Your research paper for the “economic policy brief” considers the historical and policy contexts for a specific country. You consider the economic development history and important economic and politi

LO 13.5 State why it is difficult to have precise estimates of job gains and losses due to trade, and give specific examples of how imports may create jobs and exports may occur after a loss of jobs.

LO 13.6   Not for Di str ib u tio n Table 13.4 Key T rade Initiatives of the Unit ed States Free T rade Agr eements Members Goals Trans-P acific Par tnership (TPP) 12 Free tr ade Asia-P acific Economic Cooper ation (APEC) 21 Free tr ade in theor y, but in practice an economic forum for addr essing issues of concern Transatlantic T rade and Investment P ar tnership (T -TIP) 29 T rade and investment liber alization Prefer ential Agreements Beneficiaries Purpose Gener alized S ystem of Prefer ences (GSP) (1976) 122 Duty-fr ee access for many goods from 122 low- and middle-income countries Caribbean Basin Initiative (CBI) (1983) 17 Duty-fr ee access for most goods from 17 C aribbean nations African Gr owth and Opportunity Act (AGO A) (2000) 39 Duty-fr ee access for most goods from 40 sub-Sahar an countries; eligibility varies with political conditions The United States continues to seek new trade and investment agreements while unilaterally offering enhanced market access to many low- and middle-income countries.

Source: Office of the United States Trade Representative.Not for Di str ib u tio n The two FTAs listed in Table 13.4 , particularly the Asia Pacific Economic Cooperation (APEC) economic forum, include a large number of countries. APEC spans the Pacific, from north to south and east to west, and includes some of the largest economies in the world, including China, Japan, South Korea, Mexico, Canada, and Australia. It differs from other FTAs in that it is not directed at creating an FTA among its members, but rather seeks to create free trade for all, members and nonmembers, within the Asia-Pacific region. In its original goals, it set 2010 as a target date for free trade for all its industrial economy members, and 2020 for the developing economies. The first target date was not met and has been scaled back as APEC has become a forum for discussing trade issues of concern. In part, it was lack of progress in APEC that caused the United States to join with a subset of APEC countries to pursue a FTA in the form of the Trans-Pacific Partnership (TPP).

In the agreements completed ( Table 13.2 ) under negotiation, similar issues arise over and over. These include labor and environmental standards, investment, and job loss.  Not for Di str ib u tio n Labo r a n d E n vi ro n m en ta l S ta n dard s In nearly all the trade agreements signed since NAFTA (1994), the labor and environmental side agreements (North American Agreement on Labor Cooperation and North American Agreement on Environmental Cooperation) have served as a framework for adding labor and environmental clauses. The key principles of the labor and environmental side agreements to the NAFTA are that countries should enforce their own laws and that low or poorly enforced labor and environmental standards should not be used to attract trade or investment. Enforcement, for the most part, relies on consultations with parties levying a complaint of nonenforcement, and investigation by the home country government. The wording of the agreements is very specific and states that no investigation or enforcement may be performed by one country in the territory of another. Instead, the agreements attempt to create public awareness of noncompliance without setting specific standards or encroaching on the sovereignty of national governments.

In the newest of the proposed agreements, the Trans-Pacific Partnership, labor standards are part of the agreement, with a dispute resolution process and the possibility for imposing trade sanctions such as tariffs when standards are not met.

The content of the labor standards reflect the core principles of the International Labour Organization’s (ILO) Declaration on Fundamental Principles and Rights at Work and its follow-up (see Chapter 8 ): 1. Freedom of association and the effective recognition of the right to collective bargaining. 2. The elimination of all forms of forced or compulsory labor. 3. The effective abolition of child labor. 4. The elimination of discrimination with respect to employment and occupation. The TPP is not the first agreement to incorporate labor standards directly rather than as a side agreement, but it is the first to offer the possibility of trade sanctions as a remedy for noncompliance and it is the first to specify the content of labor standards rather than leaving it up to individual countries to set their own standards. Note, however, that the specific content is rather general, and Not for Di str ib u tio n consequently, it would be incorrect to assume that standards are harmonized. For example, worker health and safety regulations, wages, and hours of work, will undoubtedly vary greatly across the members of the proposed TPP.

