[CTC] WSJ: Why Trade Critics Are Getting Traction

[Arthur Stamoulis]

About a generation behind the times, but still interesting to see this in the Wall Street Journal...

http://www.wsj.com/articles/why-trade-critics-are-getting-traction-1459291383 <http://www.wsj.com/articles/why-trade-critics-are-getting-traction-1459291383>
Why Trade Critics Are Getting Traction

The benefits of open markets are more uneven than economic theories had assumed.

William A. Galston 
March 29, 2016 6:43 p.m. ET 
The debate over trade is one of the loudest in a high-decibel campaign. And like the rest of the nominating contest, it is being conducted in a largely fact-free zone. Developments over the past quarter-century warrant a thorough rethinking of U.S. trade policy, but the rhetoric of the past year will make it harder to get where we need to go.

Let’s start with what for many Democrats is their party’s original sin—the North American Free Trade Agreement (Nafta), which was adopted by Congress in the first year of Bill Clinton’s administration and went into effect in January 1994. A recent review by the nonpartisan Congressional Research Service concluded that Nafta “did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters.”

Many Americans believe that Nafta is responsible for the decline of the U.S. manufacturing economy. The evidence suggests otherwise. In the seven years from the beginning of 1994 to December 2000, U.S. manufacturing employment increased to 17.2 million from 16.8 million, and the average hourly earnings of production and nonsupervisory workers in manufacturing rose modestly. Although it is possible to claim that jobs and wages would have risen even more without Nafta, this argument seems too speculative to justify the torrent of abuse heaped on the agreement and the president who saw it through to final adoption.

The picture has darkened during the past 15 years, however. In the seven years from George W. Bush <http://topics.wsj.com/person/B/George-W.%20Bush/5369>’s inauguration to the beginning of the Great Recession in December 2007, manufacturing lost 3.5 million jobs. It then declined by another 2.2 million before finally bottoming out at 11.5 million in April 2010. A modest recovery in manufacturing over the past six years has boosted the job total to 12.3 million, still almost five million jobs (29%) below its level in December 2000.

What explains the severe losses of the past 15 years? Standard accounts focus on rising productivity in manufacturing. That is part of the story, as it has been for decades. But recently, labor economists David Autor, David Dorn and Gordon Hanson have found, in a paper <http://www.nber.org/papers/w21906.pdf> for the National Bureau of Economic Research, that import penetration from China has been responsible for up to 20% of U.S. job losses in manufacturing since the end of the 20th century. In the process, they say, China’s advance has “toppled much of the received empirical wisdom about the impact of trade on labor markets.”

The parts of the country dependent on industries most exposed to significant import penetration from China have been hit the hardest. For example, much of the state of Tennessee has experienced above-average job losses because of its heavy dependence on furniture manufacturing. Adjustment to trade shocks doesn’t happen smoothly, in part because workers are reluctant to leave familiar occupations and locations.

There is no evidence that increased competition from China has produced offsetting employment increases in other industries whose products are traded internationally. Hard-hit locales experience a double blow, with substantial increases in government transfer payments. 

Overall, Messrs. Autor, Dorn and Hanson conclude, local labor-market adjustment to trade is “stunningly slow,” with labor-force participation remaining depressed and unemployment elevated for a decade or more after the initial import shock. Workers displaced by trade experience lower wages and increased job instability—not only initially, but long-term. Their adjustment to changed circumstances is nothing like the frictionless process posited in neoclassical economic models.

For centuries, economists have taught that trade produces aggregate gains, even if those gains are poorly distributed across individuals and economic classes. But building on emerging research, Messrs. Autor, Dorn and Hanson suggest that when adjustment to import shocks is slow and costly, net welfare gains may be negligible. This challenges the conventional optimism about trade.

Yes, U.S. trade with China has yielded lower prices for a wide range of consumer goods. But unless we do much more than we ever have to cushion the fall and ease the transition to new opportunities or decent retirements, displaced workers are bound to regard the surge of Chinese imports as a massive redistribution from their modest incomes to the professional classes and the wealthy.

As China becomes a middle-income country and its real wages rise rapidly, the severe and prolonged disruption that Chinese exports have created may be nearing its end. China’s massive eruption into the global market may turn out to be a once-in-a-century event. 

Still, these events have left disturbing questions in their wake. Were too many economists too wedded to their theories? Were too many public officials excessively responsive to the trade winners in their electorates and insufficiently attentive to the trade losers?

Whatever else may come from the 2016 election, one thing is clear: The voices of those left behind can longer be ignored. The task of responsible politicians is to meet their pain with policies that can really help.


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