Trade Has Trade-Offs. This Should Not Surprise Anyone.

 

twenty20_85ea418a-89da-4a41-a4d9-4a455c35e585-e1457715218419“There are no solutions. There are only trade-offs,” economist Thomas Sowell writes his excellent Conflict of Visions.

And so it is with trade. Trade has trade-offs. But certainly most economists would agree with this recent statement in a blog post from Moody’s economist Adam Ozimek: “Trade increases aggregate welfare in the U.S. and past trade deals have benefited most Americans.”

In a 2012 IGM Forum survey of economists, 96% (weighted by confidence) agreed or strongly agreed that, “Freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.” And 98% agreed, “On average, citizens of the U.S. have been better off with the North American Free Trade Agreement than they would have been if the trade rules for the U.S., Canada and Mexico prior to NAFTA had remained in place.” Likewise, a 2014 IGM survey found 93% agreed, “Past major trade deals have benefited most Americans.”

Most Americans, but not all. As I note in my new The Week column: “In their paper, ‘The China Shock,‘ economists David Autor, David Dorn, and Gordon Hanson find that some American communities where manufacturing jobs moved to Asia never really recovered. Economic models predicted labor markets would eventually adjust, but they didn’t. Unemployment rates remained elevated, worker incomes depressed.”

This is a good example of how benefits are broadly distributed, while the costs are concentrated. These folks are the losers from trade, and that downside should not be hand-waved away. Help for them would include an expanded safety net: wage subsidies, wage insurance, relocation assistance, and retraining are areas worth looking at and applying some creative policymaking.

Here is Ozimek on how we should not help workers who lose out:

One suggestion is to protect or subsidize existing manufacturers to try to prevent job losses in the first place. There are two problems with this. The first is the extensive research highlighted above showing that trade exposure has increased productivity and innovation. U.S. productivity growth overall has slowed, and the last thing we want to do is cut off this source of productivity and innovation. Protecting unproductive firms would risk doing just that.

Second, protecting manufacturers does not mean protecting workers. Manufacturing output in the U.S. has increased even as employment as fallen thanks to increased automation. If output is subsidized it does little to change the fact that robots increasingly replace workers and that low-skilled manufacturing workers who lose their jobs are struggling to be re-employed.

Let me also again refer to a post by AEI’s Derek Scissors, “The trade deficit does not cost us jobs.”

There are 20 comments.

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  1. Red Fish, Blue Fish Member
    Red Fish, Blue Fish
    @RedFishBlueFish

    But still, Kasich voted for NAFTA and he is going to get slammed in Ohio for it. Just watch. It’s coming and he won’t be able to defend against it.

    We completely failed in selling free trade to the public. In part, that’s because of those concentrated harms it produces. Over time, they over take the narrative and there really isn’t a good political answer for it.

    • #1
  2. PHCheese Member
    PHCheese
    @PHCheese

    Increasing manufacturing output does not necessarily mean robots are replacing workers. More efficient companies with more productive workers would also increase outputs.

    • #2
  3. The Cloaked Gaijin Member
    The Cloaked Gaijin
    @TheCloakedGaijin

    Thanks for writing this.

    • #3
  4. Jamie Lockett Member
    Jamie Lockett
    @JamieLockett

    A great analysis that will, alas, be ignored by the protectionists.

    • #4
  5. The Reticulator Member
    The Reticulator
    @TheReticulator

    “Trade increases aggregate welfare in the U.S. and past trade deals have benefited most Americans.”

    Let’s hear it for collectivism!

    • #5
  6. Instugator Thatcher
    Instugator
    @Instugator

    The Reticulator:

    “Trade increases aggregate welfare in the U.S. and past trade deals have benefited most Americans.”

    Let’s hear it for collectivism!

    Actually, I prefer an agreement that allows me to purchase Mango from my local grocery store. Never had Mango before I was deployed to Panama in 1995. I like it. It’s tasty.

    • #6
  7. The Reticulator Member
    The Reticulator
    @TheReticulator

    Instugator:

    The Reticulator:

    “Trade increases aggregate welfare in the U.S. and past trade deals have benefited most Americans.”

    Let’s hear it for collectivism!

    Actually, I prefer an agreement that allows me to purchase Mango from my local grocery store. Never had Mango before I was deployed to Panama in 1995. I like it. It’s tasty.

    I like your preferences more than the collectivist ones.

    • #7
  8. TKC1101 Member
    TKC1101
    @TKC1101

    James Pethokoukis: In a 2012 IGM Forum survey of economists, 96% (weighted by confidence) agreed or strongly agreed that, “Freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment

    James, I know it is not your style to answer questions, but I have a few:

    How do I reconcile giving China and Mexico  higher productive efficiency and US consumers lower prices as being a good outcome with the data on stagnant middle class wages and increasing wealth concentration?

