Will KORUS FTA create the jobs the administration is hoping for (Obama: South Korea free-trade deal will create U.S. jobs)? Will it lead to the job losses its left-wing opponents claim (Free Trade Agreement with Korea will cost U.S. jobs)?
Paul Krugman says that "Trade Does Not Equal Jobs":
One thing I’m hearing, now that all hope of useful fiscal policy is gone, is the idea that trade can be a driver of recovery — that stuff like the South Korea trade agreement can serve as a form of macro policy.
Um, no.
Our macro problem is insufficient spending on U.S.-produced goods and services; this spending is defined by
Y = C + I + G + X – M
where C is consumer spending, I investment spending, G government purchases of goods and services, X is exports, and M is imports. Trade agreements raise X — but they also lead to higher M. On average, they’re a wash.
This, by the way, is why claims that the Smoot-Hawley tariff caused the Great Depression are nonsense. Yes, protectionism reduced world exports; it also reduced world imports, by the same amount.
There is a case for freer trade — it may make the world economy more efficient. But it does nothing to increase demand.
And there’s even an argument to the effect that increased trade reduces US employment in the current context; if the jobs we gain are higher value-added per worker, while those we lose are lower value-added, and spending stays the same, that means the same GDP but fewer jobs.
If you want a trade policy that helps employment, it has to be a policy that induces other countries to run bigger deficits or smaller surpluses. A countervailing duty on Chinese exports would be job-creating; a deal with South Korea, not. If you want the Korea deal, fine; but don’t claim virtues for it that it doesn’t possess.
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