Free-trade advocates need to get real

September 17, 2009

President Barack Obama’s decision to impose safeguard tariffs on imported tyres from China has drawn predictable howls of outrage from economists, think tank staff and editorial writers — none of whom has seen their job exported to China. It would be more constructive if they devoted the same effort to devising ways to compensate losers from globalisation in order to shore up waning public support for trade liberalisation.
Between 2000 and 2008, almost 4 million jobs were lost in U.S. manufacturing (22 percent of the total), many as the result of offshoring and increasing competition from lower-cost manufacturers in China and elsewhere in Asia.

Over the same period, the federal government provided just $1 billion per year in extended unemployment benefits and retraining under the Trade Adjustment Assistance (TAA) programme. In the fiscal year ending September 2008, TAA helped fewer than 100,000 workers who had lost jobs as a result of changing trade patterns.

No one questions the strong theoretical argument in favour of free trade over protectionism.

The problem is the highly uneven incidence of costs and benefits from the policy. Benefits tend to be distributed fairly widely among consumers in the form of cheaper prices. Costs are concentrated among those workers and households that lose income and jobs as the result of competition from lower-cost and more efficient producers abroad.

In theory, beneficiaries could compensate the losers, and everyone would still end up better off (free trade is “Pareto optimal” in the literature) through a system of taxes and transfers. In practice such compensation almost never happens. Politicians and proponents of trade liberalisation pay lip-service to the need to soften the impact on affected industries and households, but practical help has been limited.

All too often, once workers in affected industries are laid off, they cease to be treated as “victims” of trade liberalisation entitled to compensation. Instead they join the faceless ranks of the unemployed expected to find new employment as quickly as possible to minimise the burden on other taxpayers. Worse, when the federal government needs to find spending cuts to balance the budget, TAA funding has often been frozen or cut back.

There is something particularly callous in the way that many free-traders have turned their backs on workers affected by trade liberalisation — as if they were victims of impersonal historical forces rather than deliberate policy choices.

TRADE BECOMES TOXIC
Many of the worst affected industries are clustered in the old industrial centres of the upper Midwest and the Mid-Atlantic, so the costs of liberalisation have fallen disproportionately by particular states and communities, raising the issue’s salience, especially within the Democratic Party.

While free-traders extol the textbook benefits of liberalisation, practical political support among voters and their elected representatives has shrivelled.

In 1994, with Democrats controlling the House of Representatives (256-177) President Bill Clinton had to rely on Republican votes (121) to secure passage of the legislation implementing the Uruguay Round as a third of House Democrats rebelled and voted “no” (89). Scepticism about the costs of free trade has only grown in the intervening years within both major parties, and become intense over the last twelve months as job losses have been accelerated by the recession.

In the current climate, there is no majority in the Democratic Party to conclude the Doha Round of trade negotiations or other liberalisation, and President Obama cannot count on enough support from House Republicans to push implementing legislation through.

COMPENSATING LOSERS
Instead of delivering high-minded lectures about the perils of protectionism from the comfort of their ivory towers and think tanks, free-trade advocates need to wake up and start addressing the erosion in popular support. If support for trade liberalisation is to be maintained, more needs to be done to compensate the losers.

Extending unemployment benefits and improving retraining would be a start. Congress has extended eligibility and improved the terms of TAA benefits this year in response to the downturn. But even when displaced workers find new jobs, many suffer a long-term reduction in income as new jobs pay less than old ones. More needs to be done to find a way to replace lost income and create high-paying jobs that affected groups can do.

In the meantime, enforcing the safeguards and other trade remedies which Congress has approved in the past as the price for agreeing to reduce tariff and non-tariff barriers is one way to ease the pace and pain of adjustment.

With mounting resentment among voters and legislators about the number of jobs lost to foreign competition, the Obama administration’s decision to risk angering China to shield some workers from the worst of the global downturn by implementing rather than ignore trade defences Congress has already approved in the past as the price for liberalisation does not appear so unreasonable. The alternative might be much worse.

