Trump – USC Economics Review

Renegotiating NAFTA May Harm College-Educated African Americans

NAFTA Article Photo

Introduction

A key promise of Donald Trump’s presidential campaign – the renegotiation of the North American Free Trade Agreement (NAFTA) – is well under way, with a fifth round of trilateral talks held last month. It is no secret that President Trump has been highly critical of the trade deal, as he has taken to Twitter to slam Canada and Mexico for being “difficult” during the negotiations and suggested that his administration will “probably end up terminating NAFTA at some point.”

Proponents of free trade assert that it leads to cheaper foreign goods, additional income in the pockets of consumers, and an increase in overall economic well-being. In fact, economists tend to favor the concept of trade liberalization, with a 2007 survey finding that 83 percent of members of the American Economic Association agreed with the notion that the United States should eliminate its remaining trade barriers. Despite such a widespread consensus among economists, the American public remains divided on the virtues of free trade: a recent survey from the Pew Research Center found that 52 percent of Americans believe that free trade agreements are good for the United States, with 40 percent disagreeing.

This article investigates the differential labor-market effects of NAFTA by linking the wages, industries and geographic locations of impacted workers to changes in tariffs induced by trade liberalization. I find that African American workers experience drastic effects due to trade liberalization, while there is little evidence of a differential impact for Native American workers. In my main regression specification, individual characteristics including age, race, marital status, ability to speak English, educational attainment, worker industry tariffs and Mexican comparative advantage account for about a quarter of the variation in wage levels. Furthermore, I find that trade liberalization has stronger negative effects for less-educated workers, who tend to be employed in industries with higher initial, pre-NAFTA tariffs.

Background

As a general matter, there are deep distinctions in economic security among white, Hispanic and African American families: on average, white families have approximately ten times the wealth of Hispanic families and 13 times the wealth of African American families. Additionally, research by Amitabh Chandra finds very slow rates of wage convergence between white and African American male workers from 1950 to 1990, with African American male workers earning approximately 75 percent of what their white counterparts do, when excluding non-workers. Such large racial discrepancies in earnings introduce the possibility of endogeneity when attempting to quantify the labor-market effects of NAFTA; in other words, it is difficult to disentangle the effects of NAFTA attributable to race from the effects of other underlying factors that also influence wages. Therefore, it is important to take any prima facie relationship between race and NAFTA with a grain of salt.

Economists John McLaren and Shushanik Hakobyan have explored the local labor-market effects of NAFTA, finding evidence of substantially lower wage growth among low-education workers in areas most vulnerable to trade liberalization. Moreover, they find evidence of a “multiplier effect,” with liberalization putting significant downward pressure on wages across all industries in NAFTA-vulnerable regions. Finally, in their seminal 2013 paper, David Autor, David Dorn and Gordon Hanson find significant evidence of downward pressure on American workers’ wages as the share of Chinese imports increased.

Data and Methodology

The dataset used in my analysis incorporates publicly available U.S. Census information from 1990 and 2000, maintained through the IPUMS project of the Minnesota Population Center. The U.S. Census divides the country into 543 similarly-sized, overlapping regions determined primarily through economic integration called Consistent Public Use Microdata Areas (ConsPUMAs). The U.S. Census also defines 89 traded-goods industries. Table 1 includes summary statistics for the sample workforce for 1990 and 2000.

Table1

While most of the above measurables are fairly stable over time, there are some differences to note. First, the workforce was more diverse in 2000 than it was in 1990, as the proportion of the country identifying as “white” dropped by approximately 5.3 percentage points. Second, there is a perceptible difference in educational attainment levels, with a slightly larger proportion of workers having a college degree in 2000.

For each industry, I designated τ to be the average tariff that the United States levies on Mexican imports in that industry, similar to McLaren and Hakobyan’s convention. However, since vulnerability to NAFTA is only important if Mexico has a comparative advantage in the production of a particular good, I use a weighted-average tariff for each ConsPUMA that incorporates Mexico’s revealed comparative advantage (i.e., the share of Mexico’s world exports of a particular good relative to the share of Mexico’s world exports across all goods). The change in the weighted-average tariff from 1990 to 2000 for each ConsPUMA c is given by locΔτc.

For the purposes of estimation, I use what is known as the LASSO, or least absolute shrinkage and selection operator, to penalize the inclusion of additional, irrelevant variables to my model. The following is the preliminary model specification, prior to LASSO feature selection:

Model

The dependent variable in the model, log(wi), is the natural logarithm of worker i’s wages in 2000. The independent variables include educ, which measures the maximum educational attainment of each worker; border, which applies to those geographical areas along the border between the United States and Mexico; and X, a set of personal characteristics intrinsic to worker i, such as sex, race, age, marital status and ability to speak English. The two other independent variables, minwage and chnm, represent the state-level minimum wage and the employment-adjusted share of Chinese imports in the worker’s industry, respectively. In my analysis, the parameters of interest are β4 and β5, which measure the geographical impact of NAFTA on wages, disaggregated by race.

