US Manufacturing Is Far From Healthy And The Main Reason Appears To Be Globalization

Public awareness and acceptance of the negative consequences of corporate-driven globalization on US workers has grown dramatically over the last years, aided in part by Donald Trump’s attacks on trade agreements like NAFTA.  Of course, Trump deliberately and misleadingly claims that US corporations have also suffered.  And, his tariff-raising actions are an ineffective response to worker difficulties.

Still, many economists continue to argue that the concern over trade is misplaced, that the US manufacturing sector is generally healthy, and it is technology, in particular automation, that is the main reason for the decline in US manufacturing employment.

A new paper by the economist Susan Houseman, “Understanding the Decline of US Manufacturing Employment,” is an effective rebuttal to their arguments. As she concludes: “The widespread denial of domestic manufacturing’s weakness and globalization’s role in its employment collapse has inhibited much-needed, informed debate over trade policies.”

What’s up with the manufacturing sector?  

Figure 1 shows that manufacturing employment remained roughly stable from the mid-1960s through the early 1980s, then began a slow decline until 2000, after which it fell dramatically.

Figure 2 compares the performance of the manufacturing sector–production and employment–with that of the private sector as a whole.  As we can see, the real GDP growth of the manufacturing sector has roughly matched the real GDP growth of the private sector (red and yellow lines; left scale).

Figure 2 also shows that manufacturing’s share of private sector GDP and employment has steadily fallen (green and blue-gray lines; right scale). Manufacturing’s share of private sector GDP peaked at 33 percent in 1953, falling to 13 percent in 2016.  Manufacturing’s share of private sector employment peaked at 35 percent, also in 1953, and fell to just under 10 percent in 2016.

Those who argue that our manufacturing sector remains healthy do so on the basis of the sector’s relatively strong growth record and the fact that it was achieved with ever fewer workers.  As Houseman comments:

many [research economists] have taken it as strong prima facie evidence that higher productivity growth in manufacturing—implicitly or explicitly assumed to reflect automation—has largely caused the relative and absolute declines of manufacturing employment. Even when some role for trade is recognized, it is deemed small, and the decline is taken as inevitable.

However, there is a bit of a puzzle here.  Figure 2 shows that manufacturing GDP growth has generally matched the GDP growth of the entire private sector at the same time that manufacturing’s share of private GDP has steadily fallen.  Houseman offers the solution to this puzzle: “If real GDP growth for manufacturing has kept pace with real GDP growth in the aggregate economy yet manufacturing’s share of private sector GDP is falling, then it must be the case that the average price growth of manufactured goods has been slower than the average price growth for the goods and services produced in the economy.”

In other words, a relatively slow growth in the price of manufactured goods would boost the real value of the goods produced.  At the same time, it would also cause a decline in the manufacturing sector’s share of total output.  And, an examination of price deflators shows just such price trends, with the overall price deflator for the private sector steadily rising and the price deflator for manufacturing remaining relatively constant in the post 1980 period.  Thus, the strong growth in manufacturing GDP and its related productivity/automation story rests heavily on the striking behavior of the manufacturing price deflator.

And therein lies the problem.  Houseman finds that the strong growth in real manufacturing GDP is driven by the price behavior of goods produced by a small subset of manufacturing, namely the computer industry (which she broadens to include semiconductors).  “Although the computer industry has accounted for less than 15 percent of value-added in manufacturing throughout the period, it has an outsized effect on measured real output and productivity growth in the sector, skewing these statistics and giving a misleading impression of the health of American manufacturing.”

Digging into the data 

Figure 4 shows price indices for private industry and manufacturing, omitting the computer industry, and for the computer industry alone. Without the computer industry, the price indices for private industry and manufacturing have largely tracked each other.  The computer industry price index, on the other hand, has marched to the beat of a far different drummer.

Figure 5 illustrates the importance of the above deflators to the debate about the health of the manufacturing sector.  Starting in the mid-1980s we see an ever-greater gap between the real GDP growth of manufacturing without the computer industry (blue-gray line) and the growth of real GDP in the private sector and manufacturing (including the computer industry).

More specifically, “From 1979 to 2000, measured real GDP growth in manufacturing was 97 percent of the average for the private sector; when the computer industry is dropped from both series, manufacturing’s real GDP growth rate is just 45 percent that of the private sector average.” Growth in the manufacturing sector, with the computer industry omitted, has been exceptionally slow over the years 2000 to 2016. Over that period, “real GDP growth in manufacturing was 63 percent of the average private sector growth. Omitting the computer industry from each series, manufacturing’s measured real output growth is near zero (about 0.2 percent per year) and just 12 percent of the average for the private sector in the 2000s.”

So, without the computer industry, manufacturing is clearly struggling.  But what explains the strong computer industry performance?  As we see next, there is also reason to believe that the computer industry’s performance, and thus its contribution to the manufacturing sector, is also seriously overstated, thereby further undermining claims of manufacturing’s health.

The computer industry

The real GDP of an industry is calculated by dividing the yearly dollar value of industry sales by its price deflator.  A real increase in output thus requires that industry sales grow faster than industry prices; if sales double and prices double there is no real gain.

Product quality changes slowly in most industries allowing rather straightforward year to year comparisons of dollar output.  However, the computer industry stands as an outlier; for years now, it has produced significantly more powerful products each year.  And, on top of that, it has even lowered their prices.

As a result of this unusual behavior, estimating the real growth of the computer industry requires a complicated adjustment of the industry’s price index to account for the yearly increase in computer power and speed.  In broad brush the adjustment is handled as follows: If a consumer buys a computer that has 20 percent more computing power than the previous year’s model, the government considers that every 100 new computers produced are the equivalent of 120 of the previous year’s model.  The result of such an adjustment is a significant increase in the industry’s output even if the same number of actual computers are produced, an increase that is further magnified by the decline in industry prices.

While it is entirely reasonable to adjust the computer industry’s output for quality when studying the performance of that industry, we have to be careful when the results are used in the calculation of manufacturing’s overall performance. In fact, the computer industry’s rapid gains, based on significant increases in output with declining employment, are misleading as a measure of actual manufacturing activity for two reasons: first, they owe more to difficult-to-measure quality improvements driven by research and development, and second, a growing share of computer industry production has been globalized which means that it takes place outside the country.

As Houseman says, “quality adjustment [for the computer industry] can make the numbers difficult to interpret. Because the computer industry, though small in dollar terms, skews the aggregate manufacturing statistics and has led to much confusion, figures that exclude this industry, as shown in Figure 5, provide a clearer picture of trends in manufacturing output.”  And as we can see those trends do not support the claims made that we have a healthy manufacturing sector.

The decline in manufacturing employment

Houseman similarly shows that productivity’s role in the decline in manufacturing employment has also been seriously overstated. As Figure 1, above, makes clear, the number of manufacturing workers has been falling for some time.

From 1979 to 1989 manufacturing lost 1.4 million jobs, with the losses concentrated in the primary metals and textile and apparel industries. “Employment in manufacturing was relatively stable in the 1990s. Although measured employment declined by about 700,000, or 4 percent, from 1989 to 2000, the net decline in jobs can be entirely explained by the [domestic] outsourcing of tasks previously done in-house. . . . Had these workers been counted in manufacturing, manufacturing employment would have risen by an estimated 1.3 percent rather than declining.”

As Figure 1 also shows, the explosive decline in manufacturing employment begins in the 2000s.  From 2000 to 2007, manufacturing employment fell by 3.4 million, or 20 percent. From 2007 to 2016, manufacturing fell by another 1.5 million.  And, of course, this was a period of intensified globalization, perhaps best marked by China’s 2001 entry into the WTO.

Examining the data, Houseman found that average annual employment growth in manufacturing was approximately 2.5 percent lower than the average employment growth in the private sector as a whole over the period 1977 to 2016.  Only 15 percent of that differential is accounted for by lower output growth in manufacturing, the rest is explained by higher productivity growth.  However, “When the computer industry is omitted from both series, 61 percent of the lower manufacturing employment growth is accounted for by manufacturing’s lower output growth, and just 39 percent by its higher labor productivity growth.”

As Housemen comments, “The point of this exercise is to show that there is no prima facie evidence that productivity growth is entirely or primarily responsible for the relative and absolute decline in manufacturing employment.”

