IN
2011 Ronnie Dunn, a country singer, recorded “Cost of Livin’”, a poignant song
about a former factory worker’s search for a job. Sensing there will be many
more jobseekers than job openings, his can-do pitch gives way to desperation:
“Bank has started calling/And the wolves are at my door”. Similar refrains can
be heard all over America’s industrial heartland: almost 6m manufacturing jobs
were lost between 1999 and 2011.
The scale of these job losses is not itself
surprising: America’s dynamic economy creates and destroys around 5m jobs each
month. But a recent set of studies by economists at leading American
universities has found something disturbing. A fifth of that 1999-2011 decline
in factory jobs was caused by Chinese competition, and those who lost jobs
generally did not find new ones nearby (see article).
Nor did the newly unemployed go in search of work elsewhere. Instead there was
almost a one-for-one increase either in unemployment or, more frequently, in
people leaving the workforce entirely—often to claim disability benefits, which
5% of Americans aged 25-64 now receive.
The
anxieties that such findings stoke have made trade a touchstone issue in
America’s presidential election. Donald Trump, the Republican front-runner,
promises to slap prohibitive tariffs on imports from China and Mexico. Bernie
Sanders, the rival to Hillary Clinton, the presumptive Democratic candidate,
wears his opposition to trade deals as a badge of pride. Mrs Clinton has herself
backed away from her previous support for the Trans-Pacific Partnership (TPP),
a trade deal negotiated by Barack Obama. Freer trade was one of the engines of
the prosperous decades following the second world war, in America and beyond.
Yet mainstream politicians are now not only afraid to champion it, they pour
fuel on the fire. That is lamentable. Free trade still deserves full-throated
support, even if greater care needs to be taken of those it hurts.
Toxic topic
Advocates
of freer trade have always known that some lose out even as the great majority
benefit. In moving for repeal of the Corn Laws in 1846 (a campaign which this
newspaper was founded to support), Sir Robert Peel acknowledged concerns about
the harm this might do to agricultural labourers. “I wish it were possible to
make any change in any great system of law without subjecting some persons to
distress,” he said. Yet he also argued, correctly, that no one suffered more
from tariffs on corn than the poorest farm workers.
What
the latest research makes clear, however, is that in America’s case the losses
from free trade are more concentrated and longer-lasting than had been assumed.
In large part, that reflects the speed of China’s rise: its share of world
manufacturing exports soared from 2% in 1991 to 19% by 2013. The shock caused
by China’s emergence also exposed fault lines in America’s economy. Workers
seem less willing to switch jobs or move states than in the past. Part of the
explanation may be rising home ownership, by anchoring people to declining
areas or pricing them out of vibrant ones. Whatever the explanation, free trade
can impose big costs on a few places.
The
worst possible response to such fears is the protectionism that Mr Trump is
peddling. The surge in cheap imports of clothing, shoes, furniture, toys and
electronics from China has greatly increased the spending power of those on low
incomes. It has also added to the variety of goods they are able to buy. One
study by economists at the University of California, Los Angeles, and Columbia
University calculated that median income earners in America would lose 29% of
their purchasing power if America was closed to trade, but that the poorest
would forfeit as much as 62%, because they spend proportionately more on goods
that are traded. Add to the reckoning the eventual benefits of a richer Chinese
market for exporters, the spur to innovation in America from global competition
and the low-cost inputs for consumer goods, such as the iPhone, that raise the
productivity of American designers, and the arguments in favour of free trade
are overwhelming.
Displacement activities
But
what ought to be done to protect those workers who lose out because of
competition from abroad? The safety net provided by trade-adjustment
assistance, a federal programme, is threadbare—which is why many displaced
American workers opt for more generous disability benefits and leave the job
market altogether. In effect, America has imported some of the worst aspects of
Europe while ignoring the best. Germany is Europe’s manufacturing powerhouse
but has successfully absorbed the twin shocks of competition from China and the
accession of countries to its east into the European Union. This is in part
because Germany has been able constantly to upgrade the skills of its
workforce, thanks to its system of apprenticeships. In America community
colleges in depressed areas show promise in bridging the skills gap, but there
is still too much emphasis on an expensive four-year university education and
too little on vocational training.
America
has also lagged behind other rich countries in “active” labour-market policies.
More could be done to help workers who lose jobs to find new ones, through job
exchanges and courses to add to skills. In America’s panoramic jobs market,
there may be a case for providing relocation grants for workers hurt by trade.
A big gripe of displaced workers is that an alternative job in the service
sector does not pay as well or come with the same health-care or pension
benefits that big manufacturers used to provide. That is a strong argument for
a system of portable benefits that go with workers when they change jobs. A
system of wage insurance might have merit.
Such policies are needed not only in America—workers
in Britain’s steel plants are confronting the demise of the domestic industry
(see article). Nor are they required only to smooth trade shocks. Many of these
policies are necessary to deal with other sources of disruption, from cheaper
robots to new technologies such as 3D printing. Protectionists want to turn
back the clock. Far better to reap the permanent overall gains from trade while
preparing the workforce for change.
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