President Obama's recent decision to negotiate broad new free trade agreements with Europe and several nations in the Pacific has revived the usual objections at home first heard two decades ago with the enactment of the North American Free Trade Agreement (NAFTA).
The Trans-Pacific Partnership, in particular, raises the potential of deepening economic links between the United States, Mexico, Peru, and Chile, on the one hand, and the dynamic economies of East Asia on the other. Despite the promise of benefits for all sides, however, these initiatives are indeed politically risky. Polls indicate that trade agreements are not popular with the American public and increased trade generates suspicion and the familiar concerns from organized labor and others fearful of the impact on jobs of more international competition.
But trade with emerging economies has been assigned a villainous role that far exceeds its impact, as demonstrated by new research we have conducted. Many Americans blame our trade deficit for shrinking employment in manufacturing, for example. But we find the much bigger factor in that decline is that Americans prefer to spend more on services.
Many think trade with Mexico and emerging economies in Latin America and elsewhere will make Americans poorer because emerging economies have become more formidable competitors. But we find that emerging country growth actually raises American living standards because these other countries are not major competitors for US exporting industries, and they sell American imports at lower prices.
To be sure, trade presents challenges. Some imports from emerging economies have caused harm, as trade-related job losses hurt specific communities and are costly for displaced workers. But in the long run there are benefits to America that more than offset these costs, and thus the correct response to these problems is not to raise trade barriers but to improve aid to workers who are displaced and equip them with the skills to compete.
While trade has played a role, the principal reason for the declining share of manufacturing jobs is exceptionally fast productivity growth in that sector. Technological improvements allow producers to manufacture the same amount of goods with fewer workers and machinery. American spending patterns also contribute. Although improvements such as automation lead the prices of goods to fall relative to prices of services—compare trends in computer and healthcare prices—US consumers respond to these lower prices by using the money they save on goods to buy more services.
Compare how you spent to buy your TV or cell phone with how much you've paid for cable and telephone services.
This US manufacturing employment behavior is not unique. Since the 1970s, the share of employment in manufacturing in all industrial economies has fallen by similar percentages. This is the case even for countries such as Germany and the Netherlands that have large trade surpluses. Those who blame trade deficits with Mexico and other emerging countries are looking at the wrong culprit, in other words.
What's happening in manufacturing should be familiar, since it also happened in agriculture, a sector in which the share of employment has plummeted from more than 10 percent in the 1930s to less than 1 percent—not because of declining demand for food but because farmers became more productive than ever.
Trade with emerging economies has actually improved US welfare by allowing US exporters to earn higher prices and enjoy larger markets, and US consumers to import cheaper and more varied goods and services. Developing countries like Mexico and China are not major competitors for US exports.
In addition, while some imports have been disruptive to the US economy, close substitutes for many of the finished and intermediate products the United States imports are no longer produced at home. Taking all these effects into account, we estimate that our trade with emerging economies boosted US incomes by an average of $500 per person.
In the decades ahead, firms in developing countries could well become more formidable competitors for US exporters, but by and large these pressures are not yet present in our export markets. This does not mean that import competition has not been disruptive. But America is strong enough to adapt and take advantage of that rising tide of prosperity in the developing economies that, as President Kennedy said in 1962, lifts all boats.
Lawrence Edwards and Robert Z. Lawrence are coauthors of Rising Tide: Is Growth in Emerging Economies Good for the United States? (2013).