And there is also reason to question the meaning of the strong computer industry productivity figures. Labor productivity is defined as the value-added of an industry divided by labor input.  In the case of the computer industry, the industry’s productivity growth was probably driven most by product improvements, not automation, that boosted its value added. However, global outsourcing of production also made a contribution. While outsourcing reduces the value added of the industry, the decline in labor input is far greater. Thus, it remains unclear how much productivity increases based on the automation of production have actually contributed to the decline in US manufacturing employment, even in the computer industry.

Most importantly, there is a growing body of research that points to globalization as the major factor behind the recent decline in US manufacturing employment.  For example, Economists David Autor, David Dorn and Gordon Hanson “conservatively estimate that Chinese import competition explains 16 percent of the U.S. manufacturing employment decline between 1990 and 2000, 26 percent of the decline between 2000 and 2007, and 21 percent of the decline over the full period.”  They also find that Chinese import competition “significantly reduces earnings in sectors outside manufacturing.”

In sum, there are good reasons for concern about the health of the US manufacturing sector and opposition to corporate-driven globalization strategies.

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The Chinese Economy: Problems and Prospects

The Chinese economy is big. In 2017, it was the world’s biggest based on purchasing power parity.  Its output equaled $23.12 trillion, compared with $19.9 trillion for the EU and $19.3 trillion for the US.

China also regained its position as the world’s largest exporter in 2017, topping the EU which held the position in 2016.  Chinese exports totaled $2.2 trillion compared with EU exports of $1.9 trillion. The United States was third, exporting $1.6 trillion.

The Chinese economy also recorded an impressive 6.9 percent increase in growth last year, easily beating the government’s 2017 target of 6.5 percent and the 6.7 percent rate of growth in 2016.  According to international estimates, China was responsible for approximately 30 percent of global economic growth in 2017.

The Chinese government as well as many international analysts also claim that China has entered a new economic phase, one that is far more domestic-centered and responsive to popular needs, and thus more stable than in the past when the country relied on exports to record even higher rates of growth.

It all sounds good.  However, there are many reasons to question China’s growth record as well as the stability of the country’s economy and turn towards a new domestic-centered growth strategy.  Glowing reports aside, hard times might well lie ahead for workers in China and the broader Asian region.

Chinese Growth

As the chart below shows, China’s rate of growth fell for six straight years, from 2011 to 2016, before registering an increase in 2017. Current predictions are for a further decline, down to 6.5 percent, in 2018.

However, Chinese growth figures still need to be taken with the proverbial “grain of salt.”  As Lucy Hornby, Archie Zhang, and Jane Pong discuss in a Financial Times article, Chinese provinces routinely fudge their growth data, which compromises the reliability of national growth figures.  For example:

Inner Mongolia, one of China’s most coal-dependent areas, and the major northern port city of Tianjin, have admitted to falsifying data that will probably require their 2016 GDP to be revised down. They join neighboring Liaoning, the first province to admit to a contraction during the four-year correction in commodities markets.

Inner Mongolia admitted this month that its data for “added value of industrial enterprises of a certain scale” were inflated 40 per cent in 2016. According to the Chinese statistical yearbook, secondary industry comprises 47 per cent of its GDP. Assuming its 2015 figures are accurate, the revised 2016 figures mean the region’s economy shrank 13 per cent. . . .

Like Inner Mongolia, Liaoning admitted to a contraction in 2016 compared with its official performance in 2015. Liaoning admits it faked data for about five years but has not issued a revised series. . . .

Tianjin, one of the big ports that services northern China, could also see a revision. Its Binhai financial district, which offers tax and foreign exchange incentives to registered businesses, swelled to comprise roughly half of Tianjin’s reported GDP last year.

Binhai included in GDP the commercial activity of companies that were only registered there for tax purposes, according to revelations last week. That could result in a 20 per cent drop in reported GDP for Tianjin in 2017, according to FT calculations. Binhai’s high debt levels and access to domestic and international financing make its phantom results a concern for broader markets.

Another possible data offender is Shanxi, China’s most coal-dependent province. Its official GDP growth held up admirably during the commodities downturn.

Last summer China’s anti-corruption watchdog announced unspecified problems with Jilin’s data, adding another troubled northeastern province to the list of candidates to watch.

Wang Xiangwei, former editor-in-chief of the South China Morning Post, sums up the situation as follows:

This [falsification of data] has given rise to a popular saying that “data makes an official and an official makes data”.  The malpractice is so rampant and blatant that over the years, a long-running joke is that simply adding up the figures from all the provinces and municipalities reveals a sum that overshoots the national GDP – by 6.1 trillion yuan (more than 10 per cent!) in 2013, 4.78 trillion yuan in 2014, and 3.6 trillion yuan in 2016.

This data manipulation certainly suggests that China has regularly failed to meet government growth targets.  Perhaps more importantly, even the overstated published nation growth statistics show that China’s rate of growth has steadily fallen.

Debt problems threaten economic stability

There are also reasons to doubt that China can sustain its targeted growth rate of 6.5 percent. A major reason, as the next chart shows, is that China’s growth has been underpinned by ever increasing debt.  Said differently, it appears that ever more debt is required to sustain ever lower rates of growth.

As Matthew C Klein, writing in the Financial Times Alphaville Blog, explains:

The rapidity and size of China’s debt boom in the past decade has been almost entirely without precedent. The few precedents that do exist — Japan in the 1980s, the US in the 1920s— are not encouraging.

Most coverage has rightly focused on China’s corporate sector, particularly the debts that state-owned enterprises owe to the big four state-owned banks. After all, these liabilities constitute the biggest bulk of the total debt outstanding, and also explain most of the total growth in Chinese debt since the mid-2000s.

The explosive nature of China’s corporate sector debt growth is well illustrated by comparisons to the relatively stable corporate debt ratios in other major countries, as shown in the following chart.

China’s growing debt means it likely that sometime in the not too distant future the Chinese state will be forced to tighten its monetary policy, making it harder for Chinese companies to borrow to finance their existing levels of employment and investment, thus triggering a potentially sharp slowdown in growth.  At the same time, since much of China’s corporate debt is owed to government-controlled banks, it is also likely that the Chinese state will be able to limit the economic fallout from expected corporate defaults and avoid a major financial crisis.

But, while corporate debt has drawn the most attention, household debt is also on the rise, and not so easily managed if serious repayment problems develop. According to Klein,

Since the start of 2007, Chinese disposable household income has grown about 12 per cent each year on average, while Chinese household debt has grown about 23 per cent each year on average. The cumulative effect [as illustrated below] is that (nominal) income has slightly more than tripled but debts have grown by nearly a factor of nine. . . .

All this is finally starting to affect the aggregate debt numbers. Household debt in China is still small relative to the total — about 18 per cent as of mid-2017 — but household borrowers are now responsible for about one third of the growth in total nonfinancial debt.

By mid-2017, Chinese households held debt equal to approximately 106 percent of their disposable income, roughly equal to the current American ratio.  What makes Chinese household debt so dangerous is that, as Klein notes, “households cannot service their debts out of GDP. Instead they have to rely on their meagre incomes.”  And as we see below, the share of Chinese national output going to households is not only low but has generally been trending downward.  By comparison, disposable income in the US normally runs around 72-76 percent of GDP.

In addition, it has been “finance companies and private loan sharks” that have done most of the consumer lending, not state banks.  This will make it harder for the state to keep repayment problems from having a significant negative effect on domestic economic activity.

Thus, while Chinese officials argue that China’s new lower rate of growth represents a switch to a new more stable level of economic activity, the country’s debt explosion suggests otherwise.  As Michael Pettis argues in his August 14, 2017 Monthly Report on China:

To argue that the authorities have been successful in stabilizing GDP growth rates and now must address credit growth misses the point entirely. If GDP growth “stabilizes” while credit growth accelerates, GDP growth cannot be said to have stabilized, at least not in any meaningful way. Chinese economic growth can only be said to have stabilized if GDP growth rates remain constant without any increase in the debt burden – i.e. credit grows in line with or slower than nominal GDP – and in my opinion, as I said above, this cannot happen except at growth rates well below half the current reported GDP growth rate, or less than 3 percent.