10 comments

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Good one !

Posted by Casper | Report as abusive

Complex issues just don’t get as much public (media) attention in the U.S. as do simplistic and hyperbolic posturings. This column isn’t afraid to tackle real issues thoughtfully. Thanks for that.

Why does any American need to be a loser when their own elected governement advocates policies that give away the farm?
“If free trade has been so good for our standard of living then WHY has our nation’s largest employer gone from high union wage benfits paying GM to low nonunion wage benfits skirting Wal-Mart?”-Barbara Toncheff
First and foremost, our founding fathers were protectionists, so to vilify the word is insulting the men on Mt. Rushmore at best.
Article 1 section 8 of our Constitution is in place to “protect’ our industries, hence, independence.
Apparantly modern politicians and foreign nations look to their own bottom lines first over the nation’s best interest and buy media support as they go. The “cheap” good theory goosegrinded down American worker’s throats along with those goods is shot down by Jefferson’s quote below.
George Washington: “Their safety and interest require that promote such manufacturers as tend to render them independent of others for essentials” Abraham Lincoln “If you buy from them we get the goods and they get the money, but if you buy from us, we get the goods AND the money! ” Teddy Roosevelt ” Thank God I’m not a free trader!” Thomas Jefferson ” The prohibiting duties we lay on all articles of foreign manufacture, which prudence requires us to establish at home, with the patriotic determination of every good citizen to use no foreign article which can be made within ourselves, without regard to difference of price, secures us against a relapse into foreign dependency”
How many prefer to give up our superpower status in exchange for “cheap” goods? We will need to depend on the rest of the world to feed, clothe and transport us!
I have been a Buy American activest for years featured in different national media and continue to preach to fellow American workers to buy American and not support the “sting” operation on the middle class called unbridled free trade!

Posted by Barbara Toncheff | Report as abusive

In the 1980′s, I lost my job in the UK computer workstation industry, courtesy of cheap US imports amongst other things. I had no assistance in finding (well, creating) a higher paid replacement job, but, through my own efforts, ended up creating a successful international business, which helped OEM customers on nearly every continent, including in the USA. So subsidies for who lose their uncompetitive jobs in this way are not necessary.

Neither, I would argue, are thye desirable. Mr Kemp asks when such subsidies should cease, arguing that in most cases they end far too soon. The problem is that if they don’t end soon, they become entrenched and a drag on everyone, as in the CAP. Or worse, they bankrupt the exchequer, and _all_ those workers lose their jobs simultaneously, as happened in the Russian Federation in the early 1990′s.

Posted by Ian Kemmish | Report as abusive

Ian your comments are completely irrelevant…you’re one tiny spec of a human being who happened to get lucky when you’re job was outsourced, assuming you are telling the truth of course.

i don’t need some ivory tower economist of any political persuasion to tell me what the effects of globalisation are on the majority of workers in the US….

the evidence is all around me in one run down factory town after another. In abandoned neighborhoods and expanding ghettos, my neighbors working at crummy shit jobs for slave wages with no benefits

globalisation has lifted the rich to the super rich and shit on everyone else

Posted by allen | Report as abusive

“i don’t need some ivory tower economist of any political persuasion to tell me what the effects of globalisation are on the majority of workers in the US.”
Ok, I’m a skint archaeologist, who’s don’t know nuttin’ about economics obviously, but fairly familiar with Joseph Tainter’s ‘marginal returns’ and cyclical explainations for cultural evolution.
It isn’t ‘globalisation’ (whatever that means) that’s screwing American jobs, it’s simply that the Chinese are doing those jobs cheaper. Just like the US and Germany out performed the British Empire c1900 onwards. You’re stuck with anti-protectionism because its the means by which you achieved global trade and its benefits historically, and it’s now too fundamental to your economic structure for your lightweight politicians to ever reverse effectively.
Welcome to ‘over the hill’. The view’s nice, but it’s not as exciting as the ‘Good Ol’ Days’.

