There are many ways in which DC talks past the rest of the nation, and one of them is on the impact of global trade on the economic lives of our citizens. If you go around the country and talk to people about the economic struggles they face, many will identify global competition as a key explanatory factor. A prominent national politician once told me that when he’s on the stump, the word he hears most from people about what’s hurting their livelihoods is “China.”
But among economists and policy makers, it’s pretty widely held that those people just have it wrong. They don’t understand a) the large extent to which they benefit from trade, and b) the tiny extent to which they’re hurt by it. The conventional wisdom thus goes something like this:
Why are so many people and their political representatives so down on global trade? Because the benefits are diffuse and the costs are concentrated. Everyone benefits from a larger supply of less expensive goods, which they pretty much take for granted: you don’t hear WalMart shoppers complaining about “the China price.” But when the factory closes and moves abroad, even if it just displaces a few workers, the whole community sees it, feels it, and remembers it.
I was reminded of this take upon reading this WaPo piece the other day, which mapped (literally—there’s a really interesting map in the piece) this CW onto the current politics of the trade debate, noting how the Obama administration’s trade agenda is being derailed by this dynamic.
On the whole, trade is likely to benefit the country, said Hanson…a professor of economics at the University of California, San Diego. “There are a whole bunch of middle income folks who aren’t exposed. They are in parts of the country that benefit from trade liberalization,” he said. “They’ll get cheaper physical goods and there’s the increase in economic activity in their regions. If you own a coffee shop in Seattle, you’re delighted to see expanded trade in Asia.”
Hanson makes the point that there are so few Americans working in manufacturing today that the number of Americans affected by the trade deals would not be so substantial. “I think today, given the size of the manufacturing sector, for the median person I would expect that you’d see mildly positive net benefits,” he said. “That answer might have been different 30 years ago when manufacturing was a bigger part of the U.S. labor force.”
So, there’s an answer for why Obama supports the trade deals: They’re going to help Americans overall. And the traditional manufacturing jobs that will suffer — there aren’t that many of them around anymore anyway.
The problem with all this is that it’s almost surely wrong. There are at least two deep flaws in the logic.
First, as economist Josh Bivens points out in an important paper on the impact of trade of broad swaths of the workforce, workers displaced by global competition don’t disappear. They move from jobs in the tradable to the non-tradable sector:
…the wage effects of global integration reach beyond those workers exposed directly to foreign competition. As imports displace non-college-educated workers from tradable sectors (such as manufacturing), these laid-off workers need to accept lower wages to obtain work in other sectors (such as landscaping or construction). Further, the competition provided by these workers helps to lower the wages of similar workers already employed in these sectors. In short, while it is impossible to replace a waitress (a job in the non-tradable restaurant sector) with imports, her wages are harmed by having to compete with apparel workers who have lost jobs due to increased trade flows.
Second, as Bivens and others point out, the wage levels of the countries with whom we trade is a key determinant of the impact of trade on American workers. He emphasizes the impact of our increasing share of trade with low-wage countries, as that shift has had far reaching wage effects here. For example, he reports that “…growing trade with less-developed countries lowered wages in 2011 by 5.5 percent—or by roughly $1,800—for a full-time, full-year worker earning the average wage for workers without a four-year college degree. One-third of this total effect is due to growing trade with just China.”
Let’s be very clear about this: Bivens is not talking about only those specific workers who’ve lost their jobs due to trade. He’s talking about the two-thirds of the workforce that lacks a college degree.
Third, there’s another trade factor that reverberates well beyond those directly hit by trade competition: the persistent trade deficits that for decades now have played a large, demand-zapping role in our job market, as Dean Baker and I stress here. Our analysis finds that we’ve been alternating between investment bubbles and deficit spending to offset the loss of incomes and jobs drained out of the economy by trade deficits that have been a fixture of our national accounts since the mid-1970s (a new paper by Rob Scott gets into the job impact of these imbalances). And this too has of course hurt working people from all walks of life, including those employed in the non-tradable sector.
None of this is to negate point “a” way up above: of course trade also makes all of us better off as consumers and that’s a huge boon. It also, by the way, gives workers in emerging economies essential opportunities to improve their living standards. But far too often, elite analysis of trade thinks of people exclusively as consumers getting a better deal on price when many are also workers getting a worse deal on wages. And that latter part is a lot more common than the conventional wisdom suggests.