Economy & Budget

Who really benefits from free trade? Americans companies and workers.

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The current discussion about free trade agreements too often forgets the tremendous benefits that free trade agreements offer U.S. exporters. Last September, the U.S. Department of Commerce reported that U.S. exports to current free trade agreement partners grew 22 percent from 2009 to 2015. The Commerce Department further reported that these exports supported more than 3 million American jobs and that U.S. exports, in total, support more than 11.5 million American jobs.

A key premise of President Trump’s economic policy is to increase the total number of U.S. exports. This makes sense given that the growth of the U.S. economy in the last century was due to the dominance of U.S. manufacturers after World War II. However, what is sometimes misunderstood is that U.S. free trade agreements are also part of our growth, and have actually strengthened our nation’s economy—not weakened it.

Take the North American Free Trade Agreement (NAFTA). When it went into effect in 1994, U.S. manufacturing jobs were in rapid decline. Faced with Asian competition, American manufacturing of goods such as cars and household electronics declined because we simply could not compete against Asian manufacturers with cheaper labor. Instead of exporting these goods to other countries, the United States was importing them.

Although NAFTA did not reverse this trend, it did mitigate it. By allowing goods and services to move more freely throughout Canada, Mexico, and the United States, NAFTA built a regional economy that allowed U.S. goods to compete. Whereas the bulk of these intermediate goods, without NAFTA, would likely have come from Asia, NAFTA meant that more and more of them would be sourced from North America. This helped limit the outflow of American jobs to the Asian region.

NAFTA was smartly negotiated in 1994 by ensuring the application of strict rules of origin. Rules of origin, a concept largely unknown outside the international trade community, are the rules that determine when a good is considered to be made in a particular country, in this case, a NAFTA country. Since only goods that are made in a NAFTA country receive the benefit of the lower tariffs provided by the free trade agreement, these rules play an important part in ensuring who benefits from the free trade agreement.

In order to ensure that goods coming from Mexico were not comprised of intermediate parts from Asia, the rules of origin in NAFTA require that there be a minimum amount of North American content in order to benefit from the free trade agreement’s tariffs. The goal of these rules was to limit the importation of Asian goods into Mexico for assembly and which were then exported into the United States under the lower NAFTA tariff benefit.

What has developed over the last 25 years are industries in Mexico that take Asian and U.S. parts and components to make, for example, cars that will enter the United States after being manufactured in Mexico from U.S. technology, parts and components. Without NAFTA, there is little doubt that American car manufacturers would be less competitive with Asian car manufacturers than they are today.

While U.S. companies did move lower skilled jobs to plants in Mexico, these plants in turn bought intermediate goods and raw materials from the United States. The cheaper Mexican labor at the final assembly stage brought the total price of many goods down while still assuring that at least some of their value came from the United States. NAFTA facilitated improvements in the U.S. car manufacturing industry, avoiding a pivot of U.S. automobile manufacturing to Asia.

When the United States was negotiating the Trans-Pacific Partnership (TPP), the same logic was at play. Much like NAFTA, the agreement was motivated by the desire to make American goods more competitive against Chinese goods by building a strong regional economy that includes the United States. Additionally, the provisions of the TPP would provide increased protection of American intellectual property rights and foreign investment.

These benefits are why the outgoing U.S. Trade Representative two weeks ago, called the withdrawal of the United States from the TPP a gift to China, and is why China is negotiating its own large, multilateral trade agreement in Asia and bilateral agreements with other nations like India.

Although NAFTA and other trade agreements have caused the loss of American jobs, there are also stories of American jobs that have been saved or gained. U.S. policymakers would do well to keep this in mind and continue to promote institutions like the new Trade Finance Advisory Council (TFAC), which works with small and medium-sized businesses to find financing for U.S. manufacturing exports.

The story of American growth is an international story. It’s a story in which the United States led the globe after World War II to liberalize trade so that American manufacturers could make things and sell them to other countries. While the United States might restrict Americans’ ability to buy things from foreign countries by raising tariffs on imports, what it cannot do is force people in other countries to buy American goods that are not priced competitively.

As President Trump has wisely spoken, the United States needs to support its exporters. Part of supporting U.S. exporters may mean supporting free trade agreements. The trade agreements may help ensure we can better compete on the global stage.

Doreen Edelman is a trade expert and co-leader of the global business team at Baker Donelson. She has more than 25 years of experience advising companies on import and export compliance, foreign investment, and global expansion.

The views of contributors are their own and are not the views of The Hill.

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