Phil Levy: Four reasons why demonizing trade is costing American workers their jobs

Philip I. Levy's work in AEI's Program in International Economics ranges from free trade agreements and trade with China to antidumping policy. Prior to joining AEI, he worked on international economics issues as a member of the secretary of state's Policy Planning Staff. Mr. Levy also served as an economist for trade on the President's Council of Economic Advisers and taught economics at Yale University. He writes for AEI's International Economic Outlook series. 

In a companion piece, I argued that it was strongly in the U.S. national interest to pursue a policy of open trade and to take the lead in bolstering the global trading system. But enthusiasm for such prescriptions is often tempered by concern about what open trade has done to American labor. Prominent voices have claimed that trade agreements have cost American jobs and exacerbated wage inequality. These claims cause particular alarm in a time of high unemployment and have taken a toll on public support for trade.

In fact, there is little evidence to support the claim that trade is responsible for job woes. The public has been misled. The misplaced blame is particularly dangerous because it offers voters false hope. If only we block trade from China, or repeal NAFTA, or avoid an FTA with Colombia, the critical voices seem to suggest, we can return to the halcyon days of a labor market in which workers with limited educations enjoyed lifetime employment, good pay, and generous pensions. Not true.

Today, four arguments about what really ails the American labor market and the role trade plays.

1. Trade deficits are not driving job loss and trade is not the main driving force behind wage inequality. The trade deficit ballooned at a time when the economy was booming. That’s not a coincidence. When people feel flush, they consume more. Some of that new consumption is domestically made, but some comes in as imports. When the United States plunged into the most recent recession, unemployment soared and consumers recoiled in horror, the trade deficit plunged, too. That would seem to belie facile arguments that equate every billion dollars of trade deficit with thousands of jobs lost. The question of rising American inequality and job tumult is more subtle, and the voter can easily be forgiven for confusion. Even in healthier economic times, there is enormous turnover in the American labor market and concern that conditions have worsened for workers at the lower end of the pay scale. There are three prime candidates for roiling the job market: technological change, domestic competition, and international competition (trade). The only one that can be blocked by policy is the last, but most of the evidence points toward the first. Technological change is what leaves domestic manufacturers looking for skilled machine operators with math training while laid-off factory workers with less education search in vain for jobs.
2. Misreading the causes of labor’s discontent can lead to policies that are counterproductive. Consider two popular targets of anti-trade fervor: service outsourcing and American investment abroad. It is tempting to think foreign call centers are stealing jobs from Americans and that U.S. multinationals are opting for foreign labor instead of U.S. labor. Yet studies of outsourcing have shown that it creates American jobs, on net, by lowering business costs. On foreign investment, Dartmouth’s Matt Slaughter concludes: “Academic research…has consistently found that expansion abroad by U.S. multinationals tends to support jobs based in the U.S. More investment and employment abroad is strongly associated with more investment and employment in American parent companies.”
3. The American job market of the future looks to be a dynamic one, in which workers hold multiple jobs over the course of their careers. The misguided focus on trade as a culprit has distracted from the need to create institutions that address this unsettling dynamism, such as savings schemes, effective worker retraining programs, safety nets that work, and health insurance that is not dependant on a prolonged stint with a single employer. Instead, we have excessively narrow programs to provide trade adjustment assistance, as though only trade-driven job loss required a response.
4. In the long run, the well-being of American workers will depend on their education and productivity. The President, in this week’s State of the Union address, described the recent economic progress of India and China and said “We need to out-innovate, out-educate, and out-build the rest of the world.” Yet this language of competitiveness misleads. It suggests that if only these new competitors had remained quiescent, we could rest on our laurels. In fact, American prosperity would depend on American productivity in any case. We certainly should improve our educational system and business climate, but we should do it for the right reasons.

It is worth sorting this out, not only because doing so will build support for an essential program of trade leadership, but also because a clear articulation of these points will demonstrate that Republicans have a positive vision for how to prepare the country for the economic challenges of the 21^st century.

These issues need not be partisan. If Democrats and Republicans can work together to effect these changes, so much the better. We have yet to see leadership, however, that makes this case. Republicans have the opportunity to move beyond stale and defensive rhetoric on trade and push a broader, more thoughtful program for American prosperity.