Politically speaking, there was no debate on United States international trade agreements in 2016: All politicians seeking to win a national election, or even to create a party-spanning political coalition, agree that our trade agreements are bad things.
From the left, we had Democratic presidential primary runner-up Bernie Sanders — and a remarkably close runner-up he was — slamming trade. From the — I do not think it’s wrong but it’s not quite correct to call it “right,” at least not as Americans have hitherto understood what “right” is — but from somewhere, we had now-President Donald Trump. Listen to them: The rhetoric is the same.
It goes like this: The jobs America wants to have — the good jobs, the manufacturing jobs — have gone. First came NAFTA, in 1993. Then there was China’s entry into the World Trade Organization, which granted China a normal country's freedom to export to other countries, and obligations to accept imports from other countries. Finally, there was the not-yet-implemented (and, as of this week, officially dead) Trans-Pacific Partnership (TPP).
Such agreements will leave, or have left, "millions of our workers with nothing but poverty and heartache” (Trump), have "lost [us] … manufacturing jobs” (Trump), and created “catastrophe” (Trump). The agreements amount to "the death blow for American manufacturing” (Sanders), they “undermine our independence” (Trump), and they "forced American workers to compete against desperate and low-wage labor around the world” (Sanders), all while causing "massive job losses in the United States and the shutting down of tens of thousands of factories” (Sanders).
And what did we hear from the center establishment? We had popular vote–winning (but Electoral College–losing) Democratic Party presidential nominee Hillary Rodham Clinton. She stated: “I will stop any trade deal that kills jobs or holds down wages, including the Trans-Pacific Partnership. I oppose it now, I’ll oppose it after the election, and I’ll oppose it as president. …”
The rhetoric of all three candidates resonates with the criticism of trade agreements that we heard way back when NAFTA was on the table as a proposal — not, as today, something to blame all our current economic woes on. The independent Ross Perot and Republican insurgent Pat Buchanan claimed NAFTA would produce "a giant sucking sound [of jobs] going south” (Perot), that we’ve “wrecked the country with these kinds of deals” (Perot), that the deal added up to “anti-freedom, 1,200 pages of rules, regulations, laws, fines, commissions — plus side agreements — setting up no fewer than 49 new bureaucracies” (Buchanan).
The political truthiness has been flying thick and fast on this subject for decades now. Politicians are taking claims that have a very tenuous connection to economic reality — claims that feel true — and running with them, sometimes out of ignorance, sometimes because of cynical calculation.
Trump and Sanders were apocalyptic in their discussions of trade, and then Clinton abandoned the truth, too
Clinton was clearly the candidate whose policy claims, as a whole, had the best empirical support, so her surrender to truthy proclamations about trade was especially galling. Her advisers and experts, I am certain, did not believe the TPP would kill jobs or hold down wages, although they may have been aware of some of the technocratic economic complaints about the TPP.
Those complaints, with which I sympathize, were twofold. First, that the TPP would have given US owners of intellectual property too much of a whip hand in their extraction of economic rents from people in poorer countries. It would have made them pay through the nose for research and development that had already been done, and had already been paid for out of profits earned in the US. Second, it set in stone rules for judging whether governments were treating companies fairly. We do want a trading system in which companies exporting and investing have confidence that they will not be specifically discriminated against by governments, but the form such rules should take are very delicate. It’s not wise to set them in stone before we see how they work.
The general agreement among those who analyzed the TPP, however, was that it was on the whole very profitable for the US: Yes, it made poor foreigners pay through the nose for intellectual property. But it was definitely not a job killer for the US, or a wage suppressor. And insofar as those who profited from the TPP then turned around and employed workers in the US, which to a great extent they would have, it would have been a wage and job booster.
But for the purposes of the HRC campaign, a job killer and a wage suppressor it had to be. And so it became.
But the truthiness on the subject of trade agreements was flying even thicker and faster from the others, from Sanders last spring, from Trump — and, again, earlier, from Perot and Buchanan.
Yes, America has been losing manufacturing job share at a furious rate. Yes, the spread between the incomes of the non-college-educated and the college-educated has widened massively. Yes, the spread between the incomes of even the college-educated and our overclass has exploded.
But this is not due to NAFTA. This is not due to bringing China into the WTO rather than keeping it out. This is not due to the not-yet-completed — and now never-to-be-completed — TPP.