What new growth model?

For several years Chinese leaders have acknowledged the need for a new growth model that would produce slower but more sustainable rates of growth.  As Chinese Premier Li Keqiang explained in a recent speech to the National People’s Congress:

China’s economy is now in a pivotal period in the transformation of its growth model, its structural improvement and its shift to new growth drivers.  China’s economy is transitioning from a phase of rapid growth to a stage of high-quality development.

In other words, China is said to have abandoned its past export-driven high-speed growth strategy in favor of a slower, more domestic, human-centered growth strategy.  China’s current slower growth is in line with this transformation and thus should not be taken as a sign of economic weakness.

However, there are few signs of this transformation, other than a lower rate of growth.  For example, one hallmark of the new growth model is supposed to be the shift from external to domestic, private consumption-based drivers of growth.  The slowdown in the global economy in the post 2008 period certainly makes such a shift necessary. But the data, as shown below, reveals that there has been no significant gain in private consumption’s share of GDP.  In fact, it actually declined in 2017.

China’s private consumption accounted for 39.1 percent of GDP in Dec 2017, compared with a ratio of 39.4 percent the previous year.  The ratio recorded an all-time high of 71.3 percent in Dec 1962 and a record low of 35.6 percent in Dec 2010. And as we saw above, there has been no significant increase in disposable income’s share of GDP. Moreover, the existing consumption, in line with income trends, remains heavily skewed towards the wealthy.

What has remained high, as we see in the next chart, is investment, a pillar of the old growth model.

China’s Investment accounted for 44.4 percent of GDP in Dec 2017, compared with a ratio of 44.1 percent in the previous year. The ratio reached an all-time high of 48.0 percent in Dec 2011 and a record low of 15.1 percent in Dec 1962.

This investment continues to emphasize infrastructure, real estate development and enhancing manufacturing capacity.  One example:

A symbol of the investment addiction can be found in “China’s Manhattan.”

Tianjin’s Conch Bay, a 110-hectare district with a cluster of 40 high-rise buildings, was supposed to be the country’s new financial capital as outlays surged over the past several years. But in late November there were few signs of life. A number of buildings were still under construction; the streets were empty; and even completed buildings had no occupants.

From 2000 to 2010, investment in Tianjin — the hometown of former Premier Wen Jiabao — swelled by a factor of 10.3.

In fact, despite official pronouncements, China’s accelerated growth in 2017 owes much to external sources of demand.  As Reuters describes:

China’s economy grew faster than expected in the fourth quarter of 2017, as an export recovery helped the country post its first annual acceleration in growth in seven years, defying concerns that intensifying curbs on industry and credit would hurt expansion. . . .

A synchronized uptick in the global economy over the past year, driven in part by a surge in demand for semiconductors and other technology products, has been a boon to China and much of trade-dependent Asia, with Chinese exports in 2017 growing at their quickest pace in four years.

With fixed asset-investment growth at the weakest pace since 1999, exports helped pick up the slack.

“Real growth of overall exports…more than fully (explained) the pick-up in GDP growth last year,” Oxford Economics head of Asia economics Louis Kuijs wrote in a note.

And as we can see from the chart below, China’s export gains continue to depend heavily on the US market—a market that is becoming increasingly problematic in the wake of US tariff threats.

China’s real new growth strategy: The One Belt, One Road initiative

There are many pressures keeping Chinese leaders from seriously pursuing a real domestic-centered, consumption-based growth model.  One of the most important is that the interests of powerful political forces would be damaged if the government took meaningful steps to significantly increase the wages and improve the working conditions of Chinese workers.  And since many in the government and party directly benefit from existing relations of production they have little reason to pursue a strategy that would threaten the profitability of China-based production activity.

At the same time, it was clear to Chinese leaders that a new strategy was necessary to keep Chinese growth from further decline, an outcome which they feared could spur regime-threatening labor militancy.  Their answer, first discussed in 2013, appears to be the One Belt, One Road initiative.  The beauty of this initiative is that it allows the existing political economy to continue functioning with little change while opening up new outlets for basic industrial products produced by leading state firms, creating new export markets for private producers, and expanding the huge infrastructure that underpins the Chinese construction industry.

Asia Monitor Research Center, in the introduction to its Asian Labor Update issue on the One Belt, One Road initiative, describes what is at stake as follows:

Xi Jinping’s One Belt, One Road has been described as the next round of “opening up” by the Chinese government, following the development of Special Economic Zones and China’s accession to the WTO. Indeed, the OBOR strategy can be seen as a very significant and ambitious next step in the expansion of the role that China plays globally and its implementation will impact on the lives of millions of people domestically and globally.

Chinese government strategies towards both the BRICS and even more so towards OBOR, which has been dubbed “globalization 2.0”, potentially have important implications for the direction of globalization in the future. Given the way that China’s development strategies have led to significant environmental destruction and labor rights violations domestically, and the way that its investment overseas has been frequently criticized or led to opposition due to their adverse social and environmental consequences, suggest that there are legitimate causes for concern about the impacts on people and the environment of this direction.

In fact, the special issue includes several contributions which highlight the negative consequences of this initiative.  The initiative is first and foremost designed to enable Chinese companies to build roads, railway lines, ports and power grids for the benefit of China’s economy.  These projects come with massive environmental degradation, displacement of local communities, and local labor exploitation.  It also aims to advance Chinese efforts to control agricultural land and raw materials in targeted countries and promote the creation of Yuan currency area.

It remains to be seen how successful the One Belt, One Road initiative will be in achieving its aims.  What does seem clear is the talk of a new more stable, humane, high-quality Chinese economy is largely just that, talk.  Chinese leaders appear heavily invested in trying to breathe new life into the country’s existing growth model, a model that comes with enormous human and environmental costs.

What’s Driving Trade Tensions Between The US and China

There is a lot of concern over the possibility of a trade war between China and the US.  In early April President Trump announced that his administration was considering levying $100 billion of additional tariffs on Chinese exports, after the Chinese government responded to a previously proposed US tariff hike on Chinese goods of $50 billion by announcing its own equivalent tariff hikes on US exports.  And the Chinese government has made clear it will again respond in kind if these new tariffs are actually imposed.

So, what’s it all about?

To this point, it is worth emphasizing that no new tariffs have in fact been levied, by either the US or Chinese governments.  The first round of announced US tariffs on Chinese goods are still subject to a public comment period before becoming effective, and the content of the second round has yet to be formally decided upon.  Thus, both countries have time to back away from their threats.

Also significant is the fact that both countries are being careful about the products they are threatening to tax.  For example, the Trump administration has carefully avoided talking about placing tariffs on computers or cell phones, two of the biggest US imports from China.  The US has also refrained from putting tariffs on clothing, shoes, and furniture, also major imports from China.

It is not hard to guess the reason why: these goods are produced as part of multinational corporate controlled production and marketing networks that operate under the direction of leading US corporations like Dell, Apple, and Walmart.  Taxing these goods would threaten corporate profitability. As a former commissioner of the US International Trade Commission pointed out: “It seems that the U.S. trade representative was very much aware of the global value chains in keeping some of these items off the list.”

The Chinese government, for its part, as been equally careful. For example, it put smaller planes on its proposed tariff list while exempting the larger planes made by Boeing.

Although the media largely echoes President Trump’s claim that his tariff threats directed at China are all about trying to reduce the large US trade deficit with China in order to save high paying manufacturing jobs and revitalize US manufacturing, the president really has a far narrower aim—that is to protect the monopoly position and profits of dominant US corporations.  The short hand phrase for this is the protection of “intellectual property rights.” As Trump tweeted in March: “The U.S. is acting swiftly on Intellectual Property theft. We cannot allow this to happen as it has for many years!”

Bloomberg News offers a more detailed explanation of the connection between the tariff threats and the goal of defending corporate intellectual property:

the White House is considering imposing tariffs on a broad range of consumer goods to punish China for its IP [intellectual property] practices. . . . the U.S. alleges . . . that China has been stealing U.S. trade secrets, forcing American companies to hand over proprietary technology as a condition of doing business on the mainland, and providing state support for Chinese firms to acquire critical technology abroad. A consensus is growing that these policies, designed to establish China as a dominant player in key technologies of the future, from semiconductors to electric cars, threaten to erode America’s technological edge, both commercial and military.

