What are the Foundations of a Strong and Resilient Economy?
Is international trade a good thing? For those who have been benefited from globalization, the answer is YES without hesitation. But when it comes to question “what is trade, and what does it do?”, it requires a moment of thinking before answering that question. Indeed, the answer is complicated because we know the influence of global trade is far from binary effects. With these questions in mind, Fred P. Hochberg wrote the book Trade Is Not a Four-Letter Word as an enjoyable reading for the public to have a fundamental understanding of trade. He elaborates on the concept by explaining six daily products: taco salad, automobiles, the $10 banana, iPhone, college education, and Game of Thrones. With the acknowledgment of adverse consequences, Hochberg’s book is a defense of international trade. His arguments are compelling and constructive enough to give us a fundamental understanding of why free trade is the foundation of a strong economy. However, when it comes to the broader picture of building a resilient economy, Hochberg’s statements are oversimplified as he only mentions the significance of social welfare system to offset the harm led by trade. While I agree with his arguments, I believe Hochberg neglects the role of leadership plays in policy making. The foundation of a strong and resilient economy requires free trade and a functional social safety net and political stabilization, and the ability to respond to any disruption quickly.
Let’s start with the benefits of international trade. Hochberg starts the book by introducing the history of trade between the U.S. and its neighbors. In 1992, America, Canada and Mexico signed on North American Free Trade Agreement, known as NAFTA. It created a huge free-trade zone by reducing tariffs on imports and exports between the three countries. Since 1992, Mexico and Canada have become Americans’ second and third largest suppliers of imported goods. As of 2019, one-fourth of all U.S. imports, such as livestock, processed foods, fresh produce, and vehicles, are from Mexico and Canada. Free trade, as Hochberg states in his book, guarantees Americans’ daily needs. It ensures the variety of goods and continuous supply of food. Otherwise, if you are not a resident of California, you are unlikely to find tomatoes in your grocery store in winter because Florida, the second-largest tomatoes producer state, does not grow them during winter. If you are lucky enough to find these seasonal fruits and vegetables, you probably cannot afford them because of the price. Short supply and high demand lead to a higher price. Therefore, thanks to the hard-working farmers in Mexico, Americans can have tomatoes at their dining tables every day at a very low price. Hochberg’s statement on how global trade benefits the U.S. is correct. According to research conducted by Business Insider, everyday products, such as sneakers and jeans, are much more expensive if they were made in USA than made in China or Southeast Asia. For example, on New Balance website, the price range of the American-made sneakers starts at $165 and gets as high as $399. On the contrary, the price of foreign-made pairs is as low as $65. Thus, we should have an understanding of how international trade benefits communities.
Yet, then why would people be opposed to it? As Hochberg states in the book, and as most Americans think, the reason is massive job loss. From 1994 to 2016, approximately 350,000 jobs are lost. And NAFTA and other trade agreements hit the manufacturing industry hardest. Hochberg claims NAFTA only accelerates job displacement instead of being the primary cause to defend free trade. American manufacturing share of nonfarm employment started to decline forty years before the existence of NAFTA because of emerging technology advancements. Unless NAFTA has the power of time travel. Otherwise, no one should blame it for causing tremendous job loss. I agree with Hochberg’s argument as it is also proved by other economists. An econometric model conducted by Felbermayr, an Austrian economist who specializes in international trade, suggests that higher trade liberalization is associated with a lower structural rate of unemployment in the long run. This is because temporary unemployment is a long-term process of job turnover as workers are reallocated from shrinking to expanding sectors (Felbermayr et al.). Hence, free trade introduces a trade-off between new jobs in the rising industries and lost jobs in the manufacturing industry. The U.S. economy shifted from a labor-abundant model to a capital-abundant model in the last decades. No one would doubt the contribution of the rise of the dotcoms and internet-powered financial services in the 1990s to economic prosperity. These emerging and promising sectors created many new jobs for skilled American workers. As a result, the overall jobs, wages, and manufacturing output all increased substantially since the 1990s.
Although the gain is sweet, the pain is real too. Overall, while proving free trade only accelerated unemployment rather than causing it, Hochberg does not deny the existence of individual tragedies in American families. Since trade is double-edged, Hochberg reinforces his argument about strong and resilient economy. He believes that a robust social safety net is critical to offset these negative impacts. For example, the government should offer sufficient and effective job training programs for the unemployed.
While I agree with Hochberg’s argument on the importance of trade and the social welfare system, I don’t think his model is strong enough to build a resilient economy. Free trade and social safety net are often compromised by other factors, such as political disruption. For instance, Republicans favor weaker social welfare in America, whereas the Democrats often propose a stronger and more liberal system. Soon after Trump stepped in the White House, he implemented a series of budget cut on basic assistance programs. Despite he emphasized the significance of vocational training programs on March 17, 2017, Trump’s budget cut finding for these programs by 40% in the first year. although some may argue that Americans’ job training programs are not always successful, cutting its funding would devastate the situation even further. Other basic assistance programs faced similar problems as well. The Trump Administration proposed to a budget cut for the Department of housing and Urban Development by 18%. The new budget plan would deprive rental assistance low-income households. Those who are unemployed take a large proportion of people who seek for housing relief. A massive budget cut on such social welfare programs is destructive to their life.