Try to calculate the share that those three “bad trade agreements” played in the processes of manufacturing job loss, of widening income inequality, and the coming of the overclass of the Second Gilded Age, and — as long as you calculate honestly — you get a share of responsibility of less than 5 percent, and usually less than 1 percent.
This is what caused a populist backlash?
To defend trade deals is not to say that US economic policy has been without fault
To be clear, I do think American international economic policy has been far, far from perfect. I could rant with the best of them about our failure to be a capital-exporting nation financing the industrialization of the world, a role from which we would ultimately benefit both economically and politically. I can rant about our reluctance to properly incentivize the creation and maintenance of the global treasures that are our communities of engineering practice. It is no accident that spinning machines were made in Lowell, Massachusetts; that automobiles were made in Detroit; minicomputers were made along Route 128, Massachusetts; that programs are written in Silicon Valley; and that hoverboards are made in Shenzhen, China. A community of engineers, technicians, and businesses that have seen the problems and methods of an industry up close and who know how to solve them is an incredibly valuable and difficult-to-create economic resource. We should not “protect” such communities regardless of cost, but we should nurture them.
I also believe that a rich country like the US should be saving more than it invests here at home: It is poor countries that need to invest more than they save. And the US should be taking that extra savings — the part that’s in excess over investment — and lending it out in dollars to poor countries where capital is scarce. Those countries should then be taking those dollars and using them to buy the capital goods from us that they need to equip their workers. They would be buying those machines from firms embedded in our communities of engineering practice, thereby profiting US companies.
The US should be running not a trade deficit but a trade surplus, as do the other two leading industrial powers, Japan and Germany. And to the extent that American workers share in the surplus created by healthy communities of engineering practice — which they always have, to a significant extent — this is good not just for the world economy as a whole but for US workers too.
And in order to run that trade surplus, the US should be facilitating manufacturing production and exports by following not a strong-dollar policy but an appropriate-dollar policy. A strong dollar is not in America’s interest if it means market prices are sending the wrong signals. An overly strong dollar tells engineering-based manufacturing and other industries that they are not useful to society. It signals to businesses that they should disrupt these communities and outsource more of their work. And that does serious damage.
So yes, I acknowledge US economic policy has been far from perfect. It has been far from perfect over the past 40 years in its macroeconomic stance — the Reagan and George W. Bush tax cuts, the belief that less regulation of finance in New York is always good, the belief that the value of the dollar is how we keep score.
But the never-to-be-implemented TPP? NAFTA? And China-WTO? They are not big parts of any picture. They are not a big part of the long-run decline in the manufacturing job share. Indeed, they barely register among the flaws in US international economic policy.
By and large, the jobs that we shed as a result of NAFTA and China-WTO were low-paying jobs that we did not really want. Because of NAFTA and China-WTO, we have been able to buy a lot of good stuff much cheaper — which means we have had more income to spend on other things and to pay people to do other, more useful things than work on low-productivity blue-collar assembly lines. Skeptical? I understand. But leave me space to make my argument, and I will return to this point later.
We have not done our proper job in cushioning the incomes of and providing opportunities to those people and communities that have found themselves behind the eight-ball, in sectors flooded by imports as other countries industrialize (especially China). But NAFTA and China-WTO look, to me, like things that have been broadly good for the American economy.
And they have been even better for America as the world's dominant superpower. A Mexico that is helped by the United States makes life here more comfortable than a deeply impoverished Mexico. China is likely to be co-equal with the US as a superpower by the end of this century; enmeshing it in our economy starting now is the best move in a long-term plan to make that equality one of partnership and alliance rather than competition and cold war.
But I digress. Back to my main thread: Why do I think that what I say is the economic policy truth is in fact the truth? Here is the story as I see it:
Most of the decline in the manufacturing employment share was inevitable
The elephant in the room is the collapse over the past three generations of the manufacturing employment share here in America.
A manufacturing job making things in a factory is no longer, in any sense, a typical job for Americans. A sector of the economy that provided three out of 10 nonfarm jobs at the start of the 1950s and one in four nonfarm jobs at the start of the 1970s now provides fewer than one in 11 nonfarm jobs today. Proportionally, the United States has shed almost two-thirds of relative manufacturing employment since 1971:
I am at heart an economic historian. So stepping back to place our current political-economic debate over trade policy in a two-thirds century perspective is not enough for me. I want to go back 100 times as far: back to the invention of agriculture.
