Do free-trade agreements with low-wage countries further weaken U.S. manufacturing?

To follow is an excerpt from the CQ Researcher report "Reviving Manufacturing" by Peter Katel on July 22, 2011.


The decline in U.S. manufacturing coincided with the rise of free-trade agreements between the United States and a range of other countries, generally nations considered friendly to American interests. Pacts with 17 nations are now in effect. The agreements are designed to boost U.S. exports to partner countries — by allowing U.S. companies to bid for government contracts in free-trade partner nations, for example. Likewise, the United States agrees eventually to drop tariffs against imports from the partner countries. [Footnote 19]

But ever since a long and intense debate leading up to the landmark 1994 North American Free Trade Agreement (NAFTA) between the United States, Mexico and Canada, critics have argued that the pacts serve above all to encourage U.S. companies to build factories abroad. Labor unions that portray free-trade agreements as vehicles for expanded offshoring are among the agreements’ main critics. They are playing a major part in holding up congressional approval of pacts with Colombia, Panama and South Korea.

Defenders, including all recent Republican and Democratic presidents and their top officials, call the pacts essential to boosting U.S. job creation by expanding markets in which U.S. companies, including manufacturers, sell goods and services.

“We're in a global economy,” says the National Association of Manufacturers’ Moutray, noting the dynamism of the so-called BRIC nations — Brazil, Russia, India and China. “For multinationals, a lot of their growth in sales is coming from selling manufactured goods to the BRIC countries,” he says, contrasting them to the “relatively mature” U.S. market.

Free-trade agreements, by that logic, play a key role in expanding opportunities for U.S. firms. “Where the growth is going to come from is in trade,” Moutray says. “When you lower barriers, you're going to see more trade going back and forth.”
Manufacturing as a Share of GDP, 1947–2010

But the key to whether an agreement actually benefits the U.S. economy lies in the pact's details, says George Mason University's Hill. “When countries have highly asymmetric social and economic systems, with workplace standards, environmental standards and wage-and-hour standards that are very different,” he says, “that's where problems can arise.”

A deeper source of these problems, Hill argues, is that free-trade agreements often are proposed for political, rather than economic, reasons. He cites the proposed pact with Colombia, which has been awaiting congressional action for seven years. “Making an agreement with Colombia is a way of saying, in part, ‘We appreciate the enormous effort you've made to bring drug cartels under control, and to open your markets,’ ” he says.

But Perry of the American Enterprise Institute argues that the proposed Colombia deal makes considerable economic sense. It would immediately eliminate Colombian tariffs on 80 percent of American consumer and industrial products exported to that country. [Footnote 20] “If Caterpillar is selling to Colombia, the more they sell, the higher the profits,” Perry says. The Illinois-based heavy-equipment maker strongly backs the proposed pact.

The need to step up exports makes trade deals essential, Perry says. “The more [trade agreements] we have, the easier it is for our manufacturers to export,” he says. “That means more output and more jobs here.”

Yet, argues economist Charles McMillion, the evidence is clear that free-trade pacts damage U.S. manufacturing. “After NAFTA, we've gone from a strong manufacturing surplus to a record manufacturing deficit,” with Mexico, says McMillion, president of MBG Information Services, a Washington-based economic consulting firm. U.S. Commerce Department data he analyzed show trade surpluses in manufactured goods of $5.8 billion, $7.9 billion and $1.7 billion for the three years before NAFTA took effect — and deficits of $64.2 billion, $74.6 billion and $64.3 billion in 2006–2008. [Footnote 21]

The Issues:

  • Is U.S. manufacturing reviving?
  • Do free-trade agreements with low-wage countries further weaken U.S. manufacturing?
  • Should the government actively promote U.S. manufacturing and discourage further offshoring?
Click here for more information on this CQ Researcher report [subscription required] or purchase the PDF.



[19] The 17 free-trade partners are: Australia, Bahrain, Canada, Chile, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Israel, Jordan, Mexico, Morocco, Nicaragua, Oman, Peru, Singapore. “Free Trade Agreements,” Office of the United States Trade Representative, undated,; “U.S. Free Trade Agreements,”, updated April 26, 2011,

[20] “Overview of the U.S.-Colombia Trade Agreement,” undated, U.S. Trade Representative,

[21] “U.S. Manufacturing Trade Surpluses With Mexico Plunged to Record Deficits Since Nafta,” CW McMillion/MBG Information Services, undated.