Free trade agreements don’t kill jobs

The U.S. is slowly working towards free trade agreements with Colombia, Panama, and South Korea. After years of wrangling, they might even pass this summer. President Obama is making the agreements a priority. But it won’t be easy. Some people prefer protection to competition, and they have the ear of many politicians.

Politico, for example, reports that “Labor groups and other critics . . . have labeled the pacts ‘job-killing, NAFTA-style trade agreements.’” That’s quite a claim. Did NAFTA really kill jobs? If it did, then maybe this year’s free trade agreements are a bad idea.

Let’s look at the data and find out. The St. Louis Fed’s FRED database has exactly what we’re looking for, which is the size of the civilian labor force over time. You can view and download the raw data here, and you can view it in graph form here.

NAFTA passed in 1993 but didn’t take effect until January 1, 1994. So let’s take December 1993 as our pre-NAFTA job total. At that time, there were 129,941,000 people in the labor force. As of this writing, the most recent data is from March 2011. In that month, the labor force was 153,406,000 people strong.

That means that there are 23,465,000 more jobs in America now than there were before NAFTA. This despite the last few years of hard economic times! So when someone claims that free trade agreements are job killers, they are either uninformed or lying. Neither option speaks well of the accuser.

Of course, 23 million new jobs don’t mean that NAFTA and other trade agreements are job-creators, either. They aren’t. Most labor force growth comes from population growth. International trade has almost zero long-term effect on the number of jobs. What it affects are the types of jobs. In the long run this is a very good thing. That’s why Congress and President Obama should pass the pending trade agreements with Colombia, Panama, and South Korea.

When governments lower trade barriers, they allow more people to exchange and to work together. In economics jargon, the size of the relevant market gets bigger. And the bigger the relevant market, the more people can specialize.

Readers familiar with Adam Smith will recognize this as his division of labor. Everyone knows that specialized workers are more productive than jacks of all trades. That’s why Henry Ford’s assembly lines were so much more productive than his competitors’. The same number of people could suddenly produce more cars in less time, because they had a more specialized division of labor.

Workers didn’t have to waste time switching from one task to another. They got very good at their tasks. And because they knew their jobs so well, they were better able to come up with new, better ways of doing them. Rising productivity is how an economy grows. Prosperity doesn’t depend on the number of jobs. It depends on how much stuff workers can create.

In ancient times, farmers were so unproductive that most of the population was stuck on farms. As they specialized and innovated, it took fewer and fewer people to feed everyone. Today, it takes less than two percent of America’s population to feed the rest.

That frees up the other 98 percent of us to specialize as doctors, engineers, artists, software designers, almost anything. Division of labor and the productivity it allows are what drive the modern economy. And none of it would be possible without trade. One of the reasons that America is rich is that Illinois can’t charge tariffs on goods from Indiana. The whole country was set up as a free-trade zone. When we move in that direction with other countries, as with NAFTA and the Panama, Colombia, and South Korea agreements, we open up new possibilities for specialization and wealth creation.

Low trade barriers allow the world to come together. Imagine having nearly 7 billion specialists instead of 300 million. The upcoming trade agreements won’t open up the whole world to trade, obviously. But they are a small step in the right direction, and deserve to be passed. Critics need not worry: if NAFTA is any guide, they won’t throw millions of people out of work.

Ryan Young is Fellow in Regulatory Studies at the Competitive Enterprise Institute.

  • Gridmark

    Well, this is full of crap isn’t it.

    One of your colleagues at George Mason Univ., Veronique De Rugy, on C-span said that it was okay to lose our manufacturing jobs and that Wal Mart was hiring a lot of people. All I see is the destruction of the middle class. While we cannot have protectionism, let us really face the facts. And the fact is that there is an additional 2 billion cheap laborers that entered the free market system. And that means our middle class has to lose jobs and/or lose pay and benefits. Over the past decade some 57,000 factories have closed and some 6 million jobs lost. Have you figured out on how you will replace those jobs? You can show any graphs you want, but most of them are lagging indicators and it finally has caught up with us, as our country has done nothing to prepare for globalization. Many small towns are devastated with closed factories. And I invite you to my town anytime where we have three major factories closed and other small business closed for a total of 2000 jobs our of a population of 14,000. Factories was a place for many uneducated to be middle class. While times change, no preparation by our country came about. After years of failed ideology like tax cuts to the rich, watching our jobs leave the country, we sit with people wanting jobs and there is no jobs.

    We are supposed to have an upward movement in our society. But we don’t have that. The industries that are left, and especially in the service sector is under fierce competition and while competition is necessary, it backfires on the people when you have less jobs and less classification of jobs.

    I will ask you this. What widgets can we make hear and not some other country? I cannot answer this and no one else has an answer to this.

    Everyone, including Obama, has said they will rely on exports. Well, I guess that leaves my town out as the factories are closed.

    And (as we hear the economists and politicians) as they support small business, just what small business can you have where factories in communities have closed. You need employed people to support a small business.

    In addition to globalization and the loss of jobs, let us add some more problems. Like mergers and consolidation and the loss of jobs, automation, and lean principles and more loss of jobs. What we have is 45% of the population paying taxes. We have seen the cheap labor, the cheap dollar, cheap interest rates, and cheap products. But the fact remains is that people lost jobs. And today, after years of tax cuts, the republicans want more in tax cuts, the democrats want more spending on useless programs, the fed says more printing of money and a low dollar and cheap interest rates, and the states say they need casinos for jobs. Well, I think they, the economists like you, and our politicians who support such crap are nuts. We have lost all the stimulus we had. We have used the tax cuts (800 billion dollars), the fed has printed, and the democrats have spent. There is no more stimulus left. And as long as our jobs keep going overseas, you cannot solve one problem here.

    Now, what we have not done is to invest in our country, in our people, and in the future. I have jotted 15 points on what we can do, but I will leave that for another day. After all, economists are supposed to be smarter than me and should not be influenced by right or left wing ideology. But it is a sad case, like CATO and other institutions, just don’t give a crap about the middle class. It is all ideology with you guys.

    • thephranc

      “Well, this is full of crap isn’t it.”
      Yes most of your post was just that.

      Government is what kills jobs not free trade.

      • Gridmark

        Yeah, compare a dollar an hour to 15, 20, or 30 dollars. And you are full of crap too. And with that ignorance our jobs still go overseas. But never mind, we are still waiting for trickle down.