From that super-long-run perspective, the past two-thirds of a century's relative shift of jobs out of what we call manufacturing — a word that in its origins is Latin for "making things with our hands" — is just the latest of a number of shifts that have taken place.
- First, we lost a great many jobs in hunting and gathering, as agriculture and herding animals came in.
- Second, with the domestication of the horse around 2000 BC, we started the process of losing the jobs that involved dragging heavy things around: Horses could pull more and could be largely paid in grass. (A bonus: They found the grass themselves.)
- Third, the arrival of first practical and then theoretical understanding of what was up with nitrogen in the soil and plant growth started the process of losing jobs in agriculture: Each farmer could do more. That process has carried farmers down from three-fourths of the labor force to as small a proportion today as "gardeners, groundskeepers, and growers of ornamental plants,” according to the Bureau of Labor Statistics.
- Fourth, the coming of water-driven and then steam-driven spinning and weaving destroyed millions of home craftwork jobs — and sent the family of future Gilded Age robber baron steelmaster Andrew Carnegie fleeing from a Scotland ridden by death by starvation to the United States.
In each case, advancing technology enabled us to make vital things with less human time and energy; demand for those vital things by those with money to spend did not expand enough to preserve all the jobs.
Now, for the past two-thirds of a century, it has been the turn of blue-collar manufacturing jobs to vanish.
To be the beneficiaries of such a process is a very good thing: Lots more good stuff becomes available at a cheaper price. The $100 billion 1960-purchasing-power dollars we spent on food in 1960, for example, amounted to 20 percent of everything the US made. The $1.5 trillion of 2016-purchasing-power dollars we spend on food today is only 8 percent of everything we make. And more than $300 billion of our annual food budget today is for food processing that is paid for today but that was done unpaid by wives, mothers, sisters, and daughters back in 1960.
To be caught up as a victim of such a process of displacement — to be a farmer who loses his job because the economy is getting more efficient at producing food — is a bad thing. It’s not just that you need to find another job. It’s that you need to find another kind of job. You may well not be prepared or equipped for it. And it changes who you are. And that is if you can find another job
The research suggests, however, that when the economy is doing well — a key point — and the plant you work in shuts down, you do, indeed, take a hit, but it is not necessarily a staggering hit. Your income over the next 20 years turns out to be about 10 percent lower than the income of similarly situated people who are not caught in a mass layoff. You don’t, as a rule, permanently go from a $35-an-hour manufacturing job to a $9-an-hour McDonald’s job.
In short, those whose jobs vanish usually find something else to do that does not involve too much downward mobility, whether in income or status. And the benefits of cheap goods are, usually, not overly concentrated among the already rich. All Americans benefit from inexpensive food, after all, and inexpensive TVs and other goods.
And the process could always be made win-win for everybody. We can, collectively, at least in theory, have everything we had before, plus more. Figuring out how to distribute the fruits of the useful work we do in an equitable manner is a problem of societal organization that ought not to be beyond our abilities to solve.
However, a lot of work must be done here by the word "could" in the previous paragraph, and by the concept of "net” benefits.
Nevertheless, in American politics in 2016, the talk is not about how to better manage a generations-long process of structural economic transformation. In American politics in 2016, the talk is instead truthy talk about the villainy of NAFTA in 1993, the offense of China joining the WTO in 2001, and the theoretical disaster of TPP.
Have trade agreements driven this process of shedding manufacturing jobs in America? And would abrogating NAFTA, withdrawing from the WTO, and not ratifying the TPP be appropriate and sufficient policy responses to the shedding of manufacturing jobs?
The clear and obvious answer is: no.
Germany is widely believed to have a first-rate manufacturing sector, yet it has seen the same pattern as the US
Consider a country that has, everyone agrees, done everything right as far as nurturing its manufacturing sector is concerned: Germany. High national savings lent abroad, which provides foreigners with the deutsch marks (and now euros) to purchase German manufactures? Check. Eschewing a strong-deutsch-mark (now euro) policy to make its goods affordable? Check. Nurturing communities of engineering expertise through heavily subsidized apprenticeship and technical training programs? Check. Germany today is the manufacturing export powerhouse of the world.
