If you’re reading this blog, there’s a safe bet you’re a part of the manufacturing industry. If the words “trade agreement” fill you with a sense of foreboding, then there’s also a pretty safe bet you watch the news. The current talk about trade has taken center stage in political campaigns and discussions concerning the country’s future, painting a puzzling portrait of international trade arrangements. This week, we’re shining a light on trade agreements by breaking down their impact on manufacturing.
What Are Trade Agreements?
A trade agreement is a treaty between two or more countries in order to regulate trade between them. On paper, trade agreements have a lot going for them. For starters, they streamline trade and open-up markets for American-made goods abroad. The added markets increase demand, raising profits and employment opportunities in the United States. Trade agreements also allow firms to export labor where it’s most cost effective. This allows for many goods – like televisions – to be purchased in the U.S. at reasonable prices.
One of the more famous examples of such an arrangement is the North American Free Trade Agreement (NAFTA). Signed in 1992 by Canada, Mexico, and the United States, NAFTA lifted tariffs on the majority of goods produced by these countries, allowing for products to be bought and sold without any extra taxes. Cutting out import and export taxes allowed imported goods to compete more easily with domestic goods. The agreement also sought to eliminate any barriers for companies to invest internationally within NAFTA territory.
The World Trade Organization (WTO), founded in 1995, functions similarly to NAFTA, but on a much larger scale. The WTO is a trade association representing nations from across the globe. WTO settles international trade disputes and facilitates global free trade.
The Cost of Saving
One of the most appealing things in a trade agreement is the chance to set up manufacturing facilities in foreign, low-cost environments without having to pay taxes to import your finished products back to the U.S. The short-term savings are massive and immediate. However, Harvard Business School professors Michael Porter, Jan Rivkin, and Rosabeth Moss Kanter report that such business ventures can have unforeseen consequences.
For example, trade agreements can lead to job displacements. China joined the WTO in 2001 after 15 years of lobbying for a position. Since then, international investment in China’s economy has resulted in a manufacturing industry that steadily outpaced U.S. production and employment for more than a decade. The Washington Post estimates at least 3.2 million American jobs were displaced by the massive trade deficit between the U.S. and China.
Yet trade agreements don’t inherently lead to job loss. For example, data from the United States Chamber of Commerce shows that when NAFTA began in the 90s, U.S. manufacturers employed 16.8 million workers. By 1998, that number rose to 17.6 million despite the agreement. Although 2001-2 and 2007-9 saw sharp job declines due to recession, very few of those jobs went abroad. Survey data from the federal government also shows that less than 1 percent of layoffs can be attributed to sending jobs to other countries. In contrast, China experienced job declines as a result of its trade agreement. The country cut 25 million manufacturing jobs between 1994 and 2004, 10 times more than the U.S. in the same period. Because of numbers like these, many political figures and economists are opposed to blaming U.S. employment troubles on free trade.
Despite disagreements over the benefits of trade agreements, the technological changes and advancements appear to have a stronger impact on job availability in the U.S. than offshoring – the relocation of a business from one country to the other. Advancements in technology has changed the manufacturing industry, requiring diverse skill sets in order for welders to distinguish themselves from the ever-growing pool of unskilled welders. In fact, the rapidly declining number of welders with in-demand skills have a more direct, traceable impact on industry employment than offshoring.
What Trade Agreements Mean for Manufacturing
Jobs aren’t the only point of controversy surrounding trade agreements. The long-term side-effects of foreign investment facilitated by groups like the WTO have also been called into question. In essence, when a company builds a plant abroad, they’re investing in that country’s infrastructure in a very permanent way: one that may outlive the company’s business. A plant built in China will remain in China even if the company that built it returns its manufacturing to the U.S. Similarly, when a U.S. company trains workers abroad, those workers retain their skills and experience, but they can also pass them along to foreigners who are eager to compete with American workers for lower wages. That’s why many developing countries are willing to accept seemingly unfavorable arrangements: it’s an investment in a more independent future. On the other hand, foreign training and investment in developing countries also leads to rising wages in those very same nations. This, in turn, causes many firms to consider moving plants back to the U.S.
The downside for the companies doing the investing is that they’re helping to create the very competition that may or may not be impacting American jobs. The problems start to permeate when the foreign markets and low-cost goods that are supposed to offset the increase in competition don’t pan out. This is what happened to many U.S. investors in China. Additionally, while trade agreements may open up markets abroad for goods made in the U.S., these goods must also compete with imported goods in U.S. stores. There is no guarantee that new markets won’t fail, or that imported goods won’t overpower domestic ones.
What Trade Agreements Mean for You
In the final analysis, foreign competition definitely impacts U.S. employment, even if economists can’t exactly agree on the cause. So as a worker or business owner in the U.S., the best way to safeguard against foreign competition is by seeking or providing the very training that gets exported with trade agreements. As corporate investments in foreign countries lead to unforeseen sources of competition, the burden of remaining competitive has fallen on workers and employers who continue to do business in the U.S. So if you’re worried about where companies are investing, your best bet is to invest in yourself and your continued education.
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