Free Trade Under Fire


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Candidates in both major US parties in the recent US election spoke out against free trade. This slideshows examines the arguments against free trade, and concludes that although the country does need to address problems created by trade shocks, protectionism is not the answer.

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Free Trade Under Fire

  1. Economics Issues from Ed Dolan’s Econ Blog Free Trade Under Fire First posted Updated January 25, 2017 Updated January 25, 2017 Terms of Use: These slides are provided under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics, from BVT Publishing.
  2. Free Trade under Fire from Politicians  Free trade came under fire by both parties in the 2016 election  Protectionist Donald Trump decisively beat traditionally pro- trade Republican rivals  Democrat Bernie Sanders pushed Hillary Clinton to abandon support for new trade agreements like TPP and TTIP  First result of election: TPP and TTIP are officially pronounced dead Updated January 25, 2017 Ed Dolan’s Econ Blog “Our politicians have aggressively pursued a policy of globalization … Globalization has made the financial elite who donate to politicians very wealthy. But it has left millions of our workers with nothing but poverty and heartache.—Donald Trump
  3. . . . and from Economists Economists traditionally favor free-trade, but some of them have spoken out, too:  I used to believe in trade agreements. That was before the wages of most Americans stagnated and a relative few at the top captured just about all the economic gains.” --Robert Reich  “Not all free-trade advocates are paragons of intellectual honesty. In fact, the elite case for ever-freer trade, the one that the public hears, is largely a scam.” --Paul Krugman Updated January 25, 2017 Ed Dolan’s Econ Blog Paul Krugman
  4. Full Krugman Quote [N]ot all free-trade advocates are paragons of intellectual honesty. In fact, the elite case for ever-freer trade, the one that the public hears, is largely a scam. What you hear, all too often, are claims that trade is an engine of job creation, that trade agreements will have big payoffs in terms of economic growth and that they are good for everyone. Yet what the models of international trade used by real experts say is that, in general, agreements that lead to more trade neither create nor destroy jobs; that they usually make countries more efficient and richer, but that the numbers aren't huge; and that they can easily produce losers as well as winners. Updated January 25, 2017 Ed Dolan’s Econ Blog
  5. Still, Many Anti-Trade Arguments Are Weak The fact that opponents of free trade are winning the political debate does not mean their most popular arguments are sound, nor that protectionism is the answer to problems caused by trade Updated January 25, 2017 Ed Dolan’s Econ Blog Weak arguments against free trade  Deficits mean we are losers  Blame it on currency manipulation  Bring back manufacturing jobs  Don’t trade with the poor
  6. Trade Deficits Do Not Mean We Are Losers The US trade accounts are usually in deficit, but the deficits are no higher now than in the past. Reasons for chronic deficits include:  Foreign firms and governments choose to use part of what they earn from trade to invest in the US economy rather than buying US goods and services  US savings rates are low  The dollar is the world’s most popular reserve currency and US assets are seen as the world’s safest and most secure Updated January 25, 2017 Ed Dolan’s Econ Blog
  7. Don’t Blame It on Currency Manipulation  Some blame US trade deficits on Chinese currency manipulation  China held yuan fixed before 2005 and in 2008-2009  After 2009, yuan appreciated strongly. More recently, it has depreciated again.  Or should we say the dollar has gotten stronger? Updated January 25, 2017 Ed Dolan’s Econ Blog
  8. A Broader Look at the yuan  Bu the broad measure of real effective exchange rates, China’s currency has appreciated rapidly— more rapidly than any other Asia- Pacific currency  Real effective exchange rates take into account the value of a country’s currency relative to those of all its trading partners, adjusted for differences in inflation rates. Updated January 25, 2017 Ed Dolan’s Econ Blog
  9. China’s Currency Manipulation Then and Now How currency manipulation works:  A country can artificially weaken the value of its currency by building up foreign exchange reserves  It can artificially strengthen its currency rate by selling reserves  As this chart shows, before 2014, China did build up its reserves to keep the value of the yuan artificially weak  However, since mid-2014, it has sold off forex reserves to keep the yuan artificially strong Updated January 25, 2017 Ed Dolan’s Econ Blog
  10. Don’t Blame Loss of Manufacturing Jobs on NAFTA and China  It is popular to blame the loss of US manufacturing jobs on NAFTA (1994) and China’s admission to the WTO (2001)  However, manufacturing jobs have been declining since the 1970s  Automation is the biggest factor  NAFTA had only a tiny effect  China’s effect was larger, but even so, manufacturing jobs are now near their long-term trend  Protectionism might bring manufacturing operations back but it won’t bring back the jobs Updated January 25, 2017 Ed Dolan’s Econ Blog
