free trade

A safety net for the looming trade war

Posted on by j.giglio

Much has been written about the continuous maelstrom of trade and tariffs. Articles are legion and lengthy, and the onslaught of words is entirely shorn of humor. Is the difference between trade and “free trade” the same as the difference between love and “free love?” Many of these articles fail the memory test.

Unlike academic arguments, debates about trade and tariffs are waged at a pitch of high intensity because the stakes are so high. Often overlooked is Trade Adjustment Assistance, a program with avid supporters and fierce critics.

Trade Adjustment Assistance is the primary policy response to dislocations caused by trade and globalization. This federal program provides assistance to workers who have involuntarily lost their jobs to foreign competition, either because their jobs moved outside the United States or because of an increase in directly competitive imports. It also assists those whose hours and wages are reduced as a result of increased imports, whether or not that had anything to do with a trade deal. Congress created the program as part of the Trade Expansion Act of 1962, but it was little used until the Trade Act of 1974 eased eligibility requirements.

Trade Adjustment Assistance offers eligible recipients a variety of benefits and reemployment services. It provides expanded unemployment insurance benefits, two years of job training, job search and relocation allowances, tax credits for health insurance coverage, wage insurance for workers over 50 years of age and related subsidies.

The legislation was initiated by President John F. Kennedy as a way of building domestic support for multilateral trade negotiations. The program has undergone changes through the years. Since free trade policies are expected to bring overall economic gains, there is a rationale for providing assistance to workers whose jobs are sacrificed for the greater good. Put differently, benefits of free trade, which are diffused throughout the economy, exceed its costs, which are concentrated. The winners should compensate the losers and help train or retrain American workers to become more competitive.

The original legislation faced strong opposition, but, with labor’s backing, Trade Assistance Adjustment became law. Trade Adjustment Assistance has been the necessary political price for keeping free trade on track, the sop to displaced domestic workers.

Critics of the program are wont to complain that despite its generosity, the program has been ineffective. For example, one study of Trade Adjustment Assistance recipients shows that their incomes after returning to work were no better than those of returning workers not eligible for Trade Adjustment Assistance.

Fairness is also an issue. Why should someone get special assistance after losing a job because of trade, but not if they lose a job because of changes in technology and consumer preferences, domestic competition or simple business failure? After all, they still have bills to pay.

On the other hand, advocates argue that Trade Adjustment Assistance has provided badly needed assistance to more than 2.2 million workers who lost their jobs to globalization since the Trade Act of 1974 and is an essential complement to the broader trade agenda. They point to data showing that nearly 77 percent of program participants found employment within six months of completing their training. They are silent on the quality of the jobs and whether they have a positive effect on wages for program participants.

While the United States may gain from free trade policies at the macro level, the losses are concentrated and inflict real distress on affected workers. Free trade has cut consumer costs, reduced poverty around the world and helped multinational corporations prosper; the United States should take care of workers who have paid the price.

Regardless of the dimensions of the coming trade and tariff wars and chaos in the international trading system, some version of Trade Adjustment Assistance is essential to provide a safety net, not just a fig leaf, for those who inevitably bear the cost of trade and tariff policies.

Originally Published: July 28, 2018

 

 

Free trade doesn’t work for most American workers

Posted on by j.giglio

The aphorism “A rising tide lifts all boats” has become entwined with a basic assumption that free trade results in economic wins for all players in the global economy. Of course this assumes you are lucky enough to have a boat that has not run aground.

The classic case for free trade was made nearly 200 years ago by economist David Ricardo. This static argument relies on the principle of comparative advantage; that trade enables countries to specialize in goods and services they produce more efficiently than do their trading partners. This increases overall productivity and total output.

The conclusion follows from countries having different opportunity costs of producing tradeable goods. The opportunity cost of any good is the other goods that could have been produced by the same resources. Each country focuses on what it does best and everyone gains. This notion of free trade has a hallowed status among the cheerleaders for globalization.

Another way to understand comparative advantage is to consider the opportunity cost of undertaking a certain activity. Let’s assume that Lady Gaga, the famous entertainer, also happens to be a world-class typist. Rather than entertaining and typing, she should specialize in entertaining, where her comparative advantage is greatest and she could maximize her income.

In this example, Lady Gaga has a much higher opportunity cost of typing than does her secretary. If Lady Gaga spent an hour typing while the secretary spent the hour running the business, there would be a loss of overall output.

The real world is much more complex. Free trade has a downside: while its benefits are broadly distributed, costs are often concentrated. Consider the case of American textile workers. In the aggregate, American consumers gain by having access to cheap clothing, but unemployed textile workers bear the loss.

Many free trade cheerleaders confuse it with off shoring jobs, which is simply substituting, cheap foreign labor for more expensive American labor when nothing is in fact being traded. Moving production overseas has nothing to do with comparative advantage; it simply reflects wage and price competition from countries seeking jobs and economic growth.

