Sure, free trade’s great. But that doesn’t mean there aren’t losers

Bloomberg Businessweek (Asia) - - CONTENT - By Peter Coy

Pro­po­nents shouldn’t ig­nore the fact that work­ers are harmed by low-wage com­pe­ti­tion

It’s easy to scoff at the anti-free-trade rhetoric em­a­nat­ing from the U.S. pres­i­den­tial cam­paign trail. Don­ald Trump keeps yelling about China, Mex­ico, and Ja­pan. Bernie San­ders won’t stop shout­ing about greedy multi­na­tional cor­po­ra­tions. Hil­lary Clin­ton, Ted Cruz, and John Ka­sich are awk­wardly lean­ing in the same di­rec­tion. If you’re a typ­i­cal pro­trade busi­ness ex­ec­u­tive, you’re tempted to ask: Were these peo­ple throw­ing Fris­bees on the quad dur­ing Econ 101? A re­cent ar­ti­cle in the Na­tional Re­view ex­pressed dis­dain by blam­ing a swath of Amer­ica for its own prob­lems, at­tribut­ing Trump’s suc­cess to a “white Amer­i­can un­der­class” that’s “in thrall to a vi­cious, self­ish cul­ture whose main prod­ucts are misery and used heroin nee­dles.”

Wait. Trump and San­ders may be clumsy and overly dra­matic, and their so­lu­tions may be mis­be­got­ten, but they’re on to some­thing real. New re­search con­firms what a lot of or­di­nary peo­ple have been say­ing all along, which is that free trade, while good over­all, harms work­ers who are ex­posed to lowwage com­pe­ti­tion from abroad. Ig­nor­ing this dam­age—or pre­tend­ing that it’s be­ing cured through “re­dis­tri­bu­tion” of gains— un­der­mines the cred­i­bil­ity of free traders and makes it harder to win trade lib­er­al­iza­tion deals.

“Econ­o­mists, for what­ever odd rea­son, tend to close ranks when they talk about trade in pub­lic” for fear of giv­ing am­mu­ni­tion to pro­tec­tion­ists, says Dani Ro­drik, an econ­o­mist at Har­vard’s Kennedy School of Gov­ern­ment. “There’s a sense that it will feed the bar­bar­ians.”

The the­ory of com­par­a­tive ad­van­tage that’s taught to col­lege fresh­men is im­pos­si­bly clean: It’s all about spe­cial­iza­tion. Eng­land trades its cloth for Por­tu­gal’s wine. Even if Por­tu­gal is slightly bet­ter at pro­duc­ing cloth than Eng­land is, it should fo­cus on what it’s best at, wine­mak­ing. Por­tuguese who lose their jobs mak­ing cloth will read­ily find new ones mak­ing wine. Ef­fi­ciency im­proves. Ev­ery­one wins.

Life i s more com­pli­cated. For ex­am­ple: In times of slack global de­mand, coun­tries grab more than their fair share of the avail­able work by boost­ing ex­ports and lim­it­ing im­ports. Per­pet­ual trade deficits leave one coun­try deep in hock to an­other, threat­en­ing its sovereignty. Fi­nan­cial bub­bles form when deficit coun­tries are over­whelmed by hot money in­flows. Coun­tries re­strict trade for strate­gic rea­sons, such as to nur­ture an in­fant in­dus­try, to pun­ish a ri­val, or to guar­an­tee a do­mes­tic source for sen­si­tive mil­i­tary hard­ware and soft­ware. Na­tion­states may not ap­pear in in­tro econ, but they call the shots in the real world.

Even set­ting aside geopol­i­tics, trade cre­ates losers as well as win­ners. Back in 1941, econ­o­mists Wolf­gang Stolper and Paul Sa­muel­son pointed out that un­skilled work­ers in a high-wage coun­try

would suf­fer losses if that coun­try opened up to im­ports from a low-wage na­tion. (The pres­ti­gious Amer­i­can Eco­nomic

Re­view re­jected the pa­per, call­ing it “a com­plete ‘sell-out’ ” to pro­tec­tion­ists.)

