Walking on Trade Adjusted Eggshells

Since its inception in 1962, Trade Adjustment Assistance (TAA) has been portrayed as a way to help workers affected by trade adjust to a changing economy, but its political objective may be more important than any policy purpose: The program was viewed by many politicians and scholars as a political tool to mute free trade opposition from those with enough political sway to block or slow trade liberalizing efforts. Only by pacifying their objections to trade liberalization would free trade be able to flourish. Unfortunately, if the goal of Trade Adjustment Assistance was to buy support for trade, it has failed to achieve that objective.

It is this context, that makes a new paper (and its companion op-ed) by Sung Eun Kim and Krzysztof Pelc surprising. They find that Trade Adjustment Assistance and demands for protectionism act as substitutes, where increases in Trade Adjustment Assistance can lead to a reduction in the desire for market-distorting tariffs – specifically, antidumping tariffs. As they put it: "compensation for trade-affected workers can in fact preempt protectionism."

Finding ways to reduce the demand for protectionism would be great. However, I want to take a moment to push back a little on their suggestions and add a few words of caution.

First, their methodology for identifying protectionism takes into account only antidumping tariffs. But while antidumping is a particularly abusive example, it is not the universe of protectionism, as the Trump administration has clearly shown. Even if it is true that TAA has reduced the use of anti-dumping tariffs, there may be other forms of protectionism (such as safeguards or countervailing duties) being used, and that needs to be considered when examining whether TAA has preempted protectionism.

In addition, although Trade Adjustment Assistance has been used to buy the support, or at least soften the objections, of organized labor during contentious trade talks such as NAFTA, the usefulness of TAA in furthering the free trade cause has diminished over time while inflicting long-term damage to the free trade cause.

Instead of acting as a mechanism to further expand trade, the program has instead ensnared liberalization by incorrectly signaling that trade is a particularly onerous cause of job loss that justifies opposition to trade agreements and other forms of protectionism in the absence of Trade Adjustment Assistance. This is especially troubling when workers displaced by trade liberalization make up only a fraction of total job churn attributable to total labor market dislocations each year. A frequently referenced Ball State University study, for example, finds that about 88% of U.S. job displacement is attributable to productivity gains.

Even if increasing Trade Adjustment Assistance funding or coverage could effectively reduce protectionist demands by interest groups, as previously suggested, it is far from clear that politicians can be won over in a similar manner. A paper by Stephanie Rickard of the London School of Economics and Political Science noted that 70% of the legislators that voted against freer trade also supported increasing spending on Trade Adjustment Assistance, while legislators that favored liberalization were evenly split on the program. In other words, at the political level, protection and TAA are often not substitutes, but rather just two policies trade critics pursue simultaneously.

The program itself can also be an administrative nightmare that can dull the teeth of effective liberalization and slow its momentum. We saw just how counterproductive TAA can be in 2011 when the Obama administration was trying to push trade deals through Congress under the precondition that Trade Adjustment Assistance also be reauthorized and extended. In a sense, TAA inclusion made those instances of trade liberalization more messy, more expensive, and, after accounting for all of the costs of managed trade, less effective than it otherwise could have been.

This shouldn’t be too surprising. As Cato’s Jim Dorn pointed out nearly 40 years ago, the bribery argument is very flawed:

[It] fail[s] to recognize that as long as special interest groups can gain by using the power of government to enact laws designed to further their goals at the expense of the public, these groups will have no incentive to accept the free trade principle.

If TAA is to be used at all, it would be best if it were utilized only as a tool to ensure passage of landmark expansions of trade, instead of being used as a matter of course or even in tandem with protectionist policies. If the main goal of TAA is to win support for trade liberalization, that implies TAA is the cost, not the benefit, of trade liberalization. It would then behoove any policymaker to make certain that they don’t end up with both increased TAA funding and higher tariffs.

Unfortunately, this doomsday scenario is looking more plausible by the day. On top of market-distorting tariffs and payments to placate the many losers of tariffs, the Trump administration’s Department of Labor recently released a Notice of Proposed Rulemaking to expand the TAA program. Combining TAA with the Trump administration’s protectionism (both unilateral and in the context of revised trade deals that reverse prior liberalization) is the worst of both worlds.

Instead of perpetuating the myth that trade is at fault for America’s economic ills, it would be better if Congress worked to eliminate the TAA program altogether. A program that instead provided adjustment assistance to displaced workers regardless of circumstance seems a more palatable compromise, as it would not demonize trade in the process.