In other words, US tariff threats are, in reality, a bargaining chip to get the Chinese government to accept stronger protections for the intellectual property rights and technology of leading US firms in industries such as pharmaceuticals, aerospace, telecommunications, and autos.  If Trump succeeds, US multinational corporations will become more profitable.  But there will be little gain for US workers.

The auto industry offers a good case in point.  President Trump has repeatedly said that forcing China to lower its tariffs on imported US cars will help the US auto industry.  As he correctly points out, there is a 2.5 percent tariff on cars shipped from China to the U.S. and a 25 percent tariff on cars shipped from the U.S. to China.  Trump claims that lowering the Chinese tariff would allow US automakers to export more cars to China and boost auto employment in the US.

However, GM, Ford and other automakers have already established joint ventures with Chinese firms and the great majority of the cars they sell in China are made in China.  This allows them to avoid the tariff.  China is GM’s biggest market and has been for six years straight.  The company has 10 joint ventures and two wholly owned foreign enterprises as well as more than 58,000 employees in China. It sells approximately 4 million cars a year in China, almost all made in China.

The two largest automobile exporters from the US to China are actually German.  BMW shipped 106,971 vehicles from the U.S. to China in 2017; Mercedes sent 71,198.  Ford was the leading US owned auto exporter and in third place with total yearly exports of 45,145 vehicles.  Fiat Chrysler was fourth with 16,545.

In short, lowering tariffs on auto imports from the US will do little to boost auto production or employment in the US, or even corporate profits.  The leading US automakers have already globalized their production networks.  But, changes to the joint venture law, or a toughening of intellectual property rights in China could mean a substantial boost to US automaker profits.

For its part, the Chinese government is trying to use its large state-owned enterprises, control over finance, investment restrictions on foreign investment, licensing powers, government procurement policies, and trade restrictions to build its own strong companies.  These are reasonable development policies, ones very similar to those used by Japan, South Korea, and Taiwan.  It is short-sided for progressives in the US to criticize the use of such policies.  In fact, we should be advocating the development of similar state capacities in the US in order to rebuild and revitalize the US economy.

That doesn’t mean we should uncritically embrace the Chinese position.  The reason is that the Chinese government is using these policies to promote highly exploitative Chinese companies that are themselves increasingly export oriented and globalizing.  In other words, the Chinese state seeks only a rebalancing of power and wealth for the benefit of its own elites, not a progressive restructuring of its own or the global economy.

In sum, these threats and counter-threats over trade have little to do with defending worker interests in the US or in China.  Unfortunately, this fact has been lost in the media frenzy over how to interpret Trump’s grandstanding and ever-changing policies.  Moreover, the willingness of progressive analysts to join with the Trump administration in criticizing China for its use of state industrial policies ends up blurring the important distinction between the capacities and the way those capacities are being used.  And that will only make it harder to build the kind of movement we need to reshape the US economy.

US Trade Deficits, Trump Trade Policies, and Capitalist Globalization

Understandably concerned about the consequences of the large and sustained US trade deficit, many workers have grown tired of waiting for so-called market forces to produce balance.  Thus, they cheer Trump administration promises to correct the imbalance through tariffs or reworked trade agreements that will supposedly end unfair foreign trade practices.

Unfortunately, this view of trade encourages workers in the United States to see themselves standing with their employers and against workers in other countries who are said to be benefiting from the trade successes of their employers.  As a consequence, it also encourages US workers to support trade policies that will do little to improve their well-being.

To understand the driving force behind and develop a helpful response to US trade imbalances one must start by recognizing the interrelated nature of US domestic and international patterns of economic activity.  Large US multinational corporations, seeking to boost profits, have slowly but steadily globalized their economic activity through either the direct establishment of overseas affiliates or their use of foreign-owned subcontractors that operate under terms set by the lead multinational.  This process of globalization has meant reduced investment in plant and equipment and slower job creation in the United States, and the creation of competitiveness pressures that work to the disadvantage of workers in both the US and other countries.  It has also led to the creation of a structural trade deficit that is financed by massive flows of money back into the US as well as consumer debt, both of which swell the profits of the financial industry.  In other words, the real problem confronting workers here is capitalist globalization.

The globalization of the US economy

The World Bank divides international trade into either intra-firm trade or arm’s length trade.  Intra-firm trade refers to international trade carried out between affiliates of the same multinational corporation.  Arm’s length trade refers to international trade carried out between “independent” firms.  Independent is in quotes here because international trade between a multinational corporation and a firm operating in another country under contract would still be classified as arm’s length, even though the production and resulting trade activity is determined by the needs of the dominant multinational corporation.

As the World Bank explains in its study of intra-firm trade:

In practice, multinationals employ intra-firm and arm’s length transactions to varying degrees. In 2015, intra-firm transactions are estimated to have accounted for about one-third of global exports. Vertically integrated multinational companies, such as Samsung Electronics, Nokia, and Intel, trade primarily intrafirm. Samsung, the world’s biggest communications equipment multinational, has 158 subsidiaries across the world, including 43 subsidiaries in Europe, 32 in China and 30 in North and South America. Other multinationals, such as Apple, Motorola, and Nike, rely mainly on outsourcing, and hence on arm’s length trade with non-affiliated suppliers.

The four figures below, taken from the World Bank study, illustrate the extent to which multinational corporations shape US trade patterns with both other advanced economies (AEs) and emerging markets and developing economies (EMDEs).  The numbers shown in figures A and B are averages for the period 2002 to 2014.

Figure A shows that approximately one-third of all US exports of goods are intra-firm, meaning that they were sold by one unit of a multinational corporation operating in the US to another unit of the same multinational corporation operating outside the US.  Figure B shows that approximately one-half of all US imports of goods are intra-firm.  In both cases the share of intra-firm trade was higher with AEs than with EMDEs.  Figure E shows that the share of intra-firm exports to AEs remained remarkably constant despite the overall slump in trade that followed the 2008 Great Recession.  Figure F reveals that the share of imports that are intra-firm actually grew over the period, especially from EMDEs.


As noted above, many multinational corporations choose to subcontract production, producing arm’s length trade, rather than establish and buy goods from their own foreign affiliates.  In this case, arm’s length trade is not really independent trade.  We can gain some insight into how important this development is by examining the main sources of arm’s length US imports.  As we can see in figure B below, more than half of all US arm’s length imports come from China.

Most of these Chinese imports are actually exported by non-affiliated suppliers that operate within corporate controlled cross border production or buyer networks. For example, China is the primary US supplier of many high technology consumer goods, most notably cell phones and laptops.  Almost all are manufactured by foreign companies operating in China under according to terms set by the relevant lead multinational corporation.  The same is true for many low technology, labor intensive products such clothing, toys, and furniture, which are usually produced under contract by foreign suppliers for large retailers like Walmart.

Thus, the relatively low share of intra-firm imports from EMDEs compared with AEs owes much to the preference of many important US based multinational corporations–like Apple, Dell, and Nike–to have non-affiliated supplier firms hire workers and produce for them in China.  The same is true, although not on such a large scale, for a significant share of arm’s length US imports from Mexico.

In sum, it is likely that the globalization strategies of multinational corporations, not the decisions of truly independent foreign producers, are responsible for some 2/3 of all US imports.

Trends in trade

Global trade growth has dramatically slowed since the end of the Great Recession.  Global trade grew by an average of 7.6 percent a year over the years 2002 to 2008.  It has grown by an average of only 4.3 percent a year over the years 2010-14.  Significantly, the greatest decline has come in arm’s length trade.  This should not be surprising, since intra-firm trade is essential to the operation of the world’s leading multinational corporations.  US trade exhibits a similar trend.

In the words of the World Bank:

The U.S. trade data highlight that arm’s length trade accounted disproportionately for the overall post-crisis trade slowdown. This reflected a higher pre-crisis average and a weaker post-crisis rebound in arm’s length trade growth compared with intrafirm trade. . . . By 2014, intra-firm trade growth had returned close to its pre-crisis average (4.3 percent of exports and 5.0 percent for imports). In contrast, arm’s length trade growth remained significantly below its high pre-crisis average: its growth slowed to a post-crisis annual average of 4.7 percent compared to 11.3 percent during 2002-08.