Yet here’s the share of German employment in manufacturing since 1971:
Now you can say — correctly and truly — that one-third of that shedding by Germany of its manufacturing job share is a special case: It took place in the first half of the 1990s, when the German East was absorbed and Germany was unified:
That unification era saw an enormous one-time structural change, as the inefficient low-wage, low-productivity jobs of the communist factories of East Germany proved uncompetitive on the world market. Factories shut, shedding workers and releasing them for other, more societally productive uses elsewhere in the economy.
Before the Berlin Wall came down, East Germany’s manufacturing was heavily protected by the tariff barriers thrown up by Russia's counterpart to the European Union free trade zone, COMECON. It was further protected by the barriers thrown up by East Germany's communist centrally planned allocation economy: Even if it were cheaper to buy manufactured goods outside of East Germany, you could do so only if the planners allowed it (and they would not).
When those artificial supports for bad businesses disappeared, did East Germany's workers move on to more productive work? Yes, most of them did. Many moved to West Germany and its more robust economy. Some, however, did not. And enough wound up on the dole that the sociological aftershocks are still being felt today: Even 25 years later, unemployment in the former East Germany is 3 percentage points higher than unemployment in the former West Germany. But consider this too: An East Germany that was only 40 percent as well off as West Germany in 1989 is now 80 percent as well off as West Germany. It is very hard to say that the shedding of inefficient, unproductive, and low-wage manufacturing jobs was a minus for East Germans.
Back to the US: In 1953, lower productivity (compared with today) meant that many more workers were needed to make each car, each refrigerator, each chair. That kept US manufacturing large in terms of employment. Tariff barriers and high transportation and distribution costs, relative to today, meant that there were very few opportunities for American firms to offshore manufacturing in an efficient way. Just as in Germany after 1989, the overwhelming bulk of the shedding of the US manufacturing share of employment since the 1950s is the result of two things:
1. Rising productivity in the face of limited demand: Nobody needs two dining room tables — which now take fewer workers to create — and even though my wife and I find that we "need" two refrigerators, we are weird. This is big.
2. Reductions in transportation costs that allow producers elsewhere that used to be unable to serve the US market to do so. (Reductions in government-imposed tariff and non-tariff barriers play a very soft second fiddle here.) Those foreign producers then use the dollars they earn to buy other US made products produced in other sectors of manufacturing, or in services. This is, compared with the first factor, small.
Over all, the shedding of shop-floor jobs that results from those two trends is a good thing.
But how much of a role in “bad” job shedding did NAFTA and China joining the WTO play? And how to distinguish between “good” and “bad” shedding?
Using Germany as a yardstick
One possible baseline, given how many people hold up Germany as a model for the way it has protected its manufacturing, is to assume that under the best policies, the US would have matched Germany. It would have shed about 50 percent of its manufacturing job share since 1971, rather than the 62 percent that we did shed. That would have given the US today manufacturing employment equal to 12.2 percent rather than 8.6 percent of nonfarm employment. That represents a gap between reality and one theoretical alternative world of 5.4 million manufacturing jobs. Call that the excess shrinkage of US manufacturing.
I am probably an outlier among neoliberal and neoclassical economists in thinking that most of that shedding — US job shedding that exceeded German job shedding — was bad. (Others believe that it was efficient.) Remember: I believe that under proper economic policies, the US should be saving more than it is investing at home and so helping finance the development of the rest of the world, that it should eschew the strong dollar, and should do more to nurture and support its incredibly valuable communities of engineering practice. And pursuing such goals would have kept the manufacturing job share higher than some neoliberals believe ideal. But such policies would not have kept the manufacturing job share at the 24 percent of 1971, or the 30 percent of 1950.
But 12.2 percent seems to me something that could have been attained in a different world — one without the Reagan and W tax cuts, without the consequent Reagan and W Bush budget deficits, one without the overlong strong-dollar policy and the encouragement of excessive financialization of the economy, and one with proper attention to how manufacturing (and engineering, and design) matters. That different world would be a better one.
But how much of that gap between American and German performance was caused by NAFTA?
Examining the NAFTA case more closely
Recall that the 1994 North American Free Trade Agreement:
- Immediately eliminated tariffs on 50 percent of industrial goods imported into Mexico from the US
- Set a 10-year timetable for phasing out most tariffs — and a 15-year timetable for phasing out all tariffs — among Mexico, the US, and Canada. Before NAFTA, Mexican tariffs averaged 10 percent and US tariffs averaged 4 percent.
