It’s not surprising that trade is under attack on the campaign trail. Scapegoating foreigners and their “unfair” practices helps politicians validate the economic anxieties of primary voters, while obscuring their own failures. But as the current batch of presidential candidates fervently advocate protectionism to restore American greatness, the real causes of economic dislocation — and the right solutions — go largely unaddressed.
International trade is often blamed for the economic disparities and dislocations that too many Americans are experiencing. One reason for the connection is that trade is falsely portrayed, and easily perceived, as a contest between nations. To win the contest — the story goes — Team America must outscore the foreign team. Exports are “our” points, imports are “their” points, and the trade account is the scoreboard. Since the scoreboard shows a deficit, Team America is losing at trade and — the candidates tell us — we are losing because the foreign team cheats.
Fear not, America. Donald Trump will fix everything by imposing tariffs on imports from China and Mexico. Bernie Sanders will tear up NAFTA and all other U.S. trade agreements. Hillary Clinton will abrogate U.S. treaty obligations with respect to China’s treatment under U.S. trade laws. Ted Cruz will do all of the above.
Trade has one purpose and one purpose only: To increase the size of the economic pie.
But if there really is a problem to fix, those who aspire to the highest office in the land should be offering more constructive solutions than raising taxes on American consumers, increasing the costs of production for U.S. businesses, inviting foreign governments to discriminate against U.S. exports, undermining the rule of international trade law, and provoking costly trade wars.
Closer examination reveals that targeting trade is a bad idea. Trade has one purpose and one purpose only: To increase the size of the economic pie. In that singular, critical role, trade has succeeded. It has delivered the goods. Rather than a contest between nations, trade is a collaboration involving billions of individuals seeking value through exchange.
Trade enables each of us to focus our productive efforts on what we do best. Instead of allocating small portions of each day to producing everything we want to consume, we specialize in an occupation and exchange the output we produce most efficiently (monetized in the form of wages and salaries) for the goods and services we produce less efficiently. As the size of the market expands across borders to include people in other countries, the greater is the scope for specialization, exchange, and economic growth.
Under that arrangement, we are able to produce and consume more than we could without specialization and trade. We are freed from performing tasks that we are less well-suited to perform, yet we can consume the fruits of those foregone tasks through exchange. That specialization changes the composition of the types of value-added activities performed in the country, as well as the types of jobs. Just like adoption of new technologies, the application of new production processes, changing consumer tastes, and various other supply- and demand-side shocks, trade affects the composition of jobs available and skills demanded.
By expanding the size of the market for both inputs and output, trade is doing its job, enabling more refined specialization and economies of scale in production. Questions about how the wealth created is distributed, whether and how quickly displaced workers find new jobs, and at what wages should not burden trade any more than it burdens technology or changing demand consumer tastes. The purpose of trade is to expand the size of the pie, not to ensure that every citizen is insulated from the changes that ensue. You don’t hear cries for Apple to compensate people whose jobs were made obsolete by the apps on our iPhones.
Of course that doesn’t mean we can be cavalier about jobs. If the adoption of some new technology reduces the demand for labor in steel production by half, that’s called progress. Steel workers are now twice as productive. Output per worker has doubled. But creating the greatest amount of wealth from this process requires those five workers no longer needed in steel production to be redeployed productively elsewhere in the economy as quickly as possible.
The U.S. economy used to be better at facilitating the process of labor market adjustment and accommodating job churn than it is today. In the quarter century between 1983 and 2007 (the last year before the Great Recession), as real GDP more than doubled and the real value of U.S. trade increased five-fold, the U.S. economy created 46 million net new jobs, or 1.84 million net new jobs per year. That engine seems to have blown a cylinder or two in the past decade.
Unfortunately, a recent academic paper called “The China Shock,” by economists David Autor, David Dorn, and Gordon Hanson, which finds evidence of prolonged labor market adjustments in regions where local industries faced direct competition from imports from China last decade, is being portrayed by some in the media as a refutation of free trade. These interpretations have found their way into the political debate and are serving to obscure the proper meaning of the paper’s findings: Labor market frictions have been too severe for some workers with certain skills in certain industries in certain traditionally high-tax, pro-union states to find new jobs. The collective residue of decades of piling bad policies on top of bad policies has gummed up the works.
The candidates would be more useful to the electorate if they were to offer proposals to reduce systemic frictions in the labor market. Incentivize businesses to hire people to train them in exchange for their commitment to work for the company for a period of time. Reform a corporate tax system that currently discourages repatriation of an estimated $2 trillion of profits parked in U.S. corporate coffers abroad, deterring domestic investment, which is needed for job creation. Curb excessive and superfluous regulations that raise the costs of establishing and operating businesses without any marginal improvements in social, safety, environmental, or health outcomes. Permanently eliminate imports duties on intermediate goods to reduce production costs and make U.S.-based businesses more globally competitive. Advocate the retirement of protectionist occupational licensing practices. Encourage voters to look to the states for evidence of which policies work best to attract investment and create jobs. There is a reason that the most adversely affected workers in the Autor paper hail from places like Ohio and Michigan.
There are no circumstances under which curtailing the growth of the pie — curbing trade — can be considered a legitimate aim of public policy. But that is what the candidates offer instead of real solutions. The problem to solve is not trade. The problem is the mismatch between the supply and demand for certain kinds of labor skills.