Free Trade Agreements Mean Job Losses in the Other Country as Well

10/17/2011 04:07 pm ET | Updated Dec 17, 2011

With great fanfare recently, Congress approved Free Trade Agreements (FTAs) with Colombia, Panama, and South Korea. Congress, the White House, and big business cheered, while labor groups derided the move, arguing that the FTAs will result in more U.S. job losses. Obscured by the the debate, however, is the potential for negative economic effects in the partner countries as well.

Take Mexico as an example. Within a year of the North American Free Trade Agreement (NAFTA) finalized in 1994, Mexico lost a million jobs. The U.S. continued to subsidize U.S. farmers, and Mexican corn farmers, for instance, could not compete with the price of U.S. corn in their own backyard. Now the vast majority of corn purchased in Mexico is U.S. corn, and more than a million Mexican farmers lost their work. Mexican workers who were helping to produce pork products and auto parts lost their livelihood as well. Is there little wonder that many of those displaced by NAFTA look to the United States as a place to find work?

Why this result? An FTA is a pact between two countries that agree to lift most or all tariffs, quotas, special fees and taxes, and other barriers to trade. The purpose of FTAs is to allow faster and more business between the two countries which would benefit both. The economic theory underlying FTAs is the concept of comparative advantage, which asserts that in a free marketplace, each country will specialize in the activity in which it has a comparative advantage (that is, natural resources, skilled artisans, agriculture-friendly weather, and the like). Since each country is specializing in a particular area or product, each country should mutually benefit from the agreement and generate more overall income. The problem is that FTAs increase globalization and outsourcing, but countries that benefit from the outsourcing are generally the low-bidder, which may not be one of the partner nations to the FTA.

So in spite of Mexico's comparative advantage (cheaper labor than in the United States) and being next to the world's largest economy, Mexico got blindsided by China because Mexico was also persuaded to enter the World Trade Organization. Mexico lost hundreds of thousands of jobs to China, and in the process was replaced by China as the largest trading partner with the United States.

Maquiladoras also have not been the savior of the Mexican economy. These are assembly plants located across the border from the United States that are authorized to export products duty-free to the United States or Canada as a NAFTA product. Most of the electronics components come into Mexico duty-free from Asia. But maquiladora job growth reveals a real problem with a strategy that relies on the use of cheap labor for exports. For economic development to be sustained over time, the best paradigm would involve linking manufacturing companies with local businesses that supply materials, parts, or services. But maquiladoras are simply about low-wage workers, and the companies bring in components from outside Mexico with little connection to local businesses and the rest of the economy. Little transfer in technology takes place. The phenomenon occurs elsewhere around the globe, and the problem is that multinationals that set up shop this way can abandon a particular country when cheaper labor is found in a different country.

Much is often made of the fact that Mexico now has a trade surplus with the United States, but while many U.S. jobs did go south, Mexico lost far more jobs because of the treaty than those relocated from the United States. If the workers in bi-lateral countries involved in FTA agreements stand to lose, who gains? The multinational corporations. In an era of globalization, there is greater competition, improved technology, communication, and travel. This allows corporate America to exploit cheap labor and increase profits.

Low-wage competition on a world stage is a trap. Panama, Colombia, and South Korea, with FTA provisions reminiscent to those in NAFTA, better look out. The profit-makers are there to use them.