- Eliminated a slew of Mexican protectionist measures: requirements that the government had to approve certain classes of imports; local content quotas, requirements that Mexican firms meet targets for export performance
- Most importantly, gave Mexico guaranteed tariff- and quota-free access to the largest consumer market in the world, thus eliminating the principal cause of uncertainty that made investors leery of putting their money into the steel and concrete and machines bolted to the floor that are Mexican factories.
Back in 1992, when Republican George H.W. Bush was negotiating NAFTA, Ross Perot claimed that NAFTA would lead to a "giant sucking sound" as businesses moved huge numbers of jobs from the US to Mexico. But did NAFTA drive any rise in the unemployment rate? No. The years after NAFTA's implementation were the best as far as unemployment is concerned of any since the early 1970s.
Did NAFTA drive the fall in the manufacturing employment share? No.
Before NAFTA was signed, we were already five-sevenths of the way from July 1953 to our present state in terms of “losing” manufacturing jobs. We were three-fifths of the way from January 1971 to our present state. Even the best policies favorable to nurturing a country's manufacturing sector would not have prevented this process of the shedding of relatively inefficient manufacturing jobs. The trend preceded NAFTA, and it would have continued with or without NAFTA.
Even the work of anti-NAFTA economists demonstrates this. The most thoughtful and careful think tank that is skeptical of globalization is Larry Mishel's Economic Policy Institute. Its estimates are the most aggressive credible ones of deleterious effects of NAFTA. Writing for EPI, Robert Scott ascribes the shedding of 420,000 manufacturing jobs to the growth of trade with Mexico since the passage of NAFTA. As best as I can figure out from the more detailed numbers he provides, his estimates imply that manufacturing industries in which we are net exporters to Mexico gained about 300,000 jobs, and manufacturing industries in which we are not importers from Mexico lost about 700,000 jobs.
That would imply a net loss of 400,000 jobs. But in Scott's view, roughly 300,000 of the manufacturing jobs displaced by the pattern of growing trade with Mexico are not net reductions in total US jobs. They are, rather, shifts in net jobs from manufacturing to other sectors. In normal times, the Federal Reserve responds to overall employment declines by cutting interest rates to boost employment in other sectors, and thus the job displacement in traded goods is roughly offset by job growth elsewhere in the economy. Scott suggests that the Fed did this job reasonably well at least until 2007, by which point, because of the financial crisis, it had lowered interest rates as far as they could go; after 2007, it could offer no useful stimulus.
In the end, in Scott's view, there remain "116,400 US jobs displaced ... between 2007 and 2010... [which are] net job losses for the entire economy." In other words, in a world without NAFTA there would have been 116,400 more available positions in 2010.
116,400 jobs amounts to less than 0.1 percent of the US labor force.
Particular industries were supposed to have been placed under dire threat by competition from Mexico, most especially autos and auto parts. Both Ross Perot and his sometime-adviser Harley Shaiken, a Berkeley colleague of mine, put the auto industry at the top of their “endangered jobs” lists. Mexico, they said, had high-quality workers earning low wages in auto assembly plants, and the US simply would not be able to compete. But in the three years after NAFTA was implemented, employment in the American automotive industry grew by 14.1 percent, worker hourly earnings grew by 5.6 percent, and Ford, Chrysler, and GM invested $39.1 billion in new manufacturing plants and equipment in the US — and only $3 billion in Mexico.
What seems to have happened is that the North American auto industry reacted to NAFTA by rationalizing itself — moving those parts of it that could be effectively performed by relatively low-skill workers to Mexico, and thus gaining a cost advantage vis-à-vis European and Japanese producers. As the trade economist Sherman Robinson and his co-authors wrote, there was:
a dramatic increase in [North American] intra-industry trade in autos and parts.... [Economic] efficiency gains from finer specialization... [that] do not appear to be “Ricardian,” in that they are not primarily based on... [exploiting low wages] but “Smithian” in the sense that NAFTA widened the extent of the market and permitted increasing returns to finer specialization. Most fears about the ill effects of NAFTA on the U.S. auto industry, whether in term of employment, wages, or investment, have been proven wrong...