Figures A and B below highlight these trends in US trade.

As trade becomes ever more dominated by intra firm exchanges, it will become ever more difficult for governments to manage their international trade accounts using traditional trade tools, and that includes the US government.  For example, according to the World Bank:

Trade conducted through global value chains generally shows less sensitivity to real exchange rates. That’s because competitiveness gains from real depreciations are partly offset by rising input costs. To the extent that intra-firm trade is more strongly associated with global value chains than arm’s length trade, intra-firm U.S. exports may have benefited less from the pre-crisis U.S. dollar depreciation and been dampened to a lesser degree by the post-crisis appreciation than arm’s-length exports. In addition, firms integrated vertically may have a wider range of tools available to them to hedge against exchange rate movements.

The take-away

The US trade deficit is the result of a conscious globalization strategy by large multinational corporations.  And this strategy has greatly paid off for them.  They have been able to use their mobility to secure lower wages (by putting workers from different countries into competition for employment) and reduced regulations and lower taxes (by putting governments into competition for investment).  The result is a structural deficit in US trade that is no accident and not likely to be significantly reduced by policies that do not directly challenge multinational corporate production and investment decisions.

It is hard to imagine that the Trump administration, no matter its public pronouncements, will pursue its tariff policy or NAFTA renegotiation efforts in ways that will threaten corporate power and profits.  Whether its misdirection efforts on trade can continue to encourage workers in the United States to see other workers rather than corporate globalization as the main cause of its problems remains to be seen.

Globalization and US Labor’s Falling Share Of National Output

As the Trump administration pushes ahead with its effort to renegotiate NAFTA, we must never miss an opportunity to remind people that the globalization of US economic activity has, by design, shifted the balance of class power away from working people.  A commonly cited indicator of class power is labor’s share of output (or income), which, as shown below, dramatically fell after the turn of the 21st century after decades of slow decline.

Michael W. L. Elsby, Bart Hobijn, and Aysegül Sahin, writing in the Fall 2013 Brookings Papers on Economic Activity, tested several hypotheses about the cause of labor’s declining share of output.  They concluded, based on their econometric work, that “increases in the import exposure of U.S. businesses” was key, accounting for approximately 85 percent of the decline in the U.S. payroll share over the period 1987 to 2011.  This finding led them to suggest “that a particularly fruitful avenue for future research will be to delve further into the causal channels that underlie this statistical relationship, in particular the possibility that the decline in the U.S. labor share was driven by the offshoring of the labor-intensive component of the U.S. supply chain.”

Labor’s share of income

It is important to be clear about how the labor share is estimated and how well it captures class dynamics.  The starting point is simple: labor’s share of output is calculated by dividing the labor compensation earned during a given period by the economic output produced over the same period.  Things quickly get more complicated, however, because the labor compensation used in the calculation is actually the sum of the labor earnings of two different groups of workers: those who work for others and those who work for themselves.

The compensation of the first group includes the sum of all employee pay and benefits: wages and salaries; commissions; tips; bonuses; severance payments; early retirement buyout payments; exercised stock options; and employer contributions to employee pension and insurance funds, and to government social insurance.  Calculating the employee share of output, known as the payroll share, is relative straightforward thanks to employer fillings.

Things are not so simple when it comes to the second group, since their earnings reflect “both returns to their work effort and returns to the business property they invested in” and there is no simple way to separate their earnings into those two components.  The Bureau of Labor Statistics (BLS) handles this problem by assuming that the self-employed receive an hourly labor compensation similar to that earned by employees who work in the same sector of the economy.

The figure below, from the Brookings Papers article, shows the division of the labor share into its two component parts, the payroll share and the self-employed share.  As we can see, the payroll share is significantly greater than the self-employed share.  In fact, the share of hours of the self-employed in total work hours “has declined steadily from about 14 percent in 1948 to 8.5 percent in 2012.”  However, as Elsby, Hobijn, and Sahin point out, “In spite of the relatively small share of self-employment hours, the treatment of self-employment income plays an important role in the recent behavior of the evolution of the labor share.”

A number of economists have raised concerns about the methodology used by the BLS to divide the compensation of the self-employed into its labor and capital returns components.  One example: the BLS methodology ends up crediting the self-employed with more labor compensation than their total reported earnings for much of the 1980s and early 1990s, a highly unlikely outcome.

Alternative methodologies have been suggested, and the authors of the Brookings Papers article calculate labor’s share using the two most often cited.  The one they call the “asset basis” assumes that the return on self-employed capital is the same as the return on capital in the non-farm business sector, with the remaining earnings credited to labor.  The other, called the “economy-wide basis,” assumes that the division between labor compensation and capital income is the same for the self-employed as it is for the non-farm business sector.  As we see below, the two alternatives generally produce labor share trends that are relatively close together, and significantly lower than that published by the Bureau of Labor Statistics from the start of the series until the late 1990s, when all three series generally converge.

Because of its methodological shortcoming, Elsby, Hobijn, and Sahin prefer either of the two alternative measures, which leads them to the conclusion that use of the BLS series overstates the actual decline in the labor share.  As they explain:

The upshot of these comparisons is that around one third of the decline in the headline measure of labor’s share appears to be a by-product of the methods employed by the BLS to impute the labor income of the self-employed. Alternative measures that have less extreme implications regarding the return to capital among proprietors are more consistent with one another and indicate a more modest decline.

The fact that the difference between the BLS and the alternative measures of labor’s share largely disappeared beginning in the late 1990s suggests that the average hourly earnings of the self-employed have grown much faster than that of the employed.  This, in turn, suggests a significant transformation in the make-up of the self-employed; in particular an increase in the number of individuals engaged in highly lucrative professional work.  In this regard it is important to recall that labor compensation includes not just wage and salary earnings but also things like bonuses and stock options, rewards that became increasingly popular for a select few starting in the late 1990s thanks to the run-up in the stock market.

And in fact, this transformation is confirmed by the authors, who disaggregated the structure of the labor share for employees and total earnings for the self-employed.  The results are illustrated in the following figure, which shows that “the share of income accounted for by both payroll wages and salaries and by proprietors’ income [the sum of their labor and nonlabor earnings] has been buoyed up since the 1980s by substantial rises in the shares accounted for by the very top fractiles of households in the United States.”

As the authors point out:

This rise in inequality is even more striking for proprietors’ income than it is for payroll income. In 1948 the bottom 90 percent of employees earned 75 percent of payroll compensation. By 2010 this had declined to 54 percent. For entrepreneurial income, however, this fraction declined from 42 percent in 1948 to 14 percent in 2010. Even more starkly, over the same period the share of proprietors’ income accounted for by the bottom 99 percent fell from 74 percent to 45 percent. This suggests that the sharp rise in the average hourly compensation of proprietors relative to the payroll-employed since the late 1980s is related to substantial increases in income inequality among proprietors that dominate even the considerable rise in inequality witnessed among the payroll-employed. Moreover, this has been driven by extreme rises in proprietors’ income at the very top of the income distribution—the top 1 percent in particular.

In short, there are a lot of moving parts to the calculation of and evaluation of trends in the labor share of income.  The BLS measure may have overstated the decline, but the explosion of inequality means that the measure’s two components mask an even greater fall in the share of income going to the great majority of working people.

Globalization and the decline in the payroll share of output

Although the labor share is the “headline” statistic, the authors decided to narrow their focus to the payroll share.  As we saw above, it is no simple matter to determine the labor compensation of the self-employed.  In contrast, the payroll share is relatively easy to measure and, as a bonus, can be disaggregated by industry.  Moreover, it is the largest component of the labor share, which means that its movement is most responsible for changes in the overall labor share.

Elsby, Hobijn, and Sahin begin with a standard neoclassical aggregate production model and the most common neoclassical explanations for the decline, which rest on investment and technological change: the growth in the capital/labor ratio and skill-biased technical change.  The basic neoclassical argument is that growing investment shifts income away from labor in the first case and unskilled workers in the second.  However, in both cases the authors found that the movement in relevant variables was not consistent with the actual movement in the payroll share.