Posted by rhoops | Report as abusive

If this article is just a pompous and long-winded way of saying countries should have reasonably welfare and retraining systems, fair enough, nobody disagrees with that. But the idea that workers in “traditional” industries (usually heavily unionised dinosaur industries that make a lot of noise) should have special treatment is just nonsense. Let them compete in the real world like everybody else. I won’t pay for them.

Posted by Matthew | Report as abusive

There is no such thing as “free trade”. “Let the buyer be ware” is the only “Freedom” offered under this economic system. The people who support this system hate it when you point out the fact that our current economic system actually requires that there be a portion of the population steeped in poverty and want.

They say that one needs to “understand how the market works” before criticizing it. But one doesn’t have to be a boxer or mma fighter to know a beating when a beating is being witnessed. And right now the average American citizen is taking a severe financial beat down. But those in finance want you to think that it’s for your own good. As if somehow the average American is too stupid to figure out he’s getting screwed.

Free trade, as experience has shown continuously, is only the freedom on the part of the corporate community to entice, cheat, and entrap the working citizen in a pile of debt.

Money was intended to be a tool to facilitate the equitable exchange of resources. Instead it has been transformed into a tool of enslavement.

Lending money at interest is called usury. And there was a really simple reason that it was frowned upon. And if you look at the current economic situation you can see why lending at interest is a bad idea. That interest becomes the prize of the criminally minded who use various “financial products” to steal that profit from those who have rightly earned it.

No system will be sufficient to solve our problems. We must rise above our own individual self interests and begin working from an altruistic perspective. If we fail to learn the importance of putting people before systems, we will continue to suffer. And every episode of suffering will be more severe each time.

A really good piece. I liked the way that the plight of the losers of globlisation has been articulated. It seems clear that globalisation is a reality that must be confronted rather than an issue to be for or against.

Ian’s comments are correct, the Soviet Union closed up to the world and denied reality, for years telling itself how great it was, when compared to everywhere else its industry and economy was useless. We in the West need to adapt or die, and faceup to a changing world.

Here in the EU, a few years ago Tony Blair asked the European Parliament to think again on the bizaar subsidies and incentives we give to agriculture. Billions and billions are given(wasted) to farmers to produce unwanted food for storage(the infamous food mountains and wine lakes etc). He proposed that the money could and should be put to better use, especially in education. As an example he offered that China were at the time producing 50 maths graduates for every 1 graduate in Europe. Its not “the” answer, but a probable step in the right direction.

“Protection” is trying to keep things the way they are (or were), but it is a fool’s paradise; it is the ostrich putting his head in the sand while the tide is coming in. But at the same time, we could be dealing with the reality of globalisation a lot better than we are at the moment.

Posted by Tyler | Report as abusive

Tyler wrote: “Protection” is trying to keep things the way they are (or were), but it is a fool’s paradise.
Ok, I guess you won’t mind it if you borrow a cup of sugar from your neighbor and he takes your car in return. Or how about leaving your front door open so he can help himself?
Free trade CANNOT be accomplished unless the stakes are even and fair. That will never be possible because human nature dictates natural preservation in our instincts.
Take your head out of the sand and realize a “Utopian” idea that no one will cheat the other. 50% of our marriages end in divorce AFTER they VOW “to death do us part” You expect more from a differnet culture?
The US is the ONLY nation without a VAT tax (value added tax), all of our trading partners do! I suggest we start by addressing that.
Nations used to trade excesses, now the robber barons trade for profits alone. Merchants are loyal to no nation, if allowed to trade freely without regard to human rights, anarchy will prevail among the people. That’s what happens to “starving” people who have know a decent life prior to enslavement.
NO longer will Americans be the happy “Elois” walking into the cave of the “Morlocks” under the guise that they have provided us with our most basic needs with free trade that we know we once provided for ourselves!

Posted by Barbara Toncheff | Report as abusive