And do note that trade with Mexico would have grown and grown in a similar pattern without NAFTA — merely to a slightly lesser extent. I believe Scott is aware of this overarching trend: His report is subtitled “US-Mexico Trade and Job Displacement after NAFTA,” rather than something like "Trade and Job Displacement because of NAFTA.”
Thus the high-end credible estimate is that NAFTA produced a shedding of 200,000 manufacturing jobs. That represents:
- 0.14 percentage-points of nonfarm employment
- 1/25 of the excess shedding of the manufacturing job share
- 1/112 of the total shedding of the manufacturing job share since 1971
In the context of all the forces and disruptions affecting the US economy and the US distribution of income and wealth over the past half-century, NAFTA was and is simply not a very big deal.
And there are important benefits from NAFTA. The higher real incomes we get from having Mexico as a more prosperous trading partner — because our dollars buy more goods, since those goods are cheaper — make up one set of benefits. Other sets of benefits are at least as important. The biggest of them is that we need to do what we can to make a peaceful world. It is part of the US’s job as a superpower to extend a helping hand so that Mexico can become richer faster. A world in which schoolchildren in the future are taught — truly — that America did all it could to close off economic opportunities to others and keep them poor and barefoot is unlikely to be a safe world for Americans. And it makes us into a worse America as well.
But what about China?
In the decade from 1991 to 2001, the year China joined the WTO, the Chinese economy sat up: US imports from China increased from $20 billion at 2007 prices — 0.6 percent of the market in the US for manufactured goods — to $120 billion, 2.3 percent of the market. And then in the half-decade from 2001 to 2007, the Chinese economy stood up: US imports of Chinese goods surged from $120 to $320 billion at 2007 prices — from 2.4 percent to 5.8 percent of the US manufactured goods market. This is, potentially, a bigger deal than NAFTA occurring in a shorter time: three times as large an increase in manufactured goods imports as in Mexico in less than half the time. This is the "China shock."
The MIT economist Daron Acemoglu and his colleagues attribute the loss of 560,000 American jobs to the China shock.
Once again, the pre-2008 shedding of manufacturing jobs is overwhelmingly a job shift rather than a job loss. The people who lose jobs in import-competing manufacturing and leave the sector for the most part found jobs elsewhere — in services, in construction, and so forth. The Federal Reserve was trying to, and largely succeeding at, nailing the unemployment rate to 5 percent, its estimate of what the American economy could sustain without causing undue inflation.
It was not until 2008 the Federal Reserve was tapped out, in the sense that it was unable or unwilling to adopt policies that it expected to return the economy to full employment within a couple of years. So as far as net job losses are concerned — as opposed to the redistribution of jobs — we are talking about what has happened since 2008.
Once again, remember that manufactured goods imports from China would have surged substantially even had China not joined the WTO — the development that Donald Trump claims "enabled the greatest jobs theft in history." Even a China that had not joined the WTO would have industrialized, and exported. Therefore, I think it is not unreasonable to take the true numbers to be half those of Acemoglu et al. Halving his figures, we find that because China joined the WTO, the US has 200,000 more jobs in manufacturing industries that export to China, and 500,000 fewer manufacturing jobs in industries where China exports to the US. The net loss is 300,000.
That represents 0.22 percentage points of nonfarm employment. That is one-sixteenth of the excess shedding —beyond what Germany experienced over the same period — of the manufacturing job share. That is one-eightieth of the total shedding of the manufacturing job share since 1971.
Once again, not a big deal.
The Trans-Pacific Partnership: RIP, TPP
The Trans-Pacific Partnership, it is now clear, will never happen. None of the geopolitical gains for which it was negotiated will come to pass. Nor will any job losses.
Had TPP gone into effect, it would not have done nearly as much as NAFTA or China's accession to the WTO did to reduce the costs and frictions that other countries face when they ship their manufactured goods to the United States.
What TPP would have done was:
- Reassure countries in Asia that the US was interested in giving them options other than becoming part of China's economic sphere — and, eventually, security sphere
- Give US owners of intellectual property — cough, pharma, cough, Hollywood — more legal tools to extract high rents from consumers and punish intellectual property piracy (or, if you think, as I do, that patent and copyright terms are already too long, "piracy") on the other side of the Pacific.