Recognizing the limitations inherent in a simple aggregate production function model of the economy, the authors decided to take advantage of their industry data to see whether a more micro/industry perspective yielded better results. More specifically, they econometrically tested whether investment specific technological change, declines in unionization, or increases in import competition can explain the decline in the payroll share.  They found that “Our data yield one robust correlation: that declines in payroll shares are more severe in industries that face larger increases in competitive pressures from imports.”

In the case of investment specific technical change, the authors looked to see whether those industries which enjoyed the lowest price increases for investment goods had the largest declines in payroll share, with the assumption being that these industries would be the most likely to replace workers with capital.  In fact, it turned out that there was a weak negative relationship between the change in equipment prices and the change in payroll shares across industries, the opposite of what was expected “if capital deepening due to the decline in price of equipment were the driving force of the decline in the payroll share.”  This result reinforced the conclusion from their aggregate analysis that investment activity does not explain the decline in the payroll share of output.

The test of unionization was more straight forward.  The authors looked to see if there was a positive relationship between changes in union density in an industry and changes in payroll shares.  While they did find “a positive correlation between the change in unionization and the change in payroll shares across industries,” the relationship was weak. “The weighted least squares regression indicates that cross-industry variation in changes in unionization rates explains less than 5 percent of the variation in changes in payroll shares across industries.”

Last was the test of globalization, or more specifically a test of whether the import-caused hollowing out of US industry was a primary cause of the decline in the payroll share.  Elsby, Hobijn, and Sahin assumed two possible channels for a rise in imports to cause a fall in the payroll share.  The first involved trade-generated capital deepening.  In this case, the outsourcing of production by US firms would lead to a reduction in labor, a rise in the capital-labor ratio, and a decline in the payroll share of income.  However, as the authors noted, they had already tested capital deepening as a potential cause of the decline and found no support for the hypothesis.

The second trade channel relied on wage differentials rather than shifts in capital intensity.  Industries with high labor shares likely have high labor costs, making them vulnerable to import competition.  The greater the competition the more likely firms in these industries were to take actions to lower those costs, including offshoring segments of their production process, thereby producing a decline in their payroll share.

The authors pursued this possibility by computing the import exposure of each industry.  They did so by asking the following question:

If the United States were to produce domestically all the goods that it imports, how much additional value added would each industry have to produce? For example, if all U.S. imports of clothes were produced domestically, how much would value added increase in sectors like retail, textile manufacturing, and so on.

To be able to calculate this measure of import exposure we use the annual input-output matrices that are available for the years 1993 to 2010 from the BLS. Import exposure is expressed as the percentage increase in value added needed to satisfy U.S. final demand if the United States would produce all its imports domestically.

The figure below shows the relationship between changes in import exposure and changes in the payroll share for each industry.  As we can see, import exposure increased for almost all industries—reflecting the growing hollowing out of the US economy–and the larger the exposure the greater the decline in payroll share.  A simple regression showed that the import exposure variable was significant in explaining changes in the payroll share, with cross-industry variation in changes in import exposure explaining 22 percent of the variation in changes in payroll share.

The authors then ran a regression which included all three possible explanations for the decline in the payroll share.  The globalization variable remained highly significant and was the only variable to do so.  With the import exposure valuable included in the regression, the unionization variable became insignificant.  “This suggests that those sectors where deunionization was most prevalent are also sectors that saw the biggest increase in import exposure.”

Elsby, Hobijn, and Sahin conclude:

our results indicate a cross industry link between the increases in import exposure and the decline in the labor share.  While this result cannot be interpreted as causal, it is worth noting that the statistical relationship between import exposure and payroll shares across industries is large enough to account for a substantial fraction of the aggregate trend decline in the labor share. In particular, aggregating the results of the weighted-least-squares regression across industries suggests that increases in the import exposure of U.S. businesses can account for 3.3 percentage points of the 3.9 percentage point decline in the U.S. payroll share over the past quarter century.

 

We know that trade agreements are about a lot more than lowering tariffs to promote trade.  Foremost, they are about strengthening corporate power and profitability.  And despite mainstream economic theorizing to the contrary, there is strong evidence that these corporate gains come, as designed, at the expense of majority well-being.

Studies of the effect on US workers from imports from China (see Autor, Dorn, and Hanson)  and Mexico (see Hakobyan and McLaren), most of which are produced within US transnational corporate-controlled production networks, show that US workers pay a steep price in terms of job loss and lost earnings from corporate driven globalization.  And, as we have seen, Elsby, Hobijn, and Sahin’s work strongly suggests that this process is also the main factor behind the decline in the payroll share of output.  This is class power at work–unfortunately theirs, not ours.

Just Say No To NAFTA

The North American Free Trade Agreement (NAFTA) is unpopular with many working people in the United States, who correctly blame it for encouraging capital flight, job losses, deindustrialization, and wage suppression.   President Trump has triggered the renegotiation of the agreement, which will likely conclude early next year.  Unfortunately, progressives are in danger of missing an important opportunity to build a working class movement for meaningful economic change.  By refusing to openly call for termination of the agreement, they are allowing President Trump to present himself as the defender of the US workers, a status that will likely help him secure the renewal of the treaty and a continuation of destructive globalization dynamics.

The NAFTA debate

According to a recent poll commissioned by Public Citizen:

At a time of great peril for our democracy and deepening public opposition to Donald Trump on many fronts, he wins high marks from voters on handling trade and advocating for American workers: 46 percent approve of his handling of trade agreements with other countries, 51 percent, his ‘putting American workers ahead of the interests of big corporations’ and 60 percent, how he is doing “keeping jobs in the United States.”

This perception of Trump’s advocacy for workers is encouraged by media stories of the strong opposition by leading multinational corporations to several of President Trump’s demands for changes to the existing NAFTA agreement.

The most written about and controversial proposals include:

  • Major modifications to NAFTA’s investor-state dispute settlement system, which allows foreign investors to sue host governments in secret tribunals that trump national laws if these investors believe that government actions threaten their expected profits. The Trump administration proposes to change this system by (1) establishing an “opt-in” provision that would make participation voluntary and (2) ending the ability of private investors to use claims of denial of “minimum standard of treatment” or an “indirect expropriation” as grounds for filing a claim.
  • A tightening of the rules on the origins of car parts. NAFTA rules govern the share of a product that must be sourced within NAFTA member countries to receive the agreement’s low tariff benefits. The Trump administration wants to raise the auto rules of origin to 85 percent from the current 62.5 percent and include steel as one of the products to be included in the calculations.  It has also proposed adding a new US-only content requirement of 50 percent.
  • The introduction of a NAFTA sunset clause that would allow any of the participating countries to terminate the deal after five years, a clause that could well mean a renegotiation of the agreement every five years.

Canadian and Mexican government trade representatives have publicly rejected these proposals.  The US corporate community has called them “poison pills” that could doom the renegotiating process, possibly leading to a termination of the agreement.  The president of the US Chamber of Commerce has said that:

All of these proposals are unnecessary and unacceptable. They have been met with strong opposition from the business and agricultural community, congressional trade leaders, the Canadian and Mexican governments, and even other U.S. agencies. . . . The existential threat to the North American Free Trade Agreement is a threat to our partnership, our shared economic vibrancy, and clearly the security and safety of all three nations.

Corporate lobbyists are hard at work, trying to convince members of Congress to use their influence to get Trump to withdraw these proposals, but so far with little success.  In fact, the Trump administration has pushed back:

In remarks to the news media in mid-October, Robert E. Lighthizer, the United States trade representative, said that businesses should be ready to forego some of the advantages they receive under NAFTA as the United States seeks to negotiate a better deal for workers. In order to win the support of people in both parties, businesses would have to “give up a little bit of candy,” he said.

It is this kind of public back and forth between corporate leaders and the Trump administration that has encouraged many working people to see President Trump as sticking up for their interests.  In broad brush, workers do not trust a dispute resolution settlement system that allows corporations to pursue profits through secret tribunals that stand above national courts.  They also welcome measures that appear likely to force multinational corporations to reverse their past outsourcing of jobs, especially manufacturing jobs, and promote “Buy American” campaigns.  And, they have no problem with periodic reviews of the overall agreement to allow for ongoing corrections that might be needed to improve domestic economic conditions.