Amer­i­can sup­port for free trade was strong for most of the 20th cen­tury. The Stolper-Sa­muel­son the­o­rem was of mainly the­o­ret­i­cal in­ter­est be­cause most U.S. trade was with other de­vel­oped na­tions. Be­sides, eco­nomic text­books as­sured stu­dents that losers from trade could be com­pen­sated with a por­tion of so­ci­ety’s gains. The Trade Ex­pan­sion Act of 1962 was the first of a se­ries of mea­sures to pro­vide gov­ern­ment as­sis­tance to U.S. work­ers who lost their jobs to for­eign com­pe­ti­tion. Amer­i­can la­bor unions gen­er­ally sup­ported free trade as both a cre­ator of jobs in the ex­port sec­tor and a bul­wark against com­mu­nism.

Com­pe­ti­tion from Ja­pan shook some unions’ and law­mak­ers’ faith in trade. In 1981, Ja­panese au­tomak­ers agreed to “vol­un­tary” re­straints on auto ex­ports to the U.S. to avoid pos­si­ble tar­iffs. A deal with Ja­pan on mem­ory chips fol­lowed in 1986. Among econ­o­mists, though, the con­sen­sus in fa­vor of un­bri­dled free trade re­mained in­tact. If jobs were lost, they said, it was far more likely to be from au­to­ma­tion than from im­ports. As re­cently as 1997, Paul Krug­man wrote in the Jour­nal of Eco­nomic Lit­er­a­ture that “a coun­try serves its own in­ter­ests by pur­su­ing free trade re­gard­less of what other coun­tries may do.”

The rise of China did far more than Ja­pan’s as­cent to soften the free-trade con­sen­sus. China’s low-wage, low-price strat­egy swept through Amer­i­can in­dus­try like a plague. Hard­est hit were la­bor­in­ten­sive in­dus­tries such as ap­parel, shoes, fur­ni­ture, toys, and elec­tron­ics. From 1990 to 2010, ac­cord­ing to Bureau of La­bor Sta­tis­tics data, U.S. pro­duc­tion jobs in ap­parel plunged from 840,000 to 118,000. If a U.S. fac­tory couldn’t match the “China price,” it lost the busi­ness. Econ­o­mists have taken note. Krug­man wrote in his New York Times col­umn this March that while pro­tec­tion­ism is a mis­take, “the elite case for ever-freer trade, the one that the pub­lic hears, is largely a scam.”

David Au­tor, a cen­trist econ­o­mist at Mas­sachusetts In­sti­tute of Tech­nol­ogy, has care­fully doc­u­mented the con­se­quences of China’s rise. In a work­ing pa­per re­leased in Jan­uary, Au­tor and two other econ­o­mists con­clude that im­ports from China killed about 2.4 mil­lion U.S. jobs from 1999 to 2011. That wouldn’t have been ter­ri­ble if the work­ers had found jobs in other sec­tors or other

cities. But many didn’t. Job growth was slow, so there were few open­ings. Lots of laid-off fac­tory work­ers were still liv­ing off ben­e­fits a decade later, re­flect­ing a “stun­ningly slow” ad­just­ment, wrote Au­tor, David Dorn, of the Univer­sity of Zurich, and Gor­don Han­son, of the Univer­sity of Cal­i­for­nia at San Diego, in their pa­per, The China Shock: Learn­ing from La­bor Mar­ket Ad­just­ment to Large Changes in Trade.

Au­tor says he still be­lieves in free trade, in­clud­ing with China. “We don’t want our work to be mis­con­strued.” But he says their re­search did sen­si­tize them to the hu­man price that the U.S. has paid in ex­change for low-priced goods from China. In terms of lost in­comes and lost pride, Au­tor says, “the costs loom pretty large.”

Once you ac­cept the idea that some peo­ple lose from trade, the ques­tion be­comes what to do about it. Or­di­nary Amer­i­cans are con­flicted. On one hand, there’s a reser­voir of sup­port for for­eign trade. A Gallup poll pub­lished in Fe­bru­ary found that 58 per­cent of Amer­i­cans see it as an op­por­tu­nity, vs. 33 per­cent who view it as a threat. On the other hand, doubts per­sist. A Bloomberg na­tional poll in March found that al­most two-thirds of Amer­i­cans want more re­stric­tions on im­ported goods and 82 per­cent would be will­ing to pay “a lit­tle bit more” for Amer­i­can-made goods to save jobs. Democrats in Wash­ing­ton state gave San­ders a big pri­mary vic­tory on March 26 even though the state ben­e­fits enor­mously from free trade; it led the na­tion in man­u­fac­tur­ing ex­ports per capita last year, ac­cord­ing to U.S. Depart­ment of Com­merce data.