Results

The results of my analysis are included in Table 2. I find that African American workers with a college education likely benefited from trade liberalization resulting from NAFTA. This may be due to higher-than-average growth in the proportion of African Americans with a college degree relative to the rest of the workforce between 1990 and 2000. Additionally, college-educated African Americans were typically employed in industries that had fewer trade protections, and thus saw tariffs decline by less on average. This is an important point because industries that are less protected are more likely to benefit from economic integration and a higher demand for exports. Hence, in these industries one would expect less outsourcing of labor to low-wage countries, ultimately benefiting the worker.

I also find that NAFTA had a roughly uniform effect on Native American workers, as there is no statistically significant evidence of a slope change, which indicates that the effects of NAFTA on Native American workers are independent of other factors like educational attainment or industry-specific tariff reductions. This likely reflects the fact that college-educated Native American workers are more prevalent in higher-protected industries that saw larger declines in tariffs, on average. When coupled with the negative wage shock for Native Americans, the result is likely a mixed, insignificant effect of NAFTA on the wages of Native American workers. Furthermore, I conclude that the change in the share of Chinese imports in a worker’s industry, while indeed placing downward pressure on a worker’s wages, has effects that are separate and distinguishable from those caused by NAFTA’s trade liberalization.

Table2

Conclusion

From my findings, I conclude that while trade liberalization had no significant impact on the wages of Native American workers, college-educated African American workers greatly benefited from trade liberalization policies resulting from NAFTA. This likely results from the fact that college-educated workers are concentrated in industries that are less protected from Mexican competition, giving employers little incentive to outsource their jobs. However, the wage growth seen by African American workers who did benefit from NAFTA was slower than that of their white counterparts – further evidence of the persistent wage gap between white and African American workers in the United States.

Moreover, my findings suggest that President Trump’s desire to renegotiate NAFTA may reverse key gains made among urban, college-educated African Americans while failing to actually bring back blue-collar manufacturing jobs. In addition, while it may be the case that trade liberalization depressed wages for less-educated workers, American workers – including racial minorities – are becoming more educated. Thus, free, unrestricted access to Canadian and Mexican markets for professional services may benefit minorities with higher levels of educational attainment and help narrow the massive income disparity between racial groups in this country.

Triggering by Trump and the emergence of economics of escapism

A recent survey conducted by the online therapy company Talkspace found that, as of Inauguration Day, over 60 percent of respondents reported feeling some degree of post-election stress. In a 2016 Gallup poll, only 32 percent of Americans said they trusted conventional media “to report the news fully, accurately and fairly,” an eight percent drop from 2015 and the lowest level ever polled by Gallup. To cope with growing discontent, many Americans are turning away from their usual news outlets or their increasingly political Facebook newsfeeds in search of distractions. However, the thirst for distraction is not uncommon in American history, and escapism has become a staple during rough economic and political times.

Defined by the Merriam-Webster as “habitual diversion of the mind to purely imaginative activity or entertainment as an escape from reality or routine,” escapism may seem like a purely psychological issue, but there are very real economic ramifications when companies capitalize on this desperation by filling the demand for a break from reality.

During the Great Depression, Americans flocked to movie theaters. For 27 cents a ticket, about 4 USD in contemporary terms, people could escape the harsh reality of an economic depression for a stretch of time. Films like Dumbo, Fantasia and Arabian Nights, which were released during World War II, transported moviegoers into magical, exotic lands. The 1973-75 economic recession, which also marked the end of the Watergate scandal, the United States’ defeat in the Vietnam War, and two near assassinations of President Gerald Ford, shows a similar trend. In that time frame, directors like George Lucas and Steven Spielberg started releasing fantasy movies like Star Wars, Close Encounters of the Third Kind, The Exorcist and Jaws, all of which were among the top 10 highest grossing movies of the 1970s. Escapist cinema is key during economic and political hard times, as it is one of the easiest and most direct ways to find relief from the real world.

The Walt Disney Company, arguably the biggest player in escapist entertainment, had record breaking inflation-adjusted domestic gross ticket sales of over $2.93 billion in 2016, thanks to popular films like Captain America: Civil War, Finding Dory and Zootopia. From early November to late April, Disney’s stock increased over 26 percent. 21st Century Fox, another box office competitor, saw its stock rise by 37 percent from early September to late March. Even Netflix, which is not a direct competitor but another key player in escapist cinema, saw its stock increase by over 38 percent since the election, compared to a nine percent increase in the S&P 500 Index over the same period. Moreover, half of the top 10 highest grossing movies in 2016 were comic book adaptations, and all of the top 10 movies had a high degree of fantasy, meaning moviegoers actively seek fictional entertainment, and companies provide it.

The demand for escapist fiction extends over many markets, including the literature market. Orbit Books, a fantasy and science-fiction imprint, doubled its annual output last year. With the buzz of a likely science-fiction “golden age,” several other publishing companies launched their own science-fiction imprints. Is there a better way to hide from current unrest than to immerse oneself in a completely different universe? Along with science-fiction, the young adult (YA) genre – fiction published for readers in their teens – plays a key role in literature escapism. Seventy percent of YA novels are not purchased by teenagers, but rather by adults for their own reading enjoyment. YA literature provides not only a means of escapism, but also instant gratification and a sense of nostalgia.