The rest of the story

Of course, NAFTA negotiations are not limited to these few contentious issues.  In fact, trade negotiators have made great progress in reaching agreement in many other areas.  However, because of the lack of disagreement between corporations and the Trump administration on the relevant issues, the media has said little about them, leaving the public largely ignorant about the overall pace and scope of the renegotiation process.

Perhaps the main reason that agreement is being reached quickly on many new issues is because many of the Trump administration’s trade proposals closely mirror those previously agreed to by all three NAFTA country governments during the Transpacific Partnership negotiations.  These include “measures to regulate treatment of workers, the environment and state-owned enterprises” as well as “new rules to govern the trade of services, like telecommunications and financial advice, as well as digital goods like music and e-books.”  In short, taken overall, it is clear that the Trump administration remains committed to “modernizing” NAFTA in ways designed to expand the power and profitability of transnational corporations.

A case in point is the proposed change to the existing NAFTA side-agreement on labor rights.  NAFTA currently includes a rather useless side agreement on labor rights.  It only requires the three governments to enforce their own existing labor laws and standards and limits the violations that are subject to sanctions.  For example, sanctions can only be applied—and only after a long period of consultations, investigations, and hearings–to violations of laws pertaining to minimum wages, child labor, and occupational safety and health.  Violations of the right to organize, bargain collectively, and strike are not subject to sanctions.

The labor standards agreement that the US proposes to include in NAFTA is one that it has used in more recent trade agreements and was to be part of the Transpacific Partnership.  It says that “No Party shall fail to effectively enforce its labor laws through a sustained or recurring course of action or inaction in a manner affecting trade or investment between the Parties, after the date of entry into force of this Agreement for that Party.”

This labor agreement is included in the US-Dominican-Central American Free Trade Agreement (DR-CAFTA) and we now have an example of how it works, thanks to a case filed in 2011 by the US against Guatemala.  The panel chosen to hear the case concluded, in June 2017, that the US “did not prove that Guatemala failed to conform to its obligations.”  The reason: the three person panel made its own monetary calculations about whether Guatemalan labor violations were serious enough to affect trade or investment flows between the two countries and decided they were not.

As Sandra Polaski, former Deputy Director-General for Policy of the International Labor Organization, writes:

The panel reached its decision that Guatemala had not breached its obligations under the DR-CAFTA because the violations had not occurred “in a manner affecting trade” between the parties. . . . The panel chose to establish a demanding standard in its interpretation of that phrase, requiring that a complaining country would have to prove that there were cost savings from specific labor rights violations and that the savings were of sufficient scale to confer a material competitive advantage in trade between the parties.  This threshold is unprecedented in any analogous applications: WTO panels have interpreted similar language much more narrowly, as affecting conditions of competition, without requiring demonstration of costs and their effects. Demonstrating changes in costs at this level would require access to sensitive internal company accounts (at a minimum), and the perpetrators of labor violations would likely have hidden them in any case. This standard could not be met without subpoena power, which does not exist under the trade agreements. . . .

The decision is disturbing for multiple reasons: because of the injustice toward the affected Guatemalan workers; because it invalidated the parties’ explicit commitment to broad enforcement of labor rights contained both in the obligatory commitments and the overall stated purposes of the agreement; and because as the first and as of now only arbitration arising from a labor clause (or environmental clause) it set a precedent for future cases.

In short, labor exploitation is likely to continue unchecked under a possible new NAFTA, which can be expected to remain as corporate friendly as the original agreement.

The need for a new progressive strategy of opposition

President Trump has threatened to withdraw the US from NAFTA if the other two countries do not agree to his demands for key NAFTA changes, in particular to the investor-state dispute settlement system and rules on the origins of car parts, the inclusion of a sunset clause, and an end to government procurement restrictions.  While we cannot predict the future, the odds are great that compromises will be reached on these issues, allowing President Trump to present a renegotiated NAFTA as a win for working people.

As Jeff Faux, founder of the Economic Policy Institute, comments:

The erratic and belligerent Trump might, of course, drive US-Mexican relations over a cliff. But he prides himself as a deal-maker, not a deal-breaker. So the most likely outcome is a modestly revised NAFTA that: 1) Trump can boast fulfills his pledge 2) Peña Nieto can use to claim that he stood up to the bullying gringo 3) doesn’t threaten the low-wage strategy for both countries that NAFTA represents.

Revisions might include weakening NAFTA’s dispute settlement courts, raising the minimum required North American content for duty-free goods, and reducing the obstacles to cross-border trade for small businesses on both sides of the border.

Changes like this could marginally improve the agreement, and would be acceptable to the Canadians, who have been told by Trump that he is not going after them. But from the point of view of workers in the American industrial states who voted for Trump, the new NAFTA is likely to be little different from of the old one. The low-wage strategy underlying NAFTA that keeps their jobs drifting south and US and Mexican workers’ pay below their productivity will continue.

But you can bet that Trump will assure them that it is the greatest trade deal the world has ever seen.

Sadly, the progressive movement has pursued the wrong strategy to build the kind of movement we need to oppose the likely NAFTA renewal or take advantage of a possible US withdrawal.  In fact, it has largely allowed President Trump to shape the public discussion around the renegotiations.

To this point, progressive trade groups, labor unions, and Democratic Party politicians have refrained from calling Trump’s bluff and demanding termination of the agreement, despite the fact that this and other so-called free trade agreements are not really reformable in a meaningful pro-worker sense. Instead, they have concentrated on demonstrating the ways that NAFTA has harmed workers, highlighting areas that they think are in most need of revision and offering suggestions for their improvement, and mobilizing their constituencies to press the US trade representative to adopt their desired changes.  Progressive trade groups have generally turned their spotlight on the investor-state dispute resolution system and outsourcing, as have Democratic Party politicians.  Trade unions, for their part, have emphasized outsourcing and labor rights.

Significantly, these are all areas, with the exception of labor rights, where the Trump administration has put forward proposals for change which if realized would go some way to meeting progressive demands.  The result is that the progressive movement appears to be tailing or reinforcing Trump’s claims to represent popular interests.  And, by focusing on targeted issues, the movement does little to educate the population about the ways in which the ongoing negotiations are creating new avenues for corporations to enhance their mobility and profits, especially in services, finance, and e-commerce.

Apparently, leading progressive groups plan to wait until they see the final agreement and then, if they find it unacceptable with regards to their specific areas of concern, call for termination of the agreement.  But this wait and see strategy is destined to fail, not only to build a movement capable of opposing a revised NAFTA agreement, but even more importantly to advance the creation of a working class movement with the political awareness and vision required to push for a progressive transformation of US economic dynamics.

For example, this strategy of creating guidelines for selective changes in the agreement tends to encourage people to see the government as an honest broker that, when offered good ideas, is likely to do the right thing.  It also implies that the agreement itself is not a corporate creation and that a few key changes can make it an acceptable vehicle for advancing “national” interests.  Finally, because agreements like NAFTA are complex and hard to interpret it will be no simple matter for the movement to help its various constituencies truly understand whether a renegotiated NAFTA is better, worse, or essentially unchanged from the original, an outcome that is likely to demobilize rather than energize the population to take action.  Of course, if Trump actually decides to terminate the agreement, the movement will be put in the position of either having to praise Trump or else criticize him for not doing more to save NAFTA, neither outcome being desirable.

There is, in my opinion, a better strategy: engage in popular education to show the ways that trade agreements are a direct extension of decades of domestic policies designed to break unions and roll back wages and working conditions, privatize key social services, reduce regulations and restrictions on corporate activity, slash corporate taxes, and boost multinational corporate power and profitability.  Then, organize the most widespread movement possible, in concert with workers in Mexico and Canada, to demand an end to NAFTA.  Finally, build on that effort, uniting those fighting for a change in domestic policies with those resisting globalization behind a campaign directed at transforming existing relations of power and creating a new, sustainable, egalitarian, and solidaristic economy.

It is not too late to take up the slogan: just say no to NAFTA!

It is time for audacity: demand the termination of NAFTA and KORUS.