A 44-na­tion sur­vey by Pew Re­search Cen­ter in 2014 found strongly pos­i­tive views to­ward trade in de­vel­op­ing na­tions, par­tic­u­larly Tu­nisia, Uganda, Viet­nam, Le­banon, and Bangladesh. In con­trast, half of Amer­i­cans said trade de­stroys jobs, as did 49 per­cent in France, 59 per­cent in Italy, and 38 per­cent in Ja­pan.

The lib­er­tar­ian po­si­tion on free trade is that those who lose when bar­ri­ers come down de­serve noth­ing. They were be­ing pro­tected from com­pe­ti­tion; now their spe­cial deal is be­ing taken away to save con­sumers money. End of story. If any­thing, some lib­er­tar­i­ans say, the work­ers should com­pen­sate con­sumers for the ex­tra in­come they un­justly earned when the bar­ri­ers were up. “Where, in short, is my check from those ben­e­fit­ing from pro­tec­tion­ism?” Tim Worstall, a fel­low of the U.K.’s free-mar­ket Adam Smith In­sti­tute, wrote on his per­sonal blog in 2011.

There’s a U.S. pro­gram for com­pen­sat­ing peo­ple hurt by trade. It isn’t ef­fec­tive

In 1911, re­mark­ably, free trade was the pop­ulist po­si­tion. It could be­come so again

The U.S. Congress has re­jected that harsh phi­los­o­phy. In fis­cal year 2014, the U.S. Depart­ment of La­bor gave states $604 mil­lion for work­ers who were cer­ti­fied as hav­ing lost their jobs be­cause of for­eign com­pe­ti­tion. The funds cover ca­reer coun­sel­ing, job train­ing, al­lowances for job search and re­lo­ca­tion, wage sub­si­dies for older work­ers who get hired at lower pay, and weekly cash pay­ments for peo­ple whose un­em­ploy­ment ben­e­fits are ex­hausted.

But trade ad­just­ment as­sis­tance, as it’s called, is hardly a cure-all. The sums are tiny in com­par­i­son with the scale of the prob­lem, and the suc­cess rate is low. A study for the La­bor Dept. in 2012 by Math­e­mat­ica Pol­icy Re­search, a Prince­ton, N.J.-based eval­u­a­tion firm, con­cluded that partly be­cause of the time that par­tic­i­pants spent in train­ing, their earn­ings were ac­tu­ally lower than those of non­par­tic­i­pants.

Ques­tions about how to share the ben­e­fits from free trade are in­sep­a­ra­ble from broad ques­tions about so­cial jus­tice. Is a trade deal bad if it kills 1,000 jobs in South Carolina but cre­ates 10,000 in des­per­ately poor Bangladesh? Or this: Let’s say so­cial sci­en­tists fig­ured out how to make trade ad­just­ment as­sis­tance ef­fec­tive. Would it be right for gov­ern­ment to ramp up spend­ing on it 100-fold from cur­rent lev­els, so dis­placed work­ers are truly made whole, even though that’s more money out of tax­pay­ers’ pock­ets?

Trade ad­just­ment as­sis­tance is an awk­wardly shaped gov­ern­ment pro­gram, too broad in one re­spect and too nar­row in an­other. If the ob­jec­tive is to right a wrong, then it’s too broad in that it ben­e­fits peo­ple who lose jobs even when the for­eign com­pe­ti­tion is per­fectly fair. If the ob­jec­tive is to pro­vide a safety net, then it’s too nar­row in that it cov­ers only peo­ple harmed by trade. What about peo­ple who lose their jobs be­cause of au­to­ma­tion, tougher pol­lu­tion con­trols, or chang­ing con­sumer tastes? It seems un­fair to treat those groups dif­fer­ently.

For log­i­cal con­sis­tency, the as­sis­tance needs to nar­row or broaden. Har­vard’s Ro­drik and MIT’s Au­tor fa­vor broad­en­ing—that is, elim­i­nat­ing trade ad­just­ment as­sis­tance as a spe­cial cat­e­gory and putting a safety net un­der all work­ers that doesn’t de­pend on why they lost their jobs.

