With the legislation of the Trans-Pacific Partnership (a free Trade treaty) coming perilously close to passing, we should look at a much smaller fore-runner of the TPP, it was called NAFTA – The North American Free Trade Agreement between the U.S., Canada and Mexico. The below article was written by The New York Times. And one of the results from NAFTA is a unique phenomenon – it caused “manufacturing ghost towns”. It is very difficult to rehab these small little towns that were devastated by NAFTA (and the World Trade Organization).
Perils of Globalization When Factories Close and Towns Struggle
From the New York Times
GALESBURG, Ill. — Even in this city of abandoned factories, it is possible to see some of the benefits the United States reaps from increased foreign trade: At the rail yard, where boxcars of bargain-price Asian goods are routed to American consumers; at the nearby slaughterhouse, where pigs are packaged for the global market; and at Knox College, where almost 10 percent of the students now come from foreign countries.
It is also hard to miss the enduring costs. In 2004, Maytag shut down the refrigerator factory that for decades was Galesburg’s largest employer and moved much of the work to Mexico. Barack Obama, then running to represent Illinois in the Senate, described the workers as victims of globalization in his famous speech that year at the Democratic National Convention.
A decade later, many of those workers are still struggling. The city’s population is in decline, and the median household income fell 27 percent between 1999 and 2013, adjusting for inflation.
George Carney, who drove a forklift until the day the factory closed, and then found work as a bartender, is now receiving federal disability benefits. He says he is bitter that American policy makers smoothed Maytag’s road to Mexico by passing the North American Free Trade Agreement in the early 1990s.
“I don’t believe in laying someone off, in taking away someone’s livelihood just so other people can make more money,” Mr. Carney said as he nursed a beer in a windowless bar on the banks of the Mississippi River. “Why would I want to destroy that person? Why would I want to destroy lives?”
It is one of the basic principles of economics that trade is good and more trade is better. But as Mr. Obama presses Congress for the authority to negotiate a new generation of trade deals, the struggles of Galesburg illustrate why some economists have come to doubt the relevance of that orthodoxy. The costs of globalization have been greater and more enduring than they expected, and government efforts to mitigate the impact on American workers have often proved insufficient.
“I think what we’ve learned is that U.S. labor markets aren’t as flexible and self-correcting as I think we had presumed,” said Gordon Hanson, an economist at the University of California, San Diego. “The uneasiness I have about the way we’ve handled globalization is not so much globalization itself. It’s that if you don’t have the right safety net, you’re going to impose an enormous amount of hardship.”
There is also mounting evidence that the benefits of globalization have accrued disproportionately to upper-income households, while the costs have fallen heavily on the less affluent, contributing to the rise of economic inequality.
The Obama administration has presented the proposed agreements — one with nations that border the Pacific Ocean, the other with Europe — as, in part, a shield against globalization that would require other nations to move closer to American standards for environmental protection, worker rights and intellectual property.
But the administration and many outside economists say further trade, despite the negatives, is still clearly beneficial.
David Weinstein, a Columbia University economist, said the image of downtrodden Galesburg should be set alongside the prosperity of Silicon Valley, because the decline of manufacturing in the United States helped free resources to feed the high-tech boom.
“There was a sense that by losing the ability to produce computer chips, we were going to see the American electronics industry collapse, and it turns out that those cheap imported electronic components were just the thing that all of these companies needed,” he said. “What these critiques miss systematically is that the losers know who they are, but the winners don’t know who they are yet.”
Drop in the Bucket
Trade deals are at the center of the political debate about globalization, but for all the sound and fury they generate, recent deals have played only a small role in the expansion of global trade. In 2013, on the 20th anniversary of Nafta, the Congressional Research Service reviewed the research and concluded it was not that big a deal. [Well not compared to the WTO -Ed.]
“In reality, Nafta did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters,” the report concluded.
[Editor’s note: the report doesn’t say how many U.S. jobs that were lost – some sources have said as little as 670,000 jobs and as high as 3.1 million jobs. Before NAFTA, the trade between U.S, and Mexico went from (1993) a $1.7 Billion surplus to (2012) $61.4 Billion deficit. Before NAFTA, there were zero cars imported into the USA, now Mexico has imported $40.1 Billion vehicles into the USA].
Since Nafta, the United States has made trade agreements with 17 other countries, but the estimated impact of those deals, taken together, is even smaller — a few snowflakes added to a snowball already rolling downhill.
The seismic shift came after World War II, when the United States and other developed nations began to minimize tariffs and other barriers. Global trade grew as industrialization spread, particularly in China, and thanks to innovations including the standardized shipping container and the Internet.
Just as individuals benefit by working in one field and using their earnings to pay for other goods and services, economists contend that nations, too, prosper by specializing: exporting what they have and importing what they want.
