Free trade in America
The case for free trade is overwhelming. But the losers need more help
IN 2011 Ronnie Dunn, a country singer, recorded “Cost of Livin’”, a poignant song about a former factory worker’s search for a job. Sensing there will be many more jobseekers than job openings, his can-do pitch gives way to desperation: “Bank has started calling/And the wolves are at my door”. Similar refrains can be heard all over America’s industrial heartland: almost 6m manufacturing jobs were lost between 1999 and 2011.
The scale of these job losses is not itself surprising: America’s dynamic economy creates and destroys around 5m jobs each month. But a recent set of studies by economists at leading American universities has found something disturbing. A fifth of that 1999-2011 decline in factory jobs was caused by Chinese competition, and those who lost jobs generally did not find new ones nearby. Nor did the newly unemployed go in search of work elsewhere. Instead there was almost a one-for-one increase either in unemployment or, more frequently, in people leaving the workforce entirely—often to claim disability benefits, which 5% of Americans aged 25-64 now receive.
The anxieties that such findings stoke have made trade a touchstone issue in America’s presidential election. Donald Trump, the Republican front-runner, promises to slap prohibitive tariffs on imports from China and Mexico. Bernie Sanders, the rival to Hillary Clinton, the presumptive Democratic candidate, wears his opposition to trade deals as a badge of pride. Mrs Clinton has herself backed away from her previous support for the Trans-Pacific Partnership (TPP), a trade deal negotiated by Barack Obama. Freer trade was one of the engines of the prosperous decades following the second world war, in America and beyond. Yet mainstream politicians are now not only afraid to champion it, they pour fuel on the fire. That is lamentable. Free trade still deserves full-throated support, even if greater care needs to be taken of those it hurts.
What the latest research makes clear, however, is that in America’s case the losses from free trade are more concentrated and longer-lasting than had been assumed. In large part, that reflects the speed of China’s rise: its share of world manufacturing exports soared from 2% in 1991 to 19% by 2013. The shock caused by China’s emergence also exposed fault lines in America’s economy. Workers seem less willing to switch jobs or move states than in the past.
Part of the explanation may be rising home ownership, by anchoring people to declining areas or pricing them out of vibrant ones. Whatever the explanation, free trade can impose big costs on a few places.
The worst possible response to such fears is the protectionism that Mr Trump is peddling. The surge in cheap imports of clothing, shoes, furniture, toys and electronics from China has greatly increased the spending power of those on low incomes. It has also added to the variety of goods they are able to buy. One study by economists at the University of California, Los Angeles, and Columbia University calculated that median income earners in America would lose 29% of their purchasing power if America was closed to trade, but that the poorest would forfeit as much as 62%, because they spend proportionately more on goods that are traded. Add to the reckoning the eventual benefits of a richer Chinese market for exporters, the spur to innovation in America from global competition and the low-cost inputs for consumer goods, such as the iPhone, that raise the productivity of American designers, and the arguments in favour of free trade are overwhelming.
America has also lagged behind other rich countries in “active” labour-market policies. More could be done to help workers who lose jobs to find new ones, through job exchanges and courses to add to skills. In America’s panoramic jobs market, there may be a case for providing relocation grants for workers hurt by trade. A big gripe of displaced workers is that an alternative job in the service sector does not pay as well or come with the same health-care or pension benefits that big manufacturers used to provide. That is a strong argument for a system of portable benefits that go with workers when they change jobs. A system of wage insurance might have merit.
Such policies are needed not only in America—workers in Britain’s steel plants are confronting the demise of the domestic industry (see article). Nor are they required only to smooth trade shocks. Many of these policies are necessary to deal with other sources of disruption, from cheaper robots to new technologies such as 3D printing. Protectionists want to turn back the clock. Far better to reap the permanent overall gains from trade while preparing the workforce for change.