- Set in stone rules about what rights companies had when governments took steps that they saw as unfairly penalizing them — rules that were almost surely not the best, and that we would want to modify in a decade or so when we had more experience
- Do a little bit — less than NAFTA — to reduce existing trade barriers
I was a weak TPP opponent: 1 and 4 seemed to me to be good things, 3 seemed to be a bad thing, and 2 was a good thing for US intellectual property owners but a bad thing from my perspective as a rootless global cosmopolite.
Adding up the effects of the much-maligned trade agreements
The relative decline in employment in manufacturing since World War II is the biggest structural change, or evolution, to hit the American economy over the past half-century. Politicians, with their preference for truthiness over the facts, attribute roughly all the 22 percentage point decline since 1971 in the manufacturing employment share to NAFTA, to China's entry into the WTO, and to a few other scattered "corporately backed unfettered free trade agreements.” But — I really would like to drive this home — the worrisome part from trade is not the decline in the manufacturing job share from 30 percent to 12.2 percent, but the "excess" decline from 12.2 percent to 8.6 percent. That worrisome part of the decline of the manufacturing job share is, roughly, only one-sixth of the total decline: 3.6 percentage points. And the amount of decline attributable to the two big bad trade agreements is only one-tenth of that: 0.36 percentage points.
In sum, we can attribute a mere one-tenth of the excess reduction relative to Germany in the manufacturing job share to NAFTA and to China joining the WTO.
When does it hurt most to be pushed out of manufacturing?
Simply to no longer be working in manufacturing, or to not get your first job in manufacturing, or to not have the career in manufacturing you expected, is not by itself a bad thing. For many, the disappearance of blue-collar jobs is lived as being pulled out into a better alternative job rather than being pushed out into a worse one. Moreover, even if you keep your blue-collar manufacturing jobs, under what conditions do you keep them? Wage concessions under pressure from foreign competition have been a fact of blue-collar factory life in America since the coming of the Reagan tax cuts for the rich — since the era of budget deficits and the elevated dollar.
In figuring out the economic effects on human beings of job shedding, economists Steven Davis and Till von Wächter, of Stanford and UCLA, are the go-to guys. They looked at firings as opposed to quits (since one reason you might quit is that your outside options are good), and mass layoffs rather than individual firings (for in mass layoffs there is surely no possibility that every worker affected is unusually unproductive). They find that if you lose your job in a mass layoff when the unemployment rate is less than 6 percent, your income over the next 20 years will be one-seventh lower than if you’d avoided getting caught up in the mass layoff. That's three years' worth of expected wages that you will lose over that period.
In short, for the typical American, getting caught in economic destruction — creative or not — is a big and bad deal, if not a life-destroying one. It is right and normal that people should be upset at getting caught up on the downside of the industrial evolution and structural transformation of the economy. And Americans have every right to demand that the government do something about it — not to freeze the relative distribution of jobs across sectors and industries at what it was in 1953 or 1971, but to make sure that those who lose out as a result of economic evolution and structural change are compensated reasonably.
What form might this compensation take? It is the big missing ingredient in helping to “sell” and keep selling trade deals. But even thinking about this is hobbled by the fact that the response to such offers of compensation is often: We don't want “burial insurance.” People often don’t want compensation; they want things restored to the way they used to be.
But it’s important to note just how crucial the overall macroeconomic context can be when it comes to job losses. What if you are fired in a mass layoff when the unemployment rate is more than 8 percent? Then your income over the next 20 years will fall by more than twice as much as it would have in a low-unemployment economy. Such workers will lose fully six years' worth of expected wages over that period. When unemployment is high, finding another job quickly is very difficult, and long periods in which you have not been working are taken — sometimes rightly, often wrongly — by employers as a sign that you are not a worker they want around.
Thus, keeping the unemployment rate reliably below 6 percent and avoiding at all costs episodes in which the unemployment rate spikes above 8 percent would be a very effective trade adjustment policy. It’s one reason few people complained about NAFTA as its implementation took hold in the high-employment late 1990s.
Unfortunately for those caught up in the general process of the shrinkage of manufacturing, most of the job losses took place in high-unemployment recession years. Shifting 22 percent of America's nonfarm labor force out of manufacturing, as has occurred since 1971, is not chopped liver: It has had major effects on American distribution and growth.
For 22 percent of the labor force to lose an average of, say, five years' worth of income each is a huge deal. Saying that on net the process is a gain does not absolve anyone of being unprepared to figure out what are the appropriate policies to deal with it.