Unfortunately, progressive forces appear content to harp on Trump policies rather than provide leadership in building a class-based movement for real change.  Exhibit A: the unwillingness of key US progressive groups to call for the termination of the North American Free Trade Agreement (NAFTA) and the Korea-US Free Trade Agreement (KORUS).

President Trump has demanded changes to both agreements and threatened to cancel them if he doesn’t get the changes he wants.  He declared NAFTA the worst trade agreement in American history.  He called KORUS a “horrible deal” that has left America “destroyed.” Progressives fought hard to stop approval of both NAFTA and KORUS when they were being negotiated, but now that Trump has raised the possibility of their termination, they seem reluctant to take up the demand.   In my opinion, that is a big mistake.

The costs of holding back

Take the current NAFTA negotiations.  Progressives seem content to criticize Trump’s negotiating process for being nontransparent and negotiating agenda for being too restricted, in particular avoiding change to the Investor-State Dispute System (ISDS). Both true criticisms.  But where is the call for actual withdrawal from the agreement?

For example, here is the AFL-CIO’s trade and globalization policy expert on the current NAFTA negotiations:

On Sept. 5, the United States, Canada and Mexico finished the second round of talks on renegotiating a new North American Free Trade Agreement. The AFL-CIO laid out 17 ways that NAFTA needs to be improved so that we can have a North American economy that works for families, not just global corporations. So how well are the U.S. negotiators doing at creating a better deal for workers? Not well.

Granted, it is early in the process, and we don’t know a lot yet, but that’s part of the problem.

Our number one recommendation was that negotiators should be more transparent, most importantly by making public the rules they’re proposing for the new NAFTA. So far, the U.S. negotiators are failing. There has been no improvement in making the process open to the general public. As working people know, if we are not at the table, we are on the menu, so this grade is crucial.

In some important areas, the United States has not made proposals, including on labor and tax dodging. In other important areas, such as rules of origin or Buy American, the U.S. proposals are incomplete. Basically, this progress report has a lot of incomplete grades.

Is the U.S. team doing well in any areas at all? Well…the positions on enforcement and state-owned enterprises are a good starting point but need to go much further.

In sum, the U.S. negotiators need to up their game. If I were still a teacher and the U.S. negotiators were in my class, I’d be calling the parents tonight to work out an improvement plan to make sure they could pass my class. Of course, there is still plenty of time left to bring the grade up, but the question is whether the U.S. negotiators are motivated to improve or whether they just want to keep recycling failed trade ideas that will add up to another pro-corporate, anti-worker deal.

Another example: a coalition of major progressive groups has united around the demand to remove the ISDS from the NAFTA agreement.  Here is the text of their call to supporters:

If you live in North America, we need you to make sure your government representative stops a corporate power grab in the new NAFTA renegotiations.

NAFTA gave vast new powers for corporations that make it easier to offshore jobs and attack the environmental and health laws on which we all rely.

Deals like NAFTA give multinational corporations the power to sue governments in front of a tribunal of three corporate lawyers. These lawyers can order taxpayers to pay the corporations unlimited sums of money, including for the loss of expected future profits.

The multinational corporations only need to convince the lawyers that a law protecting public health, digital rights or the environment violates their special NAFTA rights. The corporate lawyers’ decisions are not subject to appeal.

This corporate power grab is formally called Investor-State Dispute Settlement (ISDS).

END ISDS: Add your name to demand that any North American Free Trade Agreement (NAFTA) renegotiation removes the corporate power grab known as ISDS.

If You Live In the U.S., Canada or Mexico:

Add your name to tell your government representative (in the U.S., your member of Congress) to commit to oppose any North American Free Trade Agreement (NAFTA) renegotiation or any other agreement that includes Investor-State Dispute Settlement (ISDS).

This focus on the limitations of the process and agenda is problematic for many reasons.  One is that the call for reform can quickly become muddied as people struggle to understand the complex legal and technical nature of the agreement’s various chapters and evaluate whether changes that might be proposed will actually improve or worsen the agreement.

In this regard, it is possible that a renegotiated NAFTA agreement will actually include changes to the ISDS, ones that were proposed by the Obama administration for the Transpacific Partnership agreement.  If that happens, the progressive movement may well find itself divided and unable to communicate a clear position on the agreement’s renewal.

An even more important reason that the call for NAFTA reform is problematic is that it encourages people to believe that the US government is capable of representing something called the “national interest” and that it is possible for a “good” agreement to somehow emerge from the negotiations.  But really, these are corporate agreements negotiated by a captured state to advance a corporate agenda.

In point of fact, if you have a domestic economic agenda that is designed to weaken unions, privatize public services, slash taxes, and deregulate economic activity, like that of the US over the last several decades, then it is almost impossible to have a progressive international economic policy.  International policy flows out of domestic policy.  Said differently, you can’t have anti-worker domestic policies and hope to tack on a progressive international policy.

This means that the progressive movement, anchored by the trade union movement, needs to attack on all fronts in a consistent way, demanding wholesale change in US economic policy by highlighting the integrated and destructive nature of both domestic and international economic policy.  Until that happens, we will remain as we are now, in a situation where international economic issues are largely seen as an add on or set of separate issues that are highly technical and largely divorced from what are considered to be the more important domestic challenges.

Unfortunately, there has been almost no discussion by the progressive community of the KORUS renegotiation.  Public Citizen has been one of the few groups to take the issue on, and it has called for the agreement’s termination, although largely because of the exploding trade imbalance between Korea and the US.  It also correctly points out that most Koreans also oppose the agreement.

The odds are overwhelming that Trump will not terminate NAFTA or KORUS.  Rather it is more likely that the negotiations will end up producing a few minor improvements and several major extensions that will expand corporate power.   If we continue to call for reform rather than termination we will again find ourselves on the political sidelines, with working people turning to the mainstream media for analysis and evaluation, where they will receive misleading information on what was negotiated and the consequences of the renegotiated agreements.

If we want to build a class movement it is time for us to show leadership.  We need to do more than challenge Trump to improve these agreements.  We need to demand that he terminate them; we should call his bluff.

What is holding us back?

So, what is holding us back?  Three reasons come to mind.  The first is that the progressive movement in the US fears being tainted with Trump nationalistic rhetoric.  Some activists have told me that the termination of NAFTA to defend US interests will leave Mexico in a bad situation.  This belief highlights the desperate need within our movements for more class analysis.  The demand for termination is not a demand to defend US interests at the expense of Mexican interests, it is a demand that asserts the rights of workers in the US, Canada, and Mexico against the interests of big capital in all three countries.

A second reason is the fear of being labeled a protectionist.  Most of the progressive movement has always mistakenly accepted the notion that these agreements are primarily about trade. They are clearly about far more than that.  Actually, one could say that one is for fair trade, as most progressive movements like to do, and demonstrate that we could have fairer trade without these agreements.  Having allowed successive administrations to cleverly identify these agreements with trade, the progressive movement has undermined its ability to highlight and take-on the broader neoliberal economic agenda that drives and shapes them.

These agreements are above all designed to boost capitalist mobility, power, and profits.  By making that clear, we can show that our demand for termination is not based on a simple objection to trade, and thus does not represent for a call for protectionism as commonly understood.  Rather, our demand is motivated by a determination to refashion our economy and help workers in other countries do the same; demanding an end to NAFTA and KORUS allows us to stand with workers in Canada, Mexico, and Korea who have also suffered as their economies have become more globalized and dominated by global capitalist accumulation dynamics.

The final reason, and one rarely voiced, is the fear of the unknown.  The media drums into our heads that existing agreements are all that stand in the way of chaos.  We are told that the world economy might spiral into depression if NAFTA and KORUS are terminated.  That is hooey.  If we end these agreements the world will not end.  We still have the WTO after all; trade will continue. But we will terminate chapters that encourage deregulation, privatization, monopolization, capital mobility, competition between workers, and union busting.

Clearly, we need to strengthen our confidence in the belief that there can be life after capitalism, that we can build movements that have the capacity to restructure economic relationships and patterns of economic activity along more sustainable, solidaristic, egalitarian, and democratic lines.  This will never happen if we fear mounting a direct challenge to capitalist imperatives.

Trump has given us an incredible opportunity.  He has put the issue of termination of existing trade agreements on the political agenda.  We need the audacity to seize the moment.