The change of leadership also impacts the resilience of economy. For example, when the former president Mr. Trump took his turn in the White House, he initiated a trade war with the world involving multiple battles with China as well as American allies. In opposition to free trade, the Trump administration advocated for greater trade protectionism by raising tariffs. Soon after he entered the White House, Trump imposed tariffs on $8.5 billion in imports of solar panels and $1.8 billion of washing machines., relatively an increase of 30% to 50% (Bown et al.). In March 2018, he imposed another series of tariffs on steel and aluminum from mostly allies under the U.S. national security grounds. The escalation of tariffs eventually led to a trade war with most countries. China imposed tariffs on American sorghum as a retaliation. Later, China, South Korea, and the EU all filed WTO disputes against the U.S. for violating trade rules. As expected, Trump’s reform on trade failed to achieve the goals he made. In fact, American consumers paid most of the cost tariffs on imported goods. While tariffs might benefit workers in some sectors, the benefit did not outweigh the hurt. Increased tariffs hurt workers in industries that rely heavily on import inputs and those in exporting industries due to retaliation by trading partners. According to Sandra Polaski, a senior research scholar at Boston University’s Global Development Policy Center, the total job loss ranges from 175,000 in one credible study to 300,000 in another credible study. Not surprisingly, trade protectionism did not fulfill Trump’s promise to “make America great again”. In the opposite of Trump’s “American First” approach, the new administration wants a policy to ensure trade is more equitably distributed. And for now, the Biden Administration has restarted tariff exclusions. Although we do not know the results yet, Biden’s policies favor more free trade than protectionism. This raises a new question; how would the economy and American people respond to the change? What benefits and drawbacks would they get? And what if the policies change every four or eight years? Can the economy quickly adjust to the new change?
Therefore, maintaining a good leadership is critical to economic growth. For example, between 1960 and 2000, real income per capita grew at only 0.43% per year in Nigeria. The situation improved dramatically in the next five years when real per capita GDP grew at an average annual rate of 4.2%. As Milton A. Iyoha, an economics professor at University of Benin in Nigeria, states that economic prosperity results from stronger leadership. The reforms on oil revenue management, debt management, and monetary policy improved overall macroeconomic policymaking. Other structural reforms on governance and public sectors contributed to the growth as well. In short, good leadership is essential for a strong economy.
In addition, it is never easy to build an economy strong and resilient enough to confront any disruption, even with an advanced social safety net. We can only learn from history to prevent or respond to a similar event. After the tragic 2008 financial crisis, the U.S. government implemented several major legislatives as responses. Dodd-Frank Act was signed in July 2010 and brought a sweeping reform in the Wall Street. It forced many government regulations on financial trading markets as well as built new laws of protection for consumers. However, for those unprecedented disruptions, there is no conclusion we can draw. None of the economists nor the general public expected our world would change entirely after February 2020. No one expected the world population would be stuck at home for months and have to wear masks for the next few years. The COVID-19 has impacted the global economy disparately. The only benefit COVID-19 has brought would be the decline of gasoline prices. According to IMF, the global GDP growth is negative 4.9 percent. In April 2020, the U.S. unemployment rate reached 14.8% — the highest number observed since data collection began in 1948. And employment declined to 86% of its pre-recession level. People moved out from expensive cities such as New York and Los Angeles to rural areas. America spent $5.2 trillion fiscal responses to the pandemic, so did other countries. We learned from the financial crisis, but our economy has never experienced a pandemic. The global economy is disrupted. Even though we draw a conclusion from this global disaster, who knows what could come next? Therefore, in addition to a functional social safety net, governments must have the ability to respond to any kind of disruption quickly.
Overall, Hochberg’s thoughts on trade openness are correct and unbiased. Beyond all doubt, free trade benefits people on a micro-level by guaranteeing variety, quantity, price, and quality of daily goods. On a macro level, it eliminates trade barriers and contributes to economic prosperity. But, as Hochberg says in the book, the effectiveness of global trade depends on what you measure. The short-term downside of trade is inevitable, but a strong social welfare system is not enough to offset the negative impacts. As trade and social safety net are often compromised by politics and unexpected events, though Hochberg’s suggestion and vision are promising, we are still far from a solid and resilient economy.
References
Bown , C. P., & Kolb, M. (2021, October 18). Trump’s Trade War Timeline: An up-to-date guide. PIIE. Retrieved November 10, 2021, from https://www.piie.com/blogs/trade- investment-policy-watch/trump-trade-war-china-date-guide.
Felbermayr, G., Prat, J., & Schmerer, H.-J. (2011). Trade and unemployment: What do the data say? European Economic Review, 55(6), 741–758. https://doi.org/10.1016/j.euroecorev.2011.02.003
Hochberg, F. P. (2021). Trade is not a four-Letter word: How six everyday products make the case for Trade. Avid Reader Press.
Iyoha, M. A. (n.d.). Leadership, policy making, and economic growth in African … Retrieved November 10, 2021, from https://documents.worldbank.org/curated/en/257751468288951249/pdf/577170NWP0Box 353766B01PUBLIC10gcwp017web.pdf.
Polaski, S., & Dollar, D. (2021, March 29). How have Trump’s trade wars affected Rust Belt Jobs? Brookings. Retrieved November 10, 2021, from https://www.brookings.edu/podcast- episode/how-have-trumps-trade-wars-affected-rust-belt-jobs/.
Thompson, F. J. (2020, October 9). Six ways trump has sabotaged the Affordable Care Act. Brookings. Retrieved November 10, 2021, from https://www.brookings.edu/blog/fixgov/2020/10/09/six-ways-trump-has-sabotaged-the- affordable-care-act/.
Varinsky, D. (2016, November 27). Here’s what 5 of your favorite products would cost if they were made in the US. Business Insider. Retrieved November 10, 2021, from https://www.businessinsider.com/how-much-products-would-cost-if-made-in-us-2016- 11#sneakers-4.
