Lost Jobs: Why fixing the trade deficit matters most

Saturday, June 18th, 2011 

Washington is obsessed with the budget deficit. It's all that lawmakers can talk about. The hysteria is such that they can't even agree on raising the ceiling on the national debt. As for how much to cut out of the budget, some would settle on reduced spending in the billions. Others want much more. As one recent headline summed it up: "(House Speaker John) Boehner demands 'trillions' in spending cuts in exchange for lifting debt ceiling."

There's only one problem: Congress is wrought up over the wrong deficit. The real deficit issue that has been out of control for 35 years is the trade deficit. That's the one that has decimated the American workforce, blocked the creation of millions of jobs, created millions more jobs for people in other countries, triggered pay cuts for millions of workers who still have jobs in the United States, and generally lowered the standard of living for many at the bottom and in the middle of the economic pile. Those at the top have flourished quite nicely under this policy.

To be sure, the trade deficit in goods is inflated in part because the United States refuses to wean itself off imported oil. But the deficit goes well beyond oil. America's largest goods deficit is with China, a country that sells no oil.

Apologists have argued that the policy enables consumers to buy goods at a much lower price than if they had been manufactured in America. But what they neglect to say, as we observed two decades ago when we first wrote America: What Went Wrong, our newspaper series and later a book, was that a country built on the principle that all that matters is the lowest possible price will look very different from a country that ensures all workers receive a living wage. To achieve the lowest prices, Democrats and Republicans threw open the doors to manufactured goods from countries whose governments protected their workforces, subsidized their industries, and blocked or restricted imports from the United States. As a result, the playing field was never level. It became so distorted that American taxpayers actually subsidized the creation of jobs in other countries.

This mistake will be terminal for working Americans who have been deceived by lawmakers — Republicans and Democrats — for decades with false promises to correct a trade imbalance that has been catastrophic to their economic well-being.

To appreciate the depth and extent of that deceit, let's go back to the early 1970s.

Up to then, the United States ran trade surpluses. A nation's trade balance is a fundamental indicator to gauge the economic well-being of its workforce. When it's in balance — meaning imports and exports are roughly the same — it means people are employed at good-paying jobs. But when imports swamp exports — as is true in the United States — it means basic industries that long underpinned middle-class Americans are undercut, and good jobs vanish.

Washington justified opening America's doors after World War II to manufactured products from other nations on the basis that foreign imports would not harm our own workers. How could a few trinkets and cheap transistor radios from Japan possibly hurt the great American economy? Plus, it was sold as good for the country: The more other countries prospered by selling to us, the more they could buy from us, which, in turn, would create more jobs at home. Reciprocity with our trading partners, we were told, would make it all work.

Impact on employment

The U.S. trade deficit with Mexico has led to more than 680,000 job displacements across the country as of 2010. Michigan, California, Texas, Ohio, Illinois and New York have been particularly hard-hit.

 

Graphic by Melanie Taube, Investigative Reporting Workshop


Source: "Heading South: U.S.-Mexico trade and job displacement after NAFTA," by Robert E. Scott, Economic Policy Institute, May 2011

The United States continued to post trade surpluses all through the 1960s, but as the decade wore on, and as imports continued to swell, the surpluses dwindled — from $5 billion in 1960 to just $607 million in 1969. By 1972 a miniscule surplus had turned into a whopping $6.4 billion deficit. Reciprocity obviously was not working. The U.S. market was open, but foreign markets for U.S. goods were not, and surging imports into the United States began to erode employment in longtime industries like apparel, shoes and textiles. The United States posted an anemic surplus in 1973 of $911 million, but that was the last trade surplus the country would ever see.

With our trade ledger suddenly in the red, Congress held hearings and debated the issue for months, culminating in passage of the Trade Act of 1974. It was the first of what would become a steady stream of trade bills over the coming decades that both parties, in a rare display of bipartisanship, claimed would safeguard domestic industries and force our trading partners to open their markets to American goods.

In urging adoption of the 1974 trade act, Democratic Sen. Russell Long of Louisiana said that "... the United States can no longer stand by and expose its markets, while other nations shelter their economies — often in violation of international agreements ... (with) practices which effectively discriminate against U.S. trade and production." Republican Sen. William Roth of Delaware asserted, "This bill strengthens basic legislation and statutes designed to protect our industries from unfair or disruptive import competition."

