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.

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.

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.


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