The environmental side agreement of the NAFTA established the framework for incorporating environmental clauses into subsequent FTAs. In many respects, it is parallel to the labor clause and is motivated by similar concerns that low environmental standards not be used to gain competitive advantages. As noted in Chapter 8 , it is unrealistic to expect environmental standards, clean-up preferences, or resource commitments to be identical in countries with different income levels. Whereas some countries may prioritize the reduction of greenhouse gases, others may still be struggling to provide access to clean drinking water. The marginal benefits of one priority over another depend on the level of income and the state of the environment in each place. Consequently, the goal of the environmental side agreement to the NAFTA was, like the labor side agreement, to ensure that countries enforced their own laws and that they did not use low standards or poorly enforced standards as a means to attract investment or to lower costs of production.

The proposed TPP does not harmonize environmental standards. Rather it focuses on the enforcement of a number of international agreements, such as agreements on wildlife trafficking, protection of endangered species, and others, while also eliminating some subsidies to fishermen that have led to over-fishing. As with labor standards, its primary emphasis is on enforcement of each country’s own standards, along with recognition of a number of multilateral commitments all countries have made, or must make.

Critics of the labor and environmental clauses come in two forms. Some economists think that trade agreements should not be about labor and the environment, and so these clauses do not belong in trade agreements. They think that including these clauses gives support to protectionists who will inevitably oppose increased trade flows by making arguments, whether based on fact or not, that the trade partner does not enforce its laws adequately. Another set of economists argue that the clauses are meaningless because there is no real enforcement mechanism. Countries Not for Di str ib u tio n are left to their own devices to determine whether laws are adequately enforced, and there is no clear consequence of nonenforcement.

These criticisms have resulted in the new approach that is being tried with the proposed TPP. The chief negotiator for the United States, called the U.S. Trade Representative (USTR), has insisted that basic labor standards be incorporated into the agreement and that countries must recognize and enforce environmental standards that have multilateral support, such as rules on wildlife trafficking and protection of endangered species. In addition, for the first time, trade sanctions would be allowed as a way to enforce standards.

It is fairly certain that NAFTA would not have been ratified by Congress without the inclusion of the labor and environment side agreements as a package deal. Members of Congress were nervous about the potential for jobs to migrate south, and they worried that Mexico’s weaker enforcement of labor and environmental laws could be used to gain competitiveness. Since then, the strategy of including labor and environmental chapters directly in the trade agreements has helped gain Congressional support and has become the standard strategy for ensuring passage of new agreements. Whether the new approach of specifying in more detail the content of the standards and allowing for the possibility of trade sanctions as a punishment for noncompliance will help gain passage of the proposed TPP remains to be seen. Undoubtedly, any future agreement will have something similar.Not for Di str ib u tio n In ve sto r-S ta te R ela tio n s A majority of the FTAs in force have chapters on investment. In addition, the United States has forty-two bilateral investment treaties (BIT) with countries across the globe. These agreements, like the FTA chapters on investment, set out the rules governing cross-border investment, including the options for dispute resolution when an investor thinks they have been treated unfairly. The rules are set within a framework emphasizing national treatment for foreign investors with the intention of eliminating all distinctions between national and foreign investors. The rules also eliminate the use of most performance requirements for foreign investment (e.g., export requirement or local content use) and guarantee a uniform set of regulatory standards for foreign and domestic firms. As transportation and communication improvements have enabled more businesses to offshore some of their production processes, U.S. trade policy has sought to address the concerns they have about investing abroad. In a very general sense, the goal of these agreements is to create a higher level of certainty for investors with respect to their property rights if they invest in a country that has an agreement with the United States.

Again, NAFTA set a framework for investor-state rules by creating a dispute settlement process specifically for investors from one NAFTA country that invest in another NAFTA country. Chapter 11 of NAFTA sets out the rules, and is perhaps the most controversial part of the agreement. Specifically, Article 1110 states: “No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment….” (emphasis added) * except for public purpose, on a nondiscriminatory basis, and with compensation.

Critics of the NAFTA argue that undermines the sovereignty of nations by allowing private enterprises to sue governments that are seeking to protect their workers or their environment, or that implement regulations that they believe to be in the public interest. Since then, FTAs and BITs have introduced language referring to “indirect nationalization” and added clauses to the effect that nothing in the  Not for Di str ib u tio n agreement shall be interpreted to mean that environmental or other standards may not be upheld or implemented if they protect the public interest.