Of course, it did nothing of the sort. Conditions worsened with the new legislation. The deficit soared from $6 billion in 1974 to $34 billion in 1978, an increase of 467 percent. Even more industries were under intense import pressure, threatening yet more jobs. Which meant it was time for Congress to pass another trade bill.

Another try

This time they called it the Trade Agreements Act of 1979. While the title was slightly different, the speeches coming out of the Capitol sounded a great deal like the speeches praising the 1974 trade bill.

Democratic Sen. Daniel Patrick Moynihan of New York described the 1979 legislation as the most momentous trade act in half a century: "It begins a new era ... that has one specific purpose above all: to see that non-tariff barriers to trade come down. (And) to stop that hemorrhage of American jobs and industries profits." Democratic Sen. Abraham Ribicoff of Connecticut contended it would "provide quick and certain relief for domestic industries which are injured by dumped or subsidized imports."

Once again, it was all nonsense. Five years later, in 1984 — as the goods deficit topped $100 billion for the first time — Congress returned to the get-tough warpath, railing about the unfairness of our trading partners and proposing remedies that lawmakers maintained would open foreign markets to American goods. In the Trade and Tariff Act of 1984, lawmakers asserted they were beefing up the law to aid companies harmed by foreign trade practices.

In lauding the bill, Republican Sen. John Danforth of Missouri recited a script handed down from earlier debates. Danforth promised the new law "significantly strengthens ... that provision in the law which provides our government with the ability to retaliate against unfair practices against U.S. exports." Democratic Sen. Lloyd Bentsen from Texas praised the bill for setting the United States on a new course and scolded our trading partners: "... the United States has taken the lead in building support for an open international trading system. The rest of the world, unfortunately, has not reciprocated. Our partners in trade have been quick to take advantage of our open markets while often managing to keep theirs closed or protected."

Three years later, the goods trade deficit soared to yet another record at $160 billion. Once more, sounding as though Congress was suffering from collective amnesia, lawmakers said they were getting serious as they crafted another ostensibly tough trade bill the following year. Republican Rep. Nancy Johnson of Connecticut called the Omnibus Trade and Competitiveness Act of 1988 a "tough trade law" that called for real reform. "Its tough penalties include mandating retaliation when negotiated agreements are broken, compensation for parties that are injured by dumping," she said. Rep. Don Sundquist of Tennessee said it would allow the United States to "go to our trading partners ... (as) a strong, unified front against unfair foreign trade practices ..." Democratic Rep. William J. Coyne of Pennsylvania said it contained "real solutions to seemingly impossible problems ... (and gave the U.S.) all of the tools we need to strengthen America's hand against unfair trade practices and start on the road toward reducing this enormous trade deficit." Democratic Sen. Bennett Johnston of Louisiana said the trade law sent a forceful message to the rest of the world: "When the United States and its products are discriminated against by other countries, we are not going to take it lying down; we are going to do something about it."

It did no such thing. The U.S., as usual, did continue to “take it lying down” on trade rather than getting tough, sacrificing yet more jobs at home. Five years later, another trade bill to open foreign markets was once again back before Congress. This was NAFTA — the North American Free Trade Agreement — a treaty that knitted together the economies of the United States, Mexico and Canada by eliminating all tariffs among them to promote the free flow of goods. Even though U.S. manufacturers of autos, machinery, apparel, electronics and many other products were sending a steady stream of jobs to Mexico, the United States was selling slightly more goods to Mexico than we bought, so in 1993 the United States had a tiny trade surplus with Mexico of less than $2 billion.

Supporters seized on this to mount their most grandiose case ever: By lowering tariffs, NAFTA would be a bonanza for American exporters and provide high-paying jobs to U.S. workers. "We will have greater access to a rapidly expanding market that hungers for U.S. consumer products," contended a bullish Republican Rep. Jim Kolbe of Arizona. But with millions of manufacturing jobs already lost and small businesses hurt by imports since the 1970s, many worried that NAFTA would accelerate the slide, and fierce opposition mounted against the trade pact.