  11. Manufacturing Jobs Are Being Lost Throughout the World  Manufacturing jobs are being lost throughout the world, even in many low wage countries  Manufacturing jobs lost are primarily low skill; high skill jobs in the sector remain strong  Peak year for manufacturing employment by country:  Mexico 1980  Brazil 1986  India 2002  China 2015? (Preliminary) Updated January 25, 2017 Ed Dolan’s Econ Blog
  12. Don’t Trade with the Poor  During the campaign, Trump, Sanders and others argued that trade with low wage countries was hurting the US economy  Supposed implications:  Trade with other rich countries is a fair game but trading with the poor is for chumps.  Trade with poor countries forces US workers into a race to the bottom in wages and working conditions Updated January 25, 2017 Ed Dolan’s Econ Blog
  13. What Makes American Workers Competitive? However . . .  American workers are not competitive because they are supermen, but because of education, technology, and strong institutions  Making America self-sufficient in low tech products would require shifting workers from industries where they are more productive to low skill industries that low- wage countries now dominate  Wages would be lower in the new jobs and more expensive products would hurt low income consumers Updated January 25, 2017 Ed Dolan’s Econ Blog
  14. Trade and Global Inequality Besides . . .  Refusing to buy from poor workers would close their own path to the global middle class  It is not just big corporations that gain from trade with poor countries:  Average wages in China have risen from $3,300 per year to $8,870 over the past 10 years  As wages have risen at home, net migration of Mexicans to the US has reversed Updated January 25, 2017 Ed Dolan’s Econ Blog ”The issue of wealth and income inequality is the great moral issue of our time; it is the great economic issue of our time; and it is the great political issue of our time.” --Bernie Sanders
  15. The Real Downside of Trade: Losers and Winners  Free traders have never denied that trade produces losers as well as winners  Instead, they have argued that . . .  The gains are much larger than the losses  Losses are only temporary as displaced workers and capital move to new opportunities  Those new jobs are created automatically in export industries, or at home, when consumers spend the money they save because imported goods are cheap Updated January 25, 2017 Ed Dolan’s Econ Blog A study from The Peterson Institute estimated that the gains to consumers from Chinese tire imports amounted to more than $800,000 for each job lost in the US tire industry.
  16. But What if Adjustment Is Slow? But new research* suggests that adjustment to trade shocks may be slow:  Job loss and lower wages in hard-hit regions persist for years.  Effects are geographically concentrated; mobility is not sufficient to ensure widespread sharing of losses by workers across regions and industries.  When an increase in the overall trade deficit accompanies a trade shock workers displaced from jobs impacted by import competition do not quickly find comparable jobs in export industries.  Those who do find work often end up in services or other sectors serving the domestic economy. Their skills do not fit those jobs, so their wages are lower.  Effects of trade shocks include increased unemployment benefits, disability benefits, food stamps, and other forms of government assistance.  Trade shocks disproportionately affect low-wage workers within affected regions and industries. *David Autor, David Dorn, and Gordon Hanson, “The China Shock: Learning from Labor Market Adjustment to Large Changes in Trade.” Updated January 25, 2017 Ed Dolan’s Econ Blog
  17. Traditional Response Trade Adjustment Assistance  The traditional response to displacement of workers has been a combination of temporary income support and retraining via the federal Trade Adjustment Assistance program  However, critics say TAA is underfunded and ineffective  Despite TAA, it appears that the US labor market has become less flexible and adjustment to trade shocks has slowed Updated January 25, 2017 Ed Dolan’s Econ Blog US Government training class in basic computer skills
  18. Indicators of Falling Labor Fluidity Updated January 25, 2017 Ed Dolan’s Econ Blog  A recent paper shows that several measures of labor fluidity are falling in the US Job reallocation: Number of jobs created plus number destroyed in new and existing firms Worker reallocation: Sum of hires, quits, and layoffs Churn: Worker reallocation minus Job reallocation
  19. Falling Interstate Migration Rates Updated January 25, 2017 Ed Dolan’s Econ Blog  Another study shows that interstate migration rates are falling in the US, especially for younger workers  The falling migration rates suggest growing barriers to labor mobility
  20. Five Factors that Slow Adjustment and What to Do About Them Updated January 25, 2017 Ed Dolan’s Econ Blog  These five factors reduce labor mobility and slow adjustment to trade and technology shocks: Disincentives in the social safety net Insufficient portability of healthcare Ownership bias in housing policy Spread of occupational licensing Growth of population with criminal records  What kind of reforms could improve ability to adjust to shocks?