Critics of these agreements argue that the asymmetry between the United States and many developing countries necessarily creates an unlevel playing field in which U.S.

corporations with extensive resources can bully developing countries’ governments with the threat of lawsuits if they attempt to raise their regulatory standards. Again, the proposed TPP attempts to overcome the objections of critics by explicitly stating that nothing in the agreement can be interpreted as a limitation on the ability of countries to impose regulations to protect public health and safety or environmental quality.Not for Di str ib u tio n Jo bs a n d T ra d e A gre em en ts There are quite a few estimates of the job gains or losses caused by NAFTA and other trade agreements. Within five years of NAFTA’s implementation, the estimates ranged from a net loss of 98,000 a year to a net gain of 42,000 a year. It is possible to estimate the number of workers needed to produce a given quantity of exports, and to estimate the number of jobs that would be created if imports were produced at home, but these values are not the same as job creation and destruction due to a trade agreement. For example, imports may supply a firm with capital or intermediate goods that make the firm more competitive and better able to survive; and exports may supply a foreign affiliate that has been recently off-shored by the home country firm. Hence, some imports create jobs, while some exports exist only because jobs at home have been moved abroad. Given these conceptual difficulties, actual estimates of the number of jobs gained or lost are closer to guesses. In addition, pro-trade think-tanks and scholars usually show job gains, while anti-trade think-tanks show job losses. In either case, however, neither side of the debate can show large job gains or losses in the United States due to trade agreements. Given that the United States creates more than 2 million net new jobs in an average (nonrecession) year, most estimates of job losses or gains due to the trade agreement are well below 5 percent of the measured total change.

Figure 13.3 illustrates this point by plotting gross job gains and gross job losses in the U.S. economy from March 1994, through March 2015. The values on the vertical axis are in thousands, making 8,000 equivalent to 8,000 thousand, or 8 million.

Figures are annual totals, measured from March to March. Job gains include new establishments or expansions in existing ones, while job losses include layoffs and establishment closings. Whenever job losses exceed job gains, there is net job loss, and vice versa when gains are greater. First, note that the two major episodes of job losses are during the recessions of 2001 and 2007–2009. Second, the period immediately after the implementation of NAFTA is not one with net job losses, but on the contrary, corresponds to a period of strong net job gains. That does not prove that NAFTA created jobs, but it does show that if there were job losses, they were substantially outweighed by other factors, including the strong economic growth of the second half of the 1990s. The most important point of Figure 13.3 is that the U.S. economy is larger than most people realize and that it is very dynamic.  Not for Di str ib u tio n Figure 13.3 Real-time data Gross Job Gains and L osses, 1994–2015 The U.S. economy creates between 10 and 16 million new jobs (gross) each year, while it loses slightly fewer in normal, nonrecession, years.

Source: Bureau of Labor Statistics A second point that has often been overlooked in the evaluation of NAFTA and other trade agreements is that the United States has much less unbalanced trade with the countries that have signed FTAs. Table 13.5 shows U.S. merchandise exports, imports, and deficits for FTA countries and the rest of the world.

Merchandise goods trade balances are much more favorable when countries sign an FTA because U.S. markets are already relatively open and tariff barriers are low, with the exceptions outlined in Chapter 7 . When countries enter into an FTA, the required elimination of trade barriers is usually much greater outside the United States than it is inside. As foreign barriers decline, U.S. exports expand.  Not for Di str ib u tio n Table 13.5 US Merchandise Goods Expor ts, Imports, and Deficits Exports Impor ts Deficits FTAs Total (billions US$) 711.4 771.8 −60.6 Shar e (%)   47.3   34.4    8.2 Rest of world Total (billions US$) 793.2 1,469.9 −676.7 Shar e (%)   52.7   65.6   91.8 U.S. trade deficits are much smaller with countries that sign FTAs.