Nevertheless, Congress brushed aside concerns about jobs. "NAFTA will provide trade reforms that will lift all boats with a rising tide of prosperity," proclaimed Republican Sen. Orrin Hatch of Utah. Democratic Sen. John Breaux of Louisiana ventured that American workers "will prosper and increase in numbers as a result of a free-trade agreement." In casting his vote for NAFTA on Nov. 20, 1993, Republican Sen. Phil Gramm of Texas said America would one day look back fondly on the day NAFTA was approved: "I think as we look back people a decade from now will have a hard time understanding what was controversial about NAFTA."

Dead wrong. As usual, Gramm and the others were speaking for the super-rich and powerful. A decade later NAFTA was more controversial than ever. The claims of its supporters turned out to be hollow, and the fears of its opponents came true. The much-vaunted trade surplus with Mexico that backers used to engineer NAFTA's passage quickly evaporated, replaced by a trade deficit that became the norm. That cumulative deficit with Mexico ballooned to $631 billion by the end of 2010. Sometime in the next five years the total will top a trillion dollars — another major congressional milestone marking the loss of American jobs.

NAFTA's influence

Rather than stimulating exports to Mexico, NAFTA triggered a rush of American companies to invest south of the border, and Mexican imports to the States surged. In the five years before NAFTA, Mexican imports increased 51 percent. In the five years afterward they jumped 91 percent. General Motors even built housing for its new workforce south of the border. As for exports to Mexico, the growth rate actually declined, according to the Washington-based Economic Policy Institute (EPI). Another way to look at the numbers offers a clearer picture of what was in store for American workers: In the five years before NAFTA, the United States maintained an average trade surplus of $168 million with Mexico. In the five years after, the numbers plunged in the other direction, to an average annual trade deficit of $12.5 billion.

After NAFTA, as companies large and small began shifting work to Mexico, the Labor Department was flooded with thousands of petitions from workers seeking unemployment benefits based on jobs lost through trade, among them:

  • Woodward Governor Co., Stevens Point, Wis., 1,330 workers
  • Smith Corona Corp., Cortland, N.Y., 874 workers
  • Oxford Industries, Dawson, Ga., 340 workers
  • Sara Lee, Martinsville, Va., 300 workers
  • Key Tronic Corp., Cheney, Wash., 277 workers
  • Johnson Controls, Bennington, Vt., 276 workers
  • Emerson Electric Co., Logansport, Ind., 200 workers
  • Alcatel Data Networks, Mt. Laurel, N.J., 120 workers
  • Parker Hannifin, Berea, Ky., 114 workers

By 2011, an estimated 1.5 million American jobs have been eliminated by imports from Mexico, according to Economic Policy Institute tabulations. EPI estimated that exports to Mexico support 791,900 jobs, meaning a net job loss of about 700,000. In 2004, EPI estimated that lost wages from NAFTA job losses were costing American workers $7.6 billion a year. That's the equivalent of the income of 150,000 American families.

Who's to blame?

But don't fault just Congress. Every occupant of the White House, regardless of party, has been equally zealous in selling out workers on trade matters. For decades, every president has been an ardent advocate of free trade and has resisted any significant step that might be interpreted as protectionist, this even though our trading partners were doing the opposite.

In 1974, when the U.S. shoe industry protested that it was being engulfed by cheap, government-supported imports from Brazil, President Gerald R. Ford refused to provide relief. Even though the U.S. International Trade Commission, itself a bastion of free trade policies, had concluded that the American shoe industry was being harmed by Brazilian government policies that violated international trade law, Ford refused to side with the U.S. industry.

To impose tariffs on Brazilian shoes, he said, "would be contrary to U.S. policy of promoting the development of an open, nondiscriminatory and fair world economic system." Two years later, Democratic President Jimmy Carter also declined to impose tariffs on Brazilian imports. At the time of Ford's decision, the American shoe industry employed 172,000 workers. Today, fewer than 15,000 work in the industry, according to the Labor Department.

In 1985, after thousands of textile industry jobs had been lost to imports, Congress passed legislation to impose higher tariffs on textile imports, but President Ronald Reagan vetoed the bill, calling it protectionist and a violation of free trade. "We want to open markets abroad, not close them at home," he said in a refrain that had become distressingly familiar to American workers in many industries. Even though he had just killed a bill that would have saved jobs, Reagan sought to assure textile employees that he was on their side and insisted that he would not "stand by and watch American workers lose their jobs because other nations do not play by the rules." In fact, he did just that. There were 746,000 textile industry workers in 1984 when Congress and Reagan took up the issue of textile tariffs. By the time he left office, the number was down to 728,000. Today, only an estimated 120,000 workers are left, according to the Labor Department.