    Given the cost of the welfare state is being deficit financed, how can you say that consumer choices are a good compared to the cost of long term unemployment of significant and increasing portions of the workforce in the long run. When people lose jobs we support them with money we print and must cover later so the effect is spread over time, yet the choice and price benefits are fleeting  and only occur in the current year.

    • #8
  9. Freesmith Member
    Freesmith
    @Freesmith

    What individuals and organizations fund the American Enterprise Institute which puts out such Panglossian analyses?

    Or is the question of who butters Pethokoukis’s, Scissors’s, Murray’s and Brooks’s bread immaterial? Let’s see: if Charles Murray decided tomorrow that the social havoc being wrought in the “Fishtowns” of the nation was exacerbated by immigration and changed his public stance from pro-immigration to anti-immigration, would AEI keep him on as a fellow at a few hundred thousand dollars per year? Or would they say, “Don’t let the door hit you on your way out?”

    What if Jimmy P. decided that free trade always helps capital far more than labor, as the income trends in the US since globalization and open markets clearly indicate, and wrote exactly that – would Arthur Brooks continue to reward his “earned success?”

    Conservatives complain about the self-reinforcing ideological hot-houses that are our universities. They rightly criticize the tenured radicals who reside in those comfortable bubbles at good salaries for little real work. Think tanks are no different.

    Follow the money.

    • #9
  10. Crow's Nest Member
    Crow's Nest
    @CrowsNest

    James Pethokoukis:This is a good example of how benefits are broadly distributed, while the costs are concentrated. These folks are the losers from trade, and that downside should not be hand-waved away.

    While policy oriented conservatives have long been familiar with this point, conservative rhetoric on trade and economics the past two decades or so has been of a more “fundamentalist” character–i.e. that trade isn’t just a net positive, but that trade is positive simply. This “high tide lifts all boats” approach has often, rhetorically at least, ignored the more sober points made by the articles Jim cites.

    The need to defend trade and capitalism against the Soviet Union helped generate this somewhat one-sided rhetorical focus, and the jubilation following its deserved collapse reinforced that rhetorical style. As did the fact that politicians speak to a public at large which is broadly ignorant of economic theory or the fine details of any trade proposal.

    Many of us on the right are “two cheers for capitalism” types, and that goes, also, for global capitalism and free trade.  To admit that problems emerge from a policy of free trade is not to admit that the Left has the correct approach for thinking about those problems, or the best policy solutions to redress them.

    • #10
  11. Larry3435 Member
    Larry3435
    @Larry3435

    PHCheese:Increasing manufacturing output does not necessarily mean robots are replacing workers. More efficient companies with more productive workers would also increase outputs.

    An increase in productivity almost always means that the enterprise is replacing labor with capital.  The only alternative way to increase productivity is to have more highly skilled employees, and given the failures of the American education system the only way to get more highly skilled employees is to increase immigration.  And I’m guessing that the no-trade crowd isn’t clamoring for that.

    • #11
  12. Larry3435 Member
    Larry3435
    @Larry3435

    It’s also worth mentioning that every negotiated Trade Agreement in the last 30 years, including NAFTA, has done absolutely nothing to lower trade barriers on imports to the US. These countries were already freely sending us their goods.  What the Trade Agreements did do was to lower trade barriers on US exports.  The benefits of these Trade Agreements went entirely to US workers.  Entirely.

    That’s not to say that the US couldn’t adopt protectionist trade barriers.  But the Trade Agreements we have entered did not tear down any such barriers.  They only opened foreign markets to our goods.

    • #12
  13. Instugator Thatcher
    Instugator
    @Instugator

    TKC1101:

    James Pethokoukis: In a 2012 IGM Forum survey of economists, 96% (weighted by confidence) agreed or strongly agreed that, “Freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment

    James, I know it is not your style to answer questions, but I have a few:

    How do I reconcile giving China and Mexico higher productive efficiency and US consumers lower prices as being a good outcome with the data on stagnant middle class wages and increasing wealth concentration?

    How about by questioning the phrase “stagnant middle class wages”?