Source: See Table 13.2 . Anti-trade rhetoric usually assumes that trade deficits are encouraged by trade agreements, yet the data show otherwise. Anti-trade arguments also often assume that mercantilism is correct in its assertion that imports are harmful while exports are beneficial. Yet, consumers have more choices and businesses more competitive when they have access to imports. Nevertheless, it is important to try to understand the sources of anti-trade rhetoric. If FTAs are not the problem and if imports are beneficial, then why do so many people in the United States view international trade as harmful? There is no easy answer to this question and economists have not been able to reach a consensus as to the causes of anti-trade sentiments in the wider public. It may be partially related to the loss of manufacturing jobs, or to wage stagnation and growing inequality, or to the complaints of a vocal minority that has lost its livelihood as a result of trade and investment abroad. As Chapters 3 and 4 show, trade causes economies to shift their production and some workers are displaced. Whatever their causes, anti-trade perspectives reflect a deep set of concerns about the future of the country.   Not for Di str ib u tio n Case S tud y The African Gr owth and Oppor tunity Act Prefer ential tr ade agreements cover a variety of schemes that admit imports either tariff fr ee or with a reduced tariff. Most high-income countries and some developing countries use these schemes t o support low- and middle-income countries by letting their goods bypass the normal tariff barriers. The most common scheme is called the Generalized System of P refer ences (GSP) . The Unit ed States implement ed the GSP in 1976 and curr ently offers tariff-fr ee access to its market for a lar ge percentage of goods coming fr om 122 developing countries.

In addition to the GSP, the United States offers two other pr eferential agreements: the Caribbean Basin Initiative (CBI) , and the African Gr owth and Oppor tunity Act (AGOA) (Table 13.4 ). Goods not cover ed under the GSP are covered in these additional pr eference schemes, although none of them cover all e xports by the beneficiar y countries. Each of these agreements has a political or economic objective. The CBI was implemented to diversify C aribbean exports and str engthen gr owth during a time of political unr est, guerilla warfare, and rising socialist par ties in Central America and the A GOA is int ended t o promot e expor t diversification and economic development in sub-Sahar an Africa.

AGO A is the most r ecent of the agr eements. Signed int o U.S. law in 2000, it curr ently covers thir ty-nine countries in sub-Sahar an Africa and is the primary trade-pr omotion initiative of the U .S. government for Africa. It provides duty-fr ee entry for 5,200 pr oducts, covering about 86 per cent of products that the U .S. imports. Countries that qualify for duty-fr ee access to the U .S. mark et under the A GOA include some of the poor est nations of sub-Saharan Africa, many with per capita incomes under $1,000 per person per year . The goal of the U .S. in offering enhanced mark et access on a unilateral basis is t o encourage export diversification and pr omotion as a catalyst for economic development.

Duty-free access t o the U.S. mark et is a significant benefit for sub-Sahar an Africa and a few countries have taken advantage of the opportunity to    Not for Di str ib u tio n *NAFT A , O rg an iz a tio n o f A m eric a n S ta te s incr ease e xports, par ticularly in the aut omotive sector (car parts) and the relatively highly pr otect ed appar el sector. In spit e of a few successes, more than one-half of all A GOA designat ed countries e xport less than $1 million in goods t o the United States, and many of those with significant expor ts mostly sell oil, the most common e xport. The difficulties associat ed with diversifying out of oil ar e limited by two fact ors. First, a few goods that ar e sensitive to the United States ar e excluded. These ar e primarily agricultur al products and include some k ey sectors. For example, cott on is an impor tant product in sever al countries (see the case study on losing compar ative advantage in Chapter 3 ), as ar e the e xcluded it ems peanuts and sugar . Secondly, distance matt ers, as it leads to higher transpor tation costs and less competitive pricing. W estern African nations are not so far fr om the United States, given cheap ocean tr ansportation, but East Africa is another matt er. F urthermor e, the disadvantage of distance is compounded for four teen sub-Sahar an African nations that ar e landlocked without dir ect access to the sea. (Africa has mor e landlocked nations than any other continent.) As noted above, A GOA e xpor ts have gr own since the implementation of the preferential scheme. Ideally, e xport growth would show a diversified set of manufactur ed goods and agricultur al products, r epresenting r obust economic per formance and new oppor tunities for these sub-Sahar an nations. Yet, most of the gr owth has been in oil e xports. Incr eased explor ation and new discoveries have led t o significant increases in oil expor ts to the Unit ed States fr om Angola, Chad, Equat orial Guinea, Gabon, and Nigeria. In 2015, 35.8 per cent of U.S. imports from A GOA countries wer e oil and r elated pr oducts. Not for Di str ib u tio n