During the 2016 elections Donald Trump, Bernie Sanders, and other politicians have claimed that international trade and trade agreements have harmed the U.S. economy. But in my career as a businessman, lawyer and consultant working in more than 50 countries I have seen over and over again how international trade and trade agreements benefit the United States both economically and politically.
The U.S. is predominantly a services economy (80% of U.S. GDP is services related) and the U.S. is the international colossus in trade in services, regularly running a large trade in services surplus with the world and even with China and Mexico. According to the U.S. Census Bureau, in 2015 the trade in services surplus amounted to over $262 billion. However, politicians and others critical of trade and trade agreements rarely mention this trade in services surplus that greatly benefits the U.S. economy and employment.
What politicians and others critical of trade and trade agreements do cite are large trade in goods deficits with countries such as China and Mexico, which they believe have resulted in a loss of U.S. manufacturing jobs. But the statistics compiled by Census greatly overstate the trade in goods deficit because of a legal anomaly. The U.S. country of origin law considers that goods “originate” in the country in which the last significant manufacturing operation takes place even if most of the value of the product doesn’t actually originate in that country. This results in statistics that inflate trade deficits.
As one illustration of this, Apple’s IPhones are assembled in China from designs and components sourced from the United States and many other countries. Thus the actual value of an IPhone attributable to components and labor originating in China is a small percentage of the total value. Mexico is an even more extreme example. Components originating in the United States account for about 40% of the value of goods imported from Mexico. However, Census statistics record these U.S. origin and other non-Mexican components as of Mexican origin when the finished goods are imported into the United States.
Putting this statistical overstatement of deficits aside, there is still no doubt that China has a large trade in goods surplus with the United States. But what has China done with the dollars from this trade in goods surplus? In order to support its trade surplus the Chinese government and individual Chinese investors must make substantial investments overseas. These include large U.S. Treasury securities purchases and a variety of other investments in the United States (ask your local real estate broker and chamber of commerce for examples). Thus the trade in goods deficit with China largely results in offsetting Chinese investments in the United States leading to lower interest rates, the funding of new businesses and increased U.S. employment.
What about the U.S. workers who lose their jobs when factories are closed or moved to another country? There are many documented instances. Bernie Sanders recently claimed that up to 800,000 jobs had been lost as a result of NAFTA and many more as a result of trade with China. Employment losses to China and Mexico in relatively low technology assembly industries reflect employment losses that would have taken place in any event because of automation or relocation of production to lower labor cost venues. A recent study by the OECD concluded that net employment effects of NAFTA were relatively small, although employment was lost in some sectors.
Nonetheless, any loss of jobs resulting from trade is a social problem that should be remedied. A humane society should take effective measures to assist workers who lose their jobs as a result of plant closures and relocations. This does not mean turning the clock back to keep out imports and stop technological innovations. Instead, workers should receive generous trade adjustment assistance and retraining so that they can participate in today’s high tech, service oriented economy.
Most striking to me are the geopolitical benefits of expanded international trade over the last four decades. Former antagonists such as China, Russia and Vietnam that now have extensive trade and economic ties with the United States are much less likely to engage in serious military provocations. Formerly poor countries such as India, Brazil, South Africa, Korea, Vietnam, Thailand and Indonesia have benefited from expanded trade and are now middle-income economies that welcome American trade and business. Despite ongoing ethnic and religious conflicts in a few Middle Eastern and South Asian countries and sporadic associated terrorism, America and the world are much safer today because of expanded international trade.
Stephen Creskoff is a lawyer and leading expert on international trade transactions, trade facilitation and the legal foundation for international trade. He has worked as a trade lawyer and senior trade consultant for international businesses, trade associations, the World Bank, the U.S. Government and other organizations in more than 50 countries. Mr. Creskoff is the author of the book, What You Need To Know To Go Global: A Guide To International Trade Transactions, a practical guide to businesses conducting international trade in goods and services.
© Washington International Trade Association.
All rights reserved. This material may not be reproduced or distributed, in whole or in part, without prior written permission of the Washington International Trade Association (WITA). However, reproduction and distribution, in whole or in part, by non-profit, research or educational institutions for their own use is permitted if proper credit is given, with full citation, and copyright is acknowledged. Any other reproduction or distribution, in whatever form and by whatever media, is expressly prohibited without the prior written consent of WITA. For further information, please contact: DAnez@wita.org.