But 98 percent of that shift would have occurred without the much-reviled trade agreements.
The effects of NAFTA and China-WTO were softened by a tight US economy
And fortunately, the principal effects of NAFTA and China-WTO on American manufacturing took place in the boom years of the late 1990s and the not-totally-awful years of the mid-2000s. The 0.36 percent of the American labor force that was pushed out of manufacturing by NAFTA and China-WTO thus lost future income equal to perhaps four years' earnings. That’s the rough equivalent of 1.5 percent of one year’s national income. And those losses are, in simple arithmetic at least, almost surely offset by bigger gains to those who get to buy greater quantities of good imported stuff cheap.
Measure this by the yardstick of the economic costs of what we used to think of as a "normal" business cycle recession, which would steal 12 percent of one year's American national income — eight times as much — from us. (And those costs have no upside, unlike trade deals.) Or measure it by the yardstick of the crisis produced by the crash of 2008 and what I am now calling the Longer Depression, which looks likely to rob the world of total wealth equal to 500 percent of one year's American national income, if not more. That’s hundreds of times more costly than the trade deals..
It is disturbing that the distributional consequences of the large decline in the manufacturing employment share are being hung on two trade agreements. And, as I have shown, that is utterly unjustified.
As I hope I’ve made clear, I do not want to be read as saying that American trade policy has been perfect, or even particularly good.
I could write an entire piece on what has been wrong with America's international economic policy. But NAFTA and China-WTO ain’t it. They are good trade deals. What has gone wrong has been our failure to assume our global responsibilities to be a capital-exporting nation that helps finance the industrialization of the rest of the world, our willingness to be a bolthole where foreign kleptocrats and others can store their money, our reluctance to properly incentivize the creation and maintenance of our communities of engineering practice, our willingness to use resources provided from abroad to finance consumption by our elite rather than investment in America, and our desire to charge poor people through the nose for access to what we deem "our" intellectual property. (TPP has, or would have had, a role in the last.)
But how one should organize the global economy to properly nurture and develop communities of engineering practice and to move toward an efficient distribution of the work and a less unfair distribution of the wealth of the world economy — that is an argument for a different article.
So let me break the fourth wall, and say that even though my work here as an economist is done, I find it vitally important that I ask all of you to try to answer a few political and psychological questions:
- Why have so many politicians focused on NAFTA, China joining the WTO, and the TPP in debates over economic policy?
- Why did left and right combine so vociferously in opposition to NAFTA in 1992 and 1993?
- Why is opposition to the TPP so much a litmus test for being a true American — rather than some form of oppressive elite rootless cosmopolite — for both the left and the right today?
I suspect this is a case of the populist impulse gone badly wrong.
As a rule, it is remarkably hard in America to build any kind of governing or intellectually hegemonic coalition by treating other Americans as enemies. (As I write, Donald Trump and his Republican Party are probing the limits of this rule and whether the rule still holds.) This is a good thing about America. Most Americans, most of the time, regard almost all of the people who live here as their fellows, as co-participants in our common enterprise, our great contract between the dead, the living, and the unborn. We are, in the words of my remote ancestor John Winthrop aboard the Arbella in 1630, engaged in the utopian project of building a City Upon a Hill. And anyone who wants to come and join us and work for it is one of us.
Most of the time.
But — and this is a very important “but” — even here in America, you can, as you definitely can elsewhere, mobilize a great deal of populist energy by identifying foreigners as the enemy. I do not think this is an impulse that it is healthy for any part of this country. I do not think this is something any political movement that seeks to do anything other than destroy can dare to encourage. And I now find myself far beyond my competence. So I want to hear from historians, sociologists, political scientists, and cultural studies practitioners about why we have come to obsess about NAFTA, about not blocking China from joining the WTO, and about TPP.
The economic case against the two agreements that passed, and the one that did not, doesn’t hold water. It’s clear, however, that candidates can make an effective political case against trade agreements — and that scares me.
Brad DeLong is a professor of economics and chief economist of the Blum Center for Developing Economies at the University of California, Berkeley; a research associate at the National Bureau of Economic Research; and from 1993 to 1995 was a deputy assistant secretary of the US Treasury. He blogs at his own site and for the Washington Center for Equitable Growth. Find him on Twitter @delong and @de1ong.
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