  21. Reform of Social Safety Net  One reason displaced workers are slow to move to new jobs is that high benefit reduction rates in safety net programs reduce their incentives  Moderate solution: Simplify and consolidate safety net programs to reduce high benefit reduction rates  More radical solution: Replace conventional welfare programs with a universal basic income For more, see The Economic Case for a Universal Basic Income Updated January 25, 2017 Ed Dolan’s Econ Blog A Congressional Budget Office report shows that benefit reductions on food stamps, EITC, health subsidies, etc. can take back 60 percent or more of income earned by low-income households.
  22. Improve Portability of Health Care  Despite the Affordable Care Act, health care is not always easily portable from job to job and from state to state  Reform proposals that give more health care authority to individual states could make it more difficult for displaced workers to move from state to state  A European-style single payer system could make health care for workers more portable, just as it now is under Medicare Updated January 25, 2017 Ed Dolan’s Econ Blog
  23. Remove Ownership Bias in Housing Policy  Trade shocks hit entire regions, making it difficult for displace workers to sell houses  US tax policy is strongly biased toward home ownership  Reform of tax policy to treat owners and renters equally would help increase mobility  Already, young workers are reluctant to buy a house because they expect to change jobs and move often Updated January 25, 2017 Ed Dolan’s Econ Blog
  24. Reverse the Spread of Occupational Licensing  In the 1950s, fewer than 5 percent of US jobs required a license  Today licensing has spread to occupations like florists, hair braiders, and interior designers.  More than a quarter of all jobs require an occupational license  Licensing varies widely from state to state making it had for licensed workers to move if another family member is displaced by trade  Reform: Limit licensing to jobs where risk of fraud and harm to consumers is high Updated January 25, 2017 Ed Dolan’s Econ Blog
  25. End Mass Incarceration and Help Those with Records Find Jobs  Some 70 million Americans have criminal records, many for minor offenses  Even a minor criminal record makes it much more difficult for a displaced worker to find a new job  Reform: Reduce incarceration rates for minor crimes and misdemeanors  Reform: Make it easier for people with records to find jobs with approaches like “Ban the Box” Updated January 25, 2017 Ed Dolan’s Econ Blog
  26. The Bottom Line: Protectionism is not the answer Why protectionism is not the answer to trade shocks: 1. A sharp change in trade policy would produce a shock of its own that would displace millions of workers 2. Trade is only one reason for loss of manufacturing jobs. Automation is a bigger factor 3. Even if protectionism brought back manufacturing operations, it would not bring back high-paid jobs for low-skill workers A better approach: Reforms that improve labor mobility and speed adjustment to trade and technology shocks Updated January 25, 2017 Ed Dolan’s Econ Blog
  27. The Bottom Line: Protectionism is not the answer Related reading from Ed Dolan’s Econ Blog:  How occupational licensing undermines labor fluidity  How reform of the social safety net could mitigate the high costs of trade adjustment  The Trump-Sanders War on Free Trade Updated January 25, 2017 Ed Dolan’s Econ Blog
  28. Click on the image to learn more about Ed Dolan’s Econ texts or visit For more posts and slideshows, Follow Ed Dolan’s Econ Blog Follow @DolanEcon on Twitter