If a firm shifts production to low-wage countries, its profits improve, driving up share prices and senior management performance bonuses. To paraphrase one-time presidential candidate Ross Perot: If you can build a factory overseas, pay about a dollar an hour, have little or no health care or retirement benefits and no environmental controls, then you are the greatest businessman in the world

But when many firms move overseas, American workers lose their incomes. So when do the costs of lower incomes resulting from job losses and government revenues exceed the benefits to consumers of lower prices? Put differently, do the costs of exporting good-paying American jobs outweigh gains from cheaper imports and contribute to a shrinking middle class.

Free trade advocates contend that the Americans left unemployed have acquired new skills and will find better jobs in “sunrise” industries. In reality, how many steelworkers do you know who have become computer software engineers?

This is one reason why Americans’ real incomes have stopped growing as manufacturing jobs have been moved offshore.

As then-presidential candidate Barack Obama said in 2008, “You go into these small towns in Pennsylvania and like a lot of small towns in the Midwest, the jobs have been gone now for over 25 years and nothing’s replaced them. And it’s not surprising, then they get bitter, they cling to guns, or religion or antipathy to people who aren’t like them or anti-immigrant sentiment or antitrade sentiment to explain their frustrations.”

A former General Motors CEO allegedly said “what is good for GM is good for America.” But offshoring challenges the conventional wisdom that American firms generally advance the nation’s economic interests. When they employ a large foreign workforce but few people within the United States, it certainly is good for the firms, but not for the American worker.

Originally Published: April 16, 2016.

Trump and Sanders may be right: Free trade is costing U.S. too much

Posted on by j.giglio

Opposing so-called free trade deals has been an important part of the rhetoric of presidential candidates in both parties, especially polar opposites Donald Trump and Bernie Sanders. They blame free trade for the loss of American jobs, the decline in workers’ real wages, increased income inequality, and a shrinking middle class.

From their opposing ends of the political spectrum, Sanders and Trump have ignited an important debate about just who benefits from free trade. Sanders criticizes free trade as a proxy for corporate greed, while Trump says such deals serve politicians who put the interests of corporate contributors over those of ordinary Americans. Both candidates roll out the full Monty of free trade criticisms and argue that the U.S. needs to be smarter about sustaining a global trading order that supports America’s workers and economic interests rather than playing the victim for trading partners who steal jobs and play by rules that don’t reflect American social and environmental values.

They are fed up with being out-traded and out-negotiated in deals that are the serial killers of American jobs. They believe other countries engage in managed trade, not free trade, and play the game in a way that produces trade surpluses for them and fewer lost jobs for the U.S .

Opposition to free trade is a major vote getter; a way to leverage voter anger and bond with ordinary Americans. In some parts of the country, it has served as an organizing principle in a deeply divided electorate.

The typical American family saw its wealth decline significantly in the wake of the Great Recession and many voters have begun to question the fairness and adequacy of past trade policies. Deals such as the 1994 North America Free Trade Agreement (NAFTA) have been blamed for massive job losses.

Barack Obama repeatedly criticized NAFTA during the 2008 Democratic primary battle, noting that “we can’t keep passing unfair trade deals like NAFTA that put special interests over workers’ interests.” Trump and Sanders, hoping to win support from working class voters who are not fans of globalization, fervently oppose the ambitious 12-member Trans-Pacific Partnership pact the president supports.

Manufacturing’s contribution to U.S. employment has fallen steadily for more than half a century. Over the last 20 years, tens of thousands of factories have closed and many have moved to lower wage countries like Mexico, China and Vietnam. The sword of additional plant closings hangs over the heads of workers as companies pursue the classic go-to move of chasing cheaper labor.

Both Trump and Sanders cite the Carrier Corp.’s recent announcement that it will close its Indianapolis manufacturing plant and move all 1,400 jobs to Mexico. The move comes after the company was awarded $5.1 million in taxpayer money in 2013 under the Clean Energy Tax Credit Program. The funds were supposed to be used to “expand production at its Indianapolis facility to meet increasing demand for its eco-friendly condensing gas furnace product line.” Carrier says it has not received the money and will not claim it despite having been awarded the funds.

Carrier is another example of how low-wage countries can raise their living standards and impoverish American workers by importing American jobs and industries. You could argue that Carrier and other firms are really engaging in the exploitation of cheap labor, a form of economic arbitrage rather than trade, but this would not accrue to the political advantage politicians pursue.

While Carrier’s move will in theory reduce the cost of its products in the U.S., who will compensate the 1,400 workers losing their jobs or the community’s tax base? Is it any wonder that large numbers of voters prefer protecting domestic jobs from low-wage countries over lower prices for consumer goods?