A 2005 study by the Peterson Institute for International Economics, a research group in Washington that is a strong proponent of trade deals, estimated that embracing trade had added about 7.3 percent to America’s economic output — or about $10,000 in annual income for every household in the United States.
But the benefits are not distributed evenly. Trade increases overall prosperity by eliminating less productive jobs. In theory, the workers find new jobs. In practice, studies by Mr. Hanson and other economists show that in cities like Galesburg, global competition is increasing unemployment and reducing wages.
Josh Bivens, an economist at the liberal Economic Policy Institute, estimates that increased globalization, aided by a strong dollar that led to a persistent trade deficit, reduced the annual earnings of the roughly 70 percent of American workers without college degrees by about $1,800.
Joseph Stiglitz, a Columbia University economist and Nobel laureate, said the magnitude of these losses was large enough that increased trade may now be harming the American economy.
“The argument was always that the winners could compensate the losers,” Mr. Stiglitz said. “But the winners never do. And that becomes particularly relevant when we have a society with as much inequality as we have today.”
Few Job Options
Richard Lindstrom, whose family has owned an appliance store on Galesburg’s Main Street for the last 89 years, said sales fell when Maytag left. But that was about the same time he started selling many imported high-definition televisions.
“We rode that crest, and it really offset the drop in appliance sales,” he said.
Some Maytag workers were able to find better jobs. Mark Semande is now a foreman on the BNSF railroad, which has prospered greatly from increased trade. He made $14.50 an hour at the factory. Now he makes $28.93. With overtime, he estimates that his pay has tripled.
But many of the 1,600 Maytag workers were not as fortunate, according to Chad Broughton, a lecturer in public policy at the University of Chicago who chronicled Galesburg’s struggles in his book, “Boom, Bust, Exodus.”
Tracy Warner, who worked at the factory for 15 years, has not come close to matching her former salary of about $37,000 a year. She works as a teacher’s assistant by day and a janitor by night and makes about $21,000.
Mr. Semande — whose father also worked at the factory — said he expected that his two daughters, ages 13 and 15, would move away when they grow up. “Maybe they could find jobs and live in the community,” he said, “but not if they want to do as well as us.”
Trade also tends to reduce prices, and there is evidence that lower-income households may benefit disproportionately, because they spend a larger share of income than wealthier households on the goods with the largest price declines. This Walmart effect may partly offset the distribution of income gains.
A study published last year estimated that international trade had lifted the purchasing power of lower-income American households, at the 10th percentile of the income distribution, about 62 percent. For wealthy households, at the 90th percentile of the income distribution, the power increase was 3 percent.
The variety of imports has also roughly tripled since the 1970s, according to a 2006 study that Mr. Weinstein, the Columbia economist, helped write. “We benefit from the fact that it’s no longer just a choice between Maxwell House and Folger’s,” he said.
Walmart opened a supercenter in Galesburg in 2007, but Mr. Broughton said the arrival of the store could hardly offset the loss of the factory.
“The decline in the quality of life for working-class families has not been nearly matched by the low, low prices,” he said. “Maybe those diffuse benefits have benefited America more generally. But it’s not the case in Galesburg.”
President Obama returned to Galesburg in 2013 to deliver an economic policy speech at Knox College. “Let’s tell the world that America is open for business,” he said. “I know there’s an old site right here in Galesburg, over on Monmouth Boulevard — let’s put some folks to work.”
But most of the old factory has been demolished. The last trace of its former life is a “Maytag Drive” street sign. The last refrigerators to roll off the line sit in a makeshift museum at the back of a downtown antiques mall.
Michael Patrick, who started working at the factory in 1959 and became a senior union official representing workers throughout the region, said job losses were nothing new. Companies went out of business, mechanized, moved to new cities. He recalled that in the 1970s, the workers who made the shells of refrigerators were replaced by a new machine the size of a football field.
The difference in recent decades, he said, is the absence of new companies.
But Mr. Patrick is not sentimental about what he views as the end of manufacturing in Galesburg. He said he focused on getting as much funding as possible to help his members train for new careers. He went to work after high school, he said, partly because there was no junior college in Galesburg. Now there is.
“Manufacturing was for people like me,” Mr. Patrick, who is now 73, said.
When Ms. Warner, 49, learned that the plant would close, she finished an associate’s degree at the local community college, then won a share of that training money to pursue a degree in communications at Western Illinois University.
But two years of tuition was not enough to reconstruct her life.
She is proud of the degree, but it has not helped her find a job. She lacks professional experience, and jobs in Galesburg are scarce. She has a teenage son and she does not want to move.
“I just needed a little more help,” she said. “I didn’t ask for my job to be taken out of the country.”
Thanks to the Alliance for American Manufacturing for pointing out this article.