A big­ger idea is to stop the chronic trade deficits from oc­cur­ring in the first place. There would be fewer losers from trade and less need for as­sis­tance if deficits were small and tem­po­rary. John May­nard Keynes, the great Bri­tish econ­o­mist, had an idea for that in 1941. His plan would have shrunk im­bal­ances by putting much of the re­spon­si­bil­ity for ad­just­ment on trade-sur­plus coun­tries. It would have driven them to spend and im­port more. Keynes’s plan didn’t ap­peal to the U.S., which was gen­er­at­ing big trade sur­pluses at the time, so it died. Some­thing slightly sim­i­lar has been pushed in re­cent years by Vladimir Masch, a Soviet-born en­gi­neer and econ­o­mist who is re­tired from Bell Lab­o­ra­to­ries. His “com­pen­sated free trade” plan would have the U.S. im­pose sep­a­rate an­nual lim­its on trade sur­pluses of each trad­ing part­ner and charge the gov­ern­ments if the lim­its are ex­ceeded. “Un­bri­dled glob­al­iza­tion un­der­mines so­ci­eties and is in­com­pat­i­ble with democ­racy,” he writes.

Trump and San­ders are right that bet­ter trade deals are part of the so­lu­tion, too. Au­tor et al. show that China ben­e­fited hugely from en­ter­ing the World Trade Or­ga­ni­za­tion in 2001. Yet China has man­aged to re­strict ac­cess to its mar­ket, clos­ing off some sec­tors, such as finance, while in­sist­ing that U.S. and other for­eign com­pa­nies trans­fer tech­nol­ogy to Chi­nese part­ners in ex­change for joint man­u­fac­tur­ing deals.

As San­ders com­plains, new trade deals s uch as t he Trans- Pa­cific Partnership and the Transat­lantic Trade and In­vest­ment Partnership seem aimed more at se­cur­ing the in­ter­ests of multi­na­tion­als than creat­ing jobs back home. In other words, sup­port­ing trade deals doesn’t au­to­mat­i­cally make a chief ex­ec­u­tive a free-trade purist. “My view is that there are bar­bar­ians on both sides of this is­sue,” says Ro­drik.

Thomas Palley, an eco­nomic pol­icy ad­viser to the AFL-CIO, says multi­na­tion­als are prac­tic­ing “barge eco­nom­ics”— a moniker in­spired by for­mer General Elec­tric CEO Jack Welch, who once said he wished he could put his fac­to­ries on barges and move them to what­ever coun­try had the best con­di­tions. With today’s trade deals, says Palley, “we have given the of­fi­cial bless­ing to in­sti­tu­tion­al­iz­ing the race to the bot­tom that barge eco­nom­ics pro­duces.”

This stuff isn’t easy. The Pa­cific and At­lantic trade deals are the prod­uct of years of painstak­ing ne­go­ti­a­tions. A Pres­i­dent Trump won’t be able to dic­tate new terms to trad­ing part­ners, no mat­ter how good a deal­maker he is. The WTO would prob­a­bly strike down his threat­ened 45 per­cent tar­iffs on Chi­nese im­ports as an un­fair trade prac­tice. Re­ject­ing the WTO’s au­thor­ity could trig­ger a mul­ti­sided tar­iff war that would hurt the U.S. as well as its trad­ing part­ners. What’s more, “if we did Chi­naspe­cific sanc­tions, the trade would just di­vert to Viet­nam, etc.,” says Dou­glas Ir­win, an econ­o­mist and free-trade ad­vo­cate at Dart­mouth Col­lege.

A cen­tury ago, re­mark­ably enough, free trade was the pop­ulist po­si­tion. In 1911, The Tar­iff in Our Times, a book by the muck­rak­ing jour­nal­ist Ida Tar­bell, ar­gued that high tar­iff walls pro­tected cap­i­tal­ists, not work­ers. Shel­tered from com­pe­ti­tion from Europe, she wrote, oli­gop­ol­ies could get away with sell­ing ex­pen­sive, shoddy goods in the U.S. mar­ket, harm­ing con­sumers. High tar­iffs on wool were even keep­ing tu­ber­cu­lo­sis pa­tients from get­ting warm woolen clothes and blan­kets, she wrote. She con­demned con­gress­men who voted re­peat­edly for high tar­iffs: “We have de­vel­oped a politi­cian who en­cour­ages the most dan­ger­ous kind of cit­i­zen­ship a democ­racy can know—the pan­icky, grasp­ing, ide­al­less kind.”

The world has changed a lot since then. Pop­ulists have lost their taste for free trade. But Tar­bell re­mains cor­rect. If the gov­ern­ment can get over its pan­icky, grasp­ing, and ide­al­less ways and do what’s right, trade can be an en­gine of pros­per­ity and a weapon against en­trenched eco­nomic power. <BW>

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