We need to be helping those who lose out from free trade

Current free trade policies create winners and losers.

The losers are those factory workers who have lost their manufacturing jobs to foreign workers. Sometimes, the shareholders of the firms who have offshored jobs are also losers.

The winners are consumers who buy imported goods that were previously made in the home country. Sometimes, the home country firms that import the product are also winners.

In a recent post, I had argued that free trade needs to work for everyone. I had concluded:

The U.S. must develop public policies that share the gains from free trade between winners and losers. This is our challenge.

This challenge is brought out clearly by a recent, widely-read article in the New York Times. Key points from the article:

  • As both political parties belatedly recognize the anxiety and deep-seated anger of blue-collar workers nationwide, the more-trade-is-good bipartisan consensus that has long held sway in Washington is being sundered.
  • The rub is that the costs and benefits aren’t distributed equally. Global trade has produced big gains for Americans, like more affordable goods — clothes, computers, even air-conditioners — and led to a more advanced economy.
  • At the same time, a chronic trade deficit and an overvalued dollar have caused factory jobs to dry up, contributing to a deep divide between the political and economic elite and the rest of the nation. Perhaps a clash was inevitable.
  • Nor are tariffs likely to bring many of these jobs back, said David Autor, a professor of economics at M.I.T., who is one of the country’s foremost specialists on the pluses and minuses of free trade. “We don’t have silver bullets,” he said.
  • “When I learned about the impact of trade agreements, the theory was that workers would be ‘released’ into the labor market and hired back at slightly lower salaries,” Mr. Autor said. “That’s not what happened. And no amount of cheaper air-conditioners will make these workers whole.”

In other words, there is virtually no hope that most of those who will lose their jobs when Carrier moves to Mexico. They will not get reasonable jobs without a new public policy intervention that does not reduce trade — the focus must be on helping the losers.

Carrier Corp. blue-collar workers on a production line that is moving to Mexico.

Strangely, the Washington Post’s economics op-ed columnist does not understand this. In his article, he downplays the significance of the job losses.

He quotes Prof. Autor — the same person quoted by the New York Times — as having concluded that the US has lost 985,000 manufacturing jobs from 1999 to 2011 due to imports from China. And then he writes:

But this large number needs context. Over the same period, all U.S. manufacturing jobs dropped 5.8 million; the share caused by China was a bit less than one-fifth. When the economists added China’s impact on non-manufacturing firms, the job decline more than doubled to 2.4 million. Still, that’s less than 2 percent of total payroll employment of 131 million in 2011 and 143 million now.

Still, he does understand the problem:

An open trade policy has served the United States well. It has advanced our strategic goals — supporting Europe’s recovery in the 1950s and 1960s, improving relations with Mexico in the 1990s — while presenting U.S. consumers with more choices and lower prices. The constant problem is that the benefits are widely disbursed while the social costs concentrate on unemployed workers and bankrupt companies.

Yet, there is no recommendation that some public policy changes are needed to help those who lose from the current free trade policies.

So, it remains an even more difficult challenge. First, we have to get more economists and analysts to accept that there is a need for new public policy measures. Then, we have to figure out what are the options to help the losers of the current free trade policies. This is an issue for all countries — not just the U.S.

We already have some public policies to help those who lose out from free trade. We have unemployment insurance for those that lose their jobs, and we have job retraining programs to help workers adjust.

But the real-world experience is that these policies are not enough.

The unemployment insurance is short-term relief, by design. However, when many people are laid off in a limited area, it is tough to find acceptable jobs quickly. There are too many people trying to get jobs that don’t really exist. There is also an indirect effect on other jobs when the consumption of the newly laid-off people comes down. So, unemployment insurance tends to run out without people having got new jobs.

Retraining is a good idea. But, it does not work well for people who have 20 or more years of work experience. Their ability to learn is quite low. And, retraining for what? There are not that many new jobs in the local area for older people with no relevant work experience. So, retraining can work for younger and mobile people. It’s not so easy for older, less mobile people.

The US already has a program, the Trade Adjustment Assistance (TAA) program, to define people who have lost their jobs due to trade.

The TAA Program is a federal entitlement program that assists U.S. workers who have lost or may lose their jobs as a result of foreign trade. This program seeks to provide adversely affected workers with opportunities to obtain the skills, credentials, resources, and support necessary to become reemployed. Since 1975, the TAA program has served more than 2 million U.S. workers.

Let me put forward a radical idea to change how the TAA program operates. It’s aimed at people with 20–25+ years of work experience in a given industry. They should be eligible for severance pay — say, 2 years worth of current wages. That’s a social safety net provided not by the employer, but by society because the benefits of free trade are diffuse; the winners from free trade are those involved in the import chain down to the consumers who benefit from lower prices. The money for the social safety net would thus come from a low import duty or sales tax on the imported goods.

Will this new scheme to spread the benefits of free trade equally work? Right now, it’s just an idea to start the debate.

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