    • #13
  14. I Walton Member
    I Walton
    @IWalton

    The safety net is part of the problem, as are all regulations, wrongly designed taxes, our centrally controlled union driven educational system.  Trade impacts are not always or even primarily concentrated.  In a healthy market economy they are intrinsic to all market activity everywhere.   Autos were different because their production lines were huge and their workers had enjoyed wages outsized to their skills.  Autos, steel and machine tools  had enjoyed a run during the war and post war monopolies.  Neither management nor unions could adjust to a more competitive world and their workers couldn’t earn the same union wages they were accustomed to.   Moreover the safety net paid not to work rather than encouraged them move or learn new skills.   Cities like Detroit lost jobs to the Southern US where unions were non existent or weak as well as to Japan.  Trade, new technologies, new innovative entrepreneurs impose trade offs and require constant  adjustments but our administrative state makes adjustment more difficult and growth slower.  Theoretically we should be able to help but we have proven ourselves incapable of doing so.  Perhaps some states could if the Feds would get out of the business.

    • #14
  15. Hank Rhody Contributor
    Hank Rhody
    @HankRhody

    Larry3435:

    PHCheese:Increasing manufacturing output does not necessarily mean robots are replacing workers. More efficient companies with more productive workers would also increase outputs.

    An increase in productivity almost always means that the enterprise is replacing labor with capital. The only alternative way to increase productivity is to have more highly skilled employees, and given the failures of the American education system the only way to get more highly skilled employees is to increase immigration. And I’m guessing that the no-trade crowd isn’t clamoring for that.

    I was right with you until you brought up education. Don’t get me wrong, education is a mess. But that point is tangential to the question.

    A factory gets more efficient the longer it’s in production, as the process and the culture improve. People learn to do their jobs better, yes, regardless of previous education. Education is always much more general than the needs of the workplace, even when it’s of good quality.

    Which is why if your factory has been in operation for 97 years you’d imagine they’d learn something not just about building a quality razor, but cheap too. Yes, Harry’s Shave, for men who put good grooming first!

    • #15
  16. Hank Rhody Contributor
    Hank Rhody
    @HankRhody

    I Walton: The safety net is part of the problem

    Agreed, which is why I was dismayed that Mr. Pethakoukis was reaching for it. He’s right to note that the model of Free Trade as always and everywhere being an unalloyed good is incorrect. The assumption that you’ll be able to buy off anyone who gets seriously hurt by it is probably wrong to begin with and seriously harmful in the long run.

    • #16
  17. Carey J. Member
    Carey J.
    @CareyJ

    [Ricochet’s Code of Conduct enjoins members to assume their interlocutor is arguing in good faith.] Because cheap stuff from China is more important than maintaining a strong middle class.

    • #17
  18. Jamie Lockett Member
    Jamie Lockett
    @JamieLockett

    What a ridiculous straw man argument. Completely unworthy of Ricochet.

    • #18
  19. Carey J. Member
    Carey J.
    @CareyJ

    Jamie Lockett:What a ridiculous straw man argument. Completely unworthy of Ricochet.

    When you put downward pressure on wages, there are social costs. Back in the day, before we sent most of our manufacturing jobs overseas, fathers could generally support their families with mama working part time, at most. Families were stronger as a result, and that made for a more stable and hopeful society.

    Today, many families are only middle class because both parents work full-time. Both parents are worn out from working full time jobs and keeping the family running. They have neither the time nor the energy to be really first-rate parents. Kids get dumped in day care, and families aren’t as strong. Divorces are up. Single-parent families are up. Entitlement costs are up. Women put off having children because they have to make their bones in the workplace, first. The result is that societal cohesion is down. OWS is not made up of the children of strong, prosperous families. Good families would at least have taught them better manners.

    Ignoring the societal costs of free trade does not make those costs vanish.

    • #19
  20. Larry3435 Member
    Larry3435
    @Larry3435

    Carey J.:

    Jamie Lockett:What a ridiculous straw man argument. Completely unworthy of Ricochet.

    When you put downward pressure on wages, there are social costs. Back in the day, before we sent most of our manufacturing jobs overseas, fathers could generally support their families with mama working part time, at most. Families were stronger as a result, and that made for a more stable and hopeful society.

    Today, many families are only middle class because both parents work full-time. Both parents are worn out from working full time jobs and keeping the family running. They have neither the time nor the energy to be really first-rate parents. Kids get dumped in day care, and families aren’t as strong. Divorces are up. Single-parent families are up. Entitlement costs are up. Women put off having children because they have to make their bones in the workplace, first. The result is that societal cohesion is down. OWS is not made up of the children of strong, prosperous families. Good families would at least have taught them better manners.

    Ignoring the societal costs of free trade does not make those costs vanish.

    Hey, we could fix all that.  Just follow how we got there before.  Bomb the crap out of the infrastructure of every other country in the world, and then get China, India, Russia, Eastern Europe, and South America to return to the socialist policies that they have all since abandoned.  You get the other countries to agree, OK?

    • #20

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