NAFTA was negotiated under President George H.W. Bush, who pledged the agreement would permit the United States to sell to Mexico "even more of the goods we're best at producing: computers, manufacturing equipment, high-tech and high-value products." But NAFTA was sold to Congress and the nation by Bill Clinton. "I believe that NAFTA will create a million jobs in the first five years of its impact," Clinton proclaimed on Sept. 14, 1993. "NAFTA will generate these jobs by creating an export boom to Mexico..." Sadly, Clinton could not count any better than his predecessors.

During the George W. Bush administration, the U.S. International Trade Commission ruled in four cases that Chinese steel imports were unfairly harming U.S. businesses and workers and recommended that the president impose tariffs on Chinese goods. But in every case Bush declined to do so: "I find that the import relief would have an adverse impact on the United States economy clearly greater than the benefits of such action," Bush wrote in denying relief.

President Obama has given tentative approval for a plan to open U.S. highways to commercial trucks from Mexico, fulfilling one of NAFTA's promises. Every president since the first George Bush has supported the idea of allowing trucks from Mexico to deliver goods to the United States, a change that would throw thousands of U.S. truckers out of business. In other words, eliminating yet more jobs of working Americans.

Who says bipartisanship is dead in Washington? As we see, the one place where it's worked to perfection has been in trade policy — with devastating consequences to working Americans.

Despite all the bluster out of Washington demanding fair trade policies by our trading partners, the United States hasn't had the political will to back up the rhetoric. To do that in all likelihood would require administering a dose of what the ardent free-traders call protectionism. But our trading partners know that's not going to happen. The pressure from powerful multinational corporations and the uproar from some economists and media types would make any move to establish trade restrictions — even temporarily — next to impossible in Washington.

So the charade goes on. While Washington mouths platitudes and gives lip service to trade reform in a never-ending cycle, the trade deficit soars. Thanks to both parties, the cumulative trade deficits since 1976 add up to a staggering $10 trillion. That's trillion with a T, an ocean of red ink which translates into millions of lost jobs. But you never hear about that. The politicians and the news media only talk about jobs created by exports. They never mention the jobs eliminated through imports.

Is it any wonder millions of workers feel betrayed by Washington?

And with good reason. First, a succession of Congresses and presidents killed their jobs and slashed the living standard of their families. And then a succession of Congresses and presidents refused — and still refuse — to move toward balanced trade, a change that even the Congressional Research Service has concluded would result in the creation of more than 5 million jobs.

So if the real problem is the trade deficit, not the budget deficit, why are Congress and the White House fixated on spending rather than trade? Because turning a trade deficit into a surplus could be harmful to the ruling class and the super-rich whose investments are spread around the globe. Congress intends to correct the budget deficit, on the other hand, by hammering the middle class and the working poor, slashing Social Security and Medicare. This even though that deficit could be eliminated over time if a few adults sat down and negotiated around a table. Unfortunately, adults are in short supply in Washington.

Donald L. Barlett and James B. Steele are contributing editors at Vanity Fair. They have worked together for four decades, first at The Inquirer (1971-1997), where they won two Pulitzer Prizes and scores of other national journalism awards, then at Time magazine (1997-2006), where they earned two National Magazine Awards, and since 2006 at Vanity Fair. They have also written seven books, including the New York Times No. 1 best-seller America: What Went Wrong? — an expanded version of the 1991 Inquirer series. Both live in Philadelphia. E-mail the writers at info@barlettandsteele.comToday's story is being co-published with The Philadelphia Inquirer. Chat live with the authors at 1 p.m. on Monday at philly.com.

 

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Donald Barlett and James Steele are revisiting America: What Went Wrong, their landmark 1991 newspaper series, in a new project with the Investigative Reporting Workshop. Over the next year, the project team will examine how four decades of public policy has shaped America's ongoing economic crisis.

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The Betrayal of the American Dream on Google Books

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Check out the first chapter of Barlett and Steele's 2012 book here.