Economic forecasting is never an exact science, but when it comes to predicting the economic impact of the tariff cuts at the core of recent trade agreements, the U.S. International Trade Commission has racked up an especially poor track record.
“It’s astounding how far off the ITC has been in their predictions,” said Robert E. Scott, director of trade and manufacturing policy research at the Economic Policy Institute, a Washington think tank.
Although the ITC is an independent, quasi-judicial federal agency that provides highly regarded trade policy advice to the legislative and executive branches of government, it has generated “many erroneous forecasts of the impact of those agreements on U.S. trade, employment and GDP,” Scott said.
Consider, for example, the ITC’s 1999 projections about the impact of China’s World Trade Organization-mandated tariff reductions. The ITC report calculated that the gains in China’s share of the U.S. apparel market that would result from those tariff cuts “would come at the expense of other exporters” of apparel to the U.S., Scott said. “Hence, overall, the study predicted that liberalizing trade with China would generate an improvement in the U.S. global trade balance.”
As it turned out, the actual impact on U.S. trade with China “dwarfed all ITC projections” in magnitude. The ITC also predicted annual U.S. exports to China would rise $2.4 billion from 2001 to 2008 as a result of China’s tariff reductions. Instead, they rose $50.5 billion.
U.S. shipments to China went up much faster than anticipated, in part because China’s economy accelerated much more rapidly than anyone anticipated, buoyed by massive investments in industrial and transportation infrastructure.
The ITC also severely underestimated the impact of China’s tariff cuts on U.S. imports. Instead of rising $3.4 billion from 2001-08, U.S. imports from China grew $235.5 billion. The net result: The U.S. trade deficit with China expanded $185 billion in the seven years, not by the paltry $1 billion figure the ITC predicted.
The ITC model for calculating the impact of tariff reductions ignores the impact of foreign direct investment. That’s unfortunate, Scott said, because FDI liberalization plays a central role in the latest generation of free trade pacts.
According to China’s official statistics, FDI in China more than tripled from $44.2 billion in 2001 — the year before China joined the WTO — to $147.8 billion in 2008. Between 2002 and 2008, China absorbed $594.75 billion in FDI.
“This surge of investment, combined with a flood of domestic investment in export-oriented production funded by local and provincial governments as well as by China’s national government and private investors in China, led to a tremendous surge in China’s exports to the U.S. and the rest of the world,” Scott said.
The surge in FDI, Scott said, should not have surprised the ITC, because a similar surge occurred after the North American Free Trade Agreement took effect. Between 1993 and 2004, FDI in Mexico grew 422 percent, and Mexico absorbed $156 billion in FDI between 1994 and 2004. Not coincidentally, U.S. trade deficits with Mexico increased $60 billion over that decade, he said.
Contact Alan M. Field at email@example.com.