Similarly, adult coloring books bring back nostalgia and reminiscence of childhood for the adult “readers.” In 2015, 12 million coloring books were sold in the United States, a huge increase from the one million sold in 2014. Millennials are 29 percent more likely to purchase an adult coloring book than all other buyers. Since coloring has the potential to reduce anxiety and increase mindfulness, it makes sense that the newfound popularity of coloring books would be directly related to the escalating need for escapism.

The rise of virtual reality (VR) and augmented reality (AR), evidenced by the boom of Pokémon GO, represents a new mode of escapist entertainment. Launched in July 2016 and known as the first use of AR to go “viral,” Pokémon GO has been downloaded globally by over 650 million people. By navigating around their physical surroundings, players are introduced to a parallel world on their phone screens, where a vast array of creatures and Pokémon supplies await discovery. The increase in popularity of AR and VR will be paved with exploitation by marketers, as already seen through the sponsorship deal between Pokémon GO and McDonald’s to entice players into the restaurant chain. Global revenue for the AR and VR markets are projected to reach almost $14 billion in 2017 and $143 billion by 2020. Clearly, this emerging market has the potential not only to provide a new means for escapism, but also to reap massive profits for those companies that utilize AR and VR.

From playing video games to trying new restaurants to visiting amusement parks, escapism is a natural way to de-stress when reality becomes overwhelming. Companies that already provide escapist entertainment are reaping the rewards of widespread unease, and if the U.S. political environment remains volatile, expect new entrants and innovations to satisfy a growing demand for escapism.

Clean energy to carry on under a Trump Presidency

On the campaign trail, President-elect Donald Trump promised to prioritize America’s energy needs by ending restrictions on coal companies. To many environmentalists, there is an implicit threat in this commitment to U.S. energy dominance: clean energy sources will face their demise as government interest in supporting the industry wanes. Furthermore, there is fear that a lack of U.S. commitment to clean energy will have a contagion effect on other nations, encouraging other countries to abandon climate agreements like COP21. On the face of it, a Trump presidency seems to herald doom for the future of clean energy.

In reality, the fate of clean energy will likely be far from catastrophic. Rapid improvements in technology for renewables like wind and solar mean that most of these products will be cost competitive with traditional fuel sources by 2025 without subsidies, while solar and wind can already compete in some geographic areas. A pro-coal president is thus unlikely to be the killing blow for the clean energy industry. Alternative energy sources like solar and wind will continue to improve and eventually replace outdated, environmentally damaging energy sources. Concern should instead center around the environmental damage that will occur in industries like coal until such a substitution occurs.

The ongoing maturation of alternative energy has ensured it will be a mainstay in the global economy in the future. While still expanding, the clean energy industry has improved far beyond the first, inefficient attempts at harnessing fuel from environmentally friendly sources. The future profitability of this industry as a large-scale energy provider is under little doubt, especially as many renewable energy sectors have matured sufficiently to near-price competitiveness with “dirtier” energy sources.

In most cases, clean energy firms no longer face an uncertain future about their viability in a competitive energy market. As a result, these firms will not suffer the chronic underinvestment that plagues infant industries, making it probable that private investment will fill the void left by a reduction in subsidies. This benefit is especially likely for firms that have moved from research to development stages for their clean energy products, as the commercial viability of such products becomes more apparent and thus appealing to private investors.

Even if the increased quantity of private investment does not entirely replace the funds provided by subsidies, clean energy industries may still benefit from the improved innovative efficiency of private investment. While subsidies add to the total quantity of innovative expenditures made by receiving firms, innovative efficiency has been found to suffer with government subsidies in many cases. More efficient allocation of investment capital would spur improved innovation rates, further making up for any loss in public investment. This results in part from the greater flexibility of private investment, which is better able to keep up with changing market conditions like the entry of new firms compared to more cumbersome public subsidies.

Globally, clean energy will also likely maintain its potential as a replacement for dirtier energy sources, regardless of the direction American energy policy takes. The U.S. currently constitutes a significant share of global energy consumption (18% in 2013 ), but other large, developing nations like China and India are increasing their shares of energy consumption as they expand their economies. While many expect these countries to do so through dirty energy sources, the reality is that developing nations already make up over half of all renewable energy investment globally. These countries do so because it is the cheaper option, due in part to the lack of fossil fuel infrastructure already in place.

As these nations continue to expand their energy infrastructure in the coming years, demand for renewables and other clean fuel sources will only increase, ensuring a bright future for the clean energy industry outside the U.S.

All of these factors will ensure the clean energy industry’s continued rise toward becoming the primary producers of fuel in the world. The environmental implications of a Trump presidency are not entirely positive, though. Proposed cuts in regulation of the coal industry that would accompany a reduction in subsidies for cleaner sources will result in greater production of environmentally harmful energy as the coal-producing firms would no longer pay for their pollution costs. Thus, there remains valid concern over environmental damage as a result of Donald Trump’s policies for the coal industry. These fears, however, are far more limited in scope and severity so long as clean energy continues along its path of innovation and expansion throughout the world.