To hold the line, Trump and Sanders contend it is time to rethink free trade and advocate for quotas and tariffs that protect and defend American interests and values rather than those of special interests such as multi-national corporations. On that issue they may have a point.

Originally Published: April 2, 2016

Obama free trade isn’t so free for US

Posted on by j.giglio

The fight for fast track legislation to allow President Obama to negotiate the secretive Trans-Pacific Partnership trade deal is over. After pulling out all the stops to push the deal through Congress, the President signed legislation giving him the authority to negotiate the trade agreement and put it before Congress for a straight up-or-down vote with no amendments allowed.

Americans are told that free trade is the best strategy for advancing global economic development, reducing poverty and achieving world peace. There is a lot to be said on behalf of the utopian dreams of free traders if you ladle enough frosting on the cake to compensate for its shortcomings. But if we want to help the American middle class -the stated goal of virtually  every politician -we would pursue different policy priorities.

To say that everyone benefits from free trade is misleading. Trade creates winners and losers and every American deserves to know the details buried in these deals. The benefits of the North American Free Trade Agreement and other trade deals have not been shared as broadly as promised.

Economists, businessmen and politicians, the most devoted acolytes, say technological advances lead to increased productivity, which means fewer workers are needed to get the job done. Yes, we have substituted capital for labor. But we have also substituted cheap offshore labor for American workers and the result is that Americans are losing jobs, their wages are stagnating and the middle class is coming apart at the seams.

How countries trade and whether they benefit from it are important questions. Starting with Adam Smith, economists have emphasized specialization and exchange as essential to increasing productivity and raising living standards.

The economic argument for free trade relies on the principle of comparative advantage developed by David Riccardo in 1817. His quaint theory, which built on Smith’s work, remains the cornerstone of free trade economics. So what in simple terms is comparative advantage?

Let’s assume that Lady Gaga, the world-famous entertainer, also happens to be a world- class typist. Rather than both entertaining and typing, she should specialize in entertaining, where her comparative advantage is greatest and she could maximize her income. This key insight is still endorsed today by the overwhelming majority  of economists.

Americans who lose their jobs are becoming less rich so people in foreign countries can be less poor. In the aggregate, people are better off, but domestic workers bear the cost. It should be clear by now that on the home front, free trade contributes to rising inequality, wage stagnation, and lost jobs .

The gains from trade are often widely dispersed, while the losses are concentrated. The extent to which offshore outsourcing is responsible for some of our current labor market woes has become highly contentious in recent years.

Perhaps it is time to adopt a national strategy that can make the American economy grow fast enough to produce decent jobs for every member of the American family who wants to work. How about if we start by investing in our broken infrastructure so it can generate economic growth instead of hamstringing it, and educating our children so they become world leaders in something besides sports?

Then we just might become internationally competitive again, and restore our economy to full employment while we’re at it

originally published: July 11, 2015

Cost of being wrong about trade is paid by American workers

Posted on by j.giglio

President Obama, powerful business and government elites, special interests and reflexive free trade advocates are working hard to garner congressional support to consummate the ambitious and furtive 12- nation trade agreement known as the Trans-Pacific Partnership (TPP). This is a big deal; linking 40 percent of the world’s economy- so big that it has been negotiated in secret.

We are told that free trade means the unimpeded flow of goods, services, capital and labor across international markets. In this best of all free trade worlds, consumers get the lowest prices.

This is all well and good for American consumers, but what about the increased unemployment and reduced wages free trade also brings? Unless consumer prices have fallen by more than the average worker’s income in recent decades, this may not be such a great deal.

In the real world, critics say the TPP is more like managed trade than free trade. America’s trading partners engage in currency manipulation to make their exports cheaper and U.S. exports more expensive than if exchange rates were determined by market forces. Consequently, some lawmakers worry that currency manipulation by trading partners is an important cause of the large and growing U.S. trade deficit, and will further injure domestic industries and workers. For them, many of the arguments for free trade are just globaloney.

Japan, a member of the proposed TPP deal, is by its own admission a currency manipulator. Its leaders want a relatively low exchange rate for its currency, the yen, because it makes their goods and services cheaper in the United States. Automakers and other manufacturers believe such currency manipulation constrains sales of American products.

Here is a simple example: The Japanese central bank prints more yen and then buys assets denominated in dollars. This increases demand for the dollar, which increases its value while at the same time driving down the value of the yen. By manipulating their currency Japan is subsidizing its exports by making them cheaper and placing a hidden tariff on imports. The U.S.-Japan goods trade deficit reached $78.3 billion in 2013, costing U.S. workers thousands of jobs. The U.S. is acquiescing in outsourcing the value of the dollar to a trading partner who wants to win jobs and gain higher incomes for their people.

On the other hand, there are those who see the trade deficit in a positive light as it provides foreigners with dollars that they recycle by bingeing on United States Treasury debt, thus financing federal budget deficits.

