Why Does Labor Object to Trade Agreements and Treaties?

Oct 5, 2009

// See this and this for background on labor and the American trade agenda.

What exactly are labor's arguments against FTAs and bilateral investment treaties, known as BITs? In testimony before the House Ways and Means Committee last May, Thea Lee described U.S. free trade agreements in this way:

Negotiated and reciprocal tariff reductions are paired with enhanced security of investment and upward harmonization of domestic laws to prevent overly "intrusive" regulation of foreign investment. This combination facilitates and accelerates the offshoring of American jobs.

This is the heart of the unions' criticism of trade agreements, and in some ways, of bilateral investment treaties. To boil it down, the idea seems to be that FTAs and BITs encourage U.S. multinationals to move production to low-wage countries and then sell their goods back into the U.S. market duty-free.

Does this argument hold water? No.

In fact, 74% of U.S. multinationals' capital expenditures are in the United States, and three-quarters of the remainder is in developed countries that have wages and labor standards similar to those in the United States. And when U.S. firms do invest abroad?  Commerce Department statistics show that 93% of the production of foreign affiliates of U.S. multinational companies is sold outside the United States. Less than 7% of their production is exported to the United States. By contrast, imports represent 18% of American GDP today.

If U.S. firms are investing abroad to sell into the U.S. market, they are certainly doing a poor job of it. In truth, the principal reason U.S. firms invest abroad is because it is so often the only way to do business in foreign markets, for instance, in the case of services such as insurance, or to manufacture goods that can be shipped only at great expense, such as potato chips.

Have our FTAs led to more offshoring? In labor's analysis, wouldn't we see more imports from and fewer exports to our FTA partners and a worsening in our trade balance with them?

Again, the data are clear that America's FTAs have been a great boon to domestic production. They have significantly boosted exports of U.S.-made goods and services to our FTA partners. In fact, the United States is now running trade surpluses with nine of the ten countries with which we have entered into free trade agreements between 2004 and 2008. Just five or so years ago, we had deficits with six of the ten. Looking at all 17 of America's FTA partners as a group, the United States has a trade surplus with them in manufactured goods, services, and agricultural products.

The only area where we run a sizeable deficit with these countries is in our large oil and gas imports from Canada and Mexico, which arguably has much more to do with geology than with trade policy.

The same holds for BITs. Frank Vargo at the National Association of Manufacturers recently issued an excellent analysis of trade between the United States and the 40 countries with which it has BITs. He writes:

The data show U.S. trade has benefitted. There has been no "race to the bottom." That is a fantasy. U.S. manufactured goods trade with the 40 BIT countries was in surplus by nearly $8 billon last year. Moreover, that surplus has increased as manufactured goods exports to the BIT countries have grown faster than imports.

The data contradict the basic allegation of opponents to the BIT program—their view that the BIT program has resulted in off-shoring U.S. production and costing jobs. Proponents of this position have not offered any data or analysis to buttress their view, and the data do not support their contention.

In sum, the facts do not support labor's contention that abandoning the playing field and giving up on FTAs or BITs will benefit American businesses or workers.

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