose to stay in the U.S. would have the option of keeping wages low to remain competitive.

• Secret dealings: Obama negotiated the terms of the TPP in secret, raising transparency complaints from members of Congress.

• Enforcement questions: While the TPP outlines labor and environmental standards the 12 countries aim to meet, the conditions may not be enforced. Critics say environmental laws and safety rules could be relaxed to maximize profit.

How it might affect the U.S.

Many countries have nationality requirements and restrictions when it comes to service jobs. The TPP would loosen those rules to the advantage of the U.S., which is a key player in the finance and engineering sectors.

The Peterson Institute for International Economics found that the TPP could increase U.S. income and exports. But the institute, a staunch advocate for international trade, also said the trade deal would not add American jobs.

What’s next?

For the TPP to take effect, six members that represent 85 percent of the 12 countries’ collective GDP must ratify the agreement. Trump slammed the TPP during his campaign, and in November, Senate Majority Leader Mitch McConnell said it would not be discussed in Congress. Without the participation of the U.S., the TPP is more than likely a failed trade deal.

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