US and Global Trade: Economic Fact and Political Fiction

July 1, 2016 9:45 AM

Proponents of more open trade may have oversold its benefits during the 1990s heyday of commercial liberalization. Now they are reaping some consequences as anti-trade rhetoric vastly exaggerates its costs, with an impressive amount of political traction.

Take the United Kingdom’s exit from the European Union, which has sent shockwaves through global policymaking circles and financial markets. A key message of the successful Leave campaign was the wrongheaded notion that an influx of immigrants from Europe is to blame for the general economic malaise that has overtaken the United Kingdom and other rich countries following the Great Recession and financial crisis of 2007–09.

Similarly, in the United States, Republican presidential candidate Donald Trump has staked his campaign on building an impossible wall along the entire US-Mexico border, which he assures voters he will somehow force Mexico to pay for. He has also called for a broad retreat from trade, including sharp increases in tariffs on major partners like China and Mexico, which economists almost unanimously believe would trigger a damaging trade war.

With the pendulum swinging so prominently in the anti-trade direction, it’s useful to establish a few basic facts to help cut through the din of trade politics. The bottom line: Trade brings widespread benefits to workers and businesses around the world, and also to consumers in the form of a wider variety of products and, importantly, much lower prices. But by underplaying trade’s costs its champions risk losing the intellectual high ground.

1. Trade is not a major job creator but also not a key culprit of job losses

As Adam Posen, president of PIIE, put it during an event on the recently signed Trans-Pacific Partnership agreement, “the real advantage of trade is about the productivity gains and the reallocations and competitive pressures you put on your industry and your own people and the price benefits that gives people at home.” PIIE Senior Fellow Robert Lawrence also notes that the expected longer-run impact of major free trade agreements on employment is to create higher-paying jobs, not necessarily more jobs on net. Trade’s benefits for workers, he argues, far outweigh its costs.

2. NAFTA did not cause the demise of American manufacturing; China did a little

US manufacturing employment barely budged after the enactment of the North American Free Trade Agreement in 1994. In fact, its boost to all three North American economies was widely documented. China’s entry into the World Trade Organization in 2001 had a much more substantial, one-time impact on US manufacturing jobs. But that was not a trade deal, and the United States was just one of multiple players. It was simply the culmination of a long process of trying to bring the world’s second largest economy into the global fold. Chinese economic growth has been a major engine for the world since, more than offsetting any drag caused by manufacturing production that was shipped there.

3. So why all the noise?

Major economies around the world have struggled to recover from the worst recession since the Great Depression. Growth has lagged for so long that economists have started reevaluating the United States’ and other countries’ growth and productive potential. This creates a sense of economic instability that has hit the middle class of rich nations particularly hard. Most workers’ incomes in the United States have barely budged over the last three decades when adjusted for inflation, with the median individual earning just over $28,000 per year. And while a lot of lip service was paid to the need for helping workers hurt by the push toward globalization, such help hardly ever materialized, and never in any systematic way that allowed for the smooth transition of large numbers of workers from one industry to another. In this environment, open trade, infused with a worrisome dose of xenophobia, becomes an easy political crutch.

In short, trade has a long-standing track record of boosting economic growth and productivity. Still, in the short run, trade does not significantly affect employment levels in either direction.