Opponents of the current deal complain that, among other things, it does not address currency manipulation, which subsidizes Japan’s exports and taxes American ones. A bipartisan amendment that would have cracked down on countries that manipulate their currencies was offered by Senator Rob Portman, R-Ohio, and Senator Debbie Stabenow, D-Michigan, during the Senate consideration of the TPP, but it failed by a narrow 51-48 vote.

The Obama administration has done a good job of sealing itself off from any discordant feedback, threatening to veto the bill if the amendment passed.

Wages for American workers have been stagnant for decades and the U.S. economy has kept going by substituting growth in consumer debt for growth in consumer income.

The essential unanswered question about TPP is whether the aggregate benefits of lower prices to American consumers that leave them allegedly with more discretionary income offset job losses for the American worker and displacement of American industries.

It’s easy to be wrong about the answer to this question when the costs of being wrong are paid by others – namely the American worker.

originally published: June 13,2015

 

Free trade’s ‘golden age’ is lacking in luster

Posted on by j.giglio

“So, Tony, it sounds like you’re not a big fan of free trade”

“Oh, I think free trade’s great- so long as it doesn’t get in the way of anything really important, like putting Americans back to work.”

“What do you mean?”

“Look, Sean. Any economist will tell you free trade is even better than macaroni and cheese. But tell that to a tool and die maker whose unemployment insurance is about to run out.”

“I guess so.”

“Some people do have a way of making free trade work for them.”

“What do you mean? “

“Look at the CEO who’s just moved 17,000 jobs from Cleveland to Jakarta so he can announce record profits next quarter from lower labor costs. Wall Street runs his stock up five or 10 points”

“Yeah.”

“Think of it this way, Sean. We can’t trust the invisible hand of the market to allocate economic resources like capital and labor among nations if we all want to prosper.”

“What’s the alternative?” “Intelligent strategic management.” “Like trade agreements?”
“Right. Make deals; it’s a sacred free-market principle.”

“True. “

“Suppose a car is speeding down a twisting mountain road. Is any sane person going to argue that guiding this car around the inevitable sharp curves should be left entirely to the invisible hand?’

“What invisible hand? “

“You know, the subtle grooves in the road’s pavement; the way it’s banked on the turns.”

“I see what you mean. “

“Obviously, the car needs a driver to avoid running off a cliff.”

“And trade is no different?”

“Right. Trade needs the federal government to manage it intelligently on behalf of the American public.”

“Do you mean industrial policy, picking  winners?”

“Actually, the record shows that the feds have a pretty good history of picking winners. Look at World War II.”

World War II? “

“Sure. Who did President Roosevelt pick to manage the war? General Marshall, General Eisenhower, Admiral Nimitz- all-stars in any league. Germany and Japan couldn’t come close.”

“I guess you’re right. “

“And look at the big spending programs the Roosevelt administration picked to create a massive amount of armaments and superior technology in a flash. Like the Manhattan Project to produce nuclear bombs and the B-29 program.”

“Yeah.”

“For all Germany’s technological know-how, efficiency and discipline, Hitler’s government had a bad habit of picking losers and choosing managers who were forefathers of the people who drove General Motors off a cliff. So what’s wrong with having the federal government manage trade to benefit the American public?”

“But won’t the academics insist that isn’t free  trade at all? It seems to violate the hands-off principles supposedly espoused by Adam Smith and other big thinkers”

“So we’ll keep everybody happy by calling our approach something like ‘free trade with American characteristics,’ like Beijing describes its version of capitalism as ‘socialism with Chinese characteristics.”‘

“I should have known. “

“The patron saint of America as an industrial powerhouse was Alexander Hamilton. As George Washington’s treasury secretary, he pushed his vision of our nation growing into a land of urban-based industries that created widespread prosperity by making things. Hamilton persuaded Congress to pass a wide range of tariffs to protect and nurture home-grown industries that made things an increasing number of Americans wanted. He protected the prosperity of American workers by forcing our trading partners to play by sensible rules.

“Yeah. “

“Now fans of economic theorists who let logic run away with common sense may have trouble getting their minds around Hamilton’s unorthodox wisdom. But putting it into practice is what gave America the capacity to out-produce Germany and Japan combined during the 1940s.”

“I guess that makes sense. “

“The heroes of Hamilton’s America are people like those masterful tool and die makers, the Michelangelos of the machinist’s trade whose artful minds and skilled hands can sculpt metal into the jigs and tools of efficient mass production.”

Yeah, I knew of one of those guys. “

“But too many like him have been sacrificed at the altar of free trade and are trying to make ends meet by flipping burgers. But not to worry; the mainstream economists tell us everything will be fine. According to them, we are living in the golden age of free trade. Sadly, what really surrounds us are copper and lead.

originally published: September 15, 2012