Trading Insecurities

Financial Times

Americans are turning against free trade. To halt the protectionist tide, government must
minimise the hardship and dislocation caused by foreign competition.

In a recent poll, 58 per cent of Americans agreed with the statement that foreign trade was
"bad for the US economy because cheap imports hurt wages". Only 32 per cent agreed with
the statement that trade was "good for the US economy; it creates foreign demand,
economic growth, and jobs".

What is particularly striking is that these anti-trade sentiments are being heard at a time
when the US economy is doing so well. Unemployment is lower than it has been in 30
years. People at the bottom of the wage ladder are beginning to see wage gains, for the
first time in several decades. If free trade inspires this much antipathy now, when the
economy is surging, what will happen when the economy slows, as it inevitably will?

Alan Greenspan, chairman of the Federal Reserve Board, spoke with uncharacteristic clarity
on the subject a few weeks ago. "I am concerned about the recent evident weakening of
support for free trade in this country," he warned.

Mr Greenspan was referring to the spate of anti-dumping suits and countervailing duties
imposed by the US in recent months, including the Commerce Department's findings that
Japan, Russia and Brazil had dumped low-priced, hot rolled carbon steel in the US.

Why are Americans turning against trade?

Trade is good for America, but it is not good for all Americans. The vigorous economic
expansion of the 1990s hasn't helped everyone. In sharp contrast to previous post-war
recoveries, the real income of the median family - $44,000 last year - is at the level it was
10 years ago, with the important difference that families are working far more hours to earn
the same income: about six full-time working weeks more than a decade ago.

Income disparities have also become more pronounced. The share of US income going to
the bottom 60 per cent of families has continued to fall, while the share going to the top 5
per cent has reached a post-war high.

The rate of corporate layoffs, meanwhile, has steadily increased. To be sure, with very low
unemployment, most people who lose their jobs do not have great difficulty finding new
ones. But if they are among the three-quarters of working Americans who do not have a
university degree, the new job is likely to pay 20 per cent less than the old one.

Trade is not the only force underlying these trends. Technological change is as important, if
not more so. But cheap imports, combined with a high dollar, have made trade an easy
target of public concern.

Buried in the economic theory of comparative advantage is one stark political reality: trade
benefits an economy only to the extent it restructures that economy, making it more
efficient. Trade reduces the demand for people and capital where they are less productive,
and increases the demand for them where they can be more productive. The bigger the
gains from trade, the bigger these social dislocations.

But the people who gain the most from trade are not the people who bear the most pain.
The gainers tend to be better educated, and have higher incomes to begin with. The losers
tend to be worse educated, and have lower incomes to begin with. They are in the jobs
that trade makes less valuable, or eliminates altogether. They have the hardest time
moving into the better-paying jobs.

The number of Americans who feel they are among the losers - or, more importantly, sense
that they could be - is a large portion of the electorate. With an election year coming up,
politicians of all stripes are especially sensitive to voter moods.

What to do? Exhortations about the overall benefits of trade are unlikely to be persuasive.
If a larger portion of the US public is to become supportive of free trade, they will need
better assurances that trade will work to their advantage. At the very least, they will have
to be confident that hardships and dislocations will be minimised. There is no easy recipe in
this regard, but I offer a few starting points.

First, the US must reduce the financial penalties associated with moving from one job to the
next. Unemployment insurance was originally intended as a temporary income support
during economic downturns. But it is less relevant today, when most workers who lose their
jobs never get them back. Their major problem now is not that they lack income until they
find a new job; it is that the new job often pays less than the former one. We should
institute "wage insurance" instead. If the new job pays less than the old, public funds
would make up a portion of the difference, for a fixed period of time.

Second, expand the "escape clause" mechanism under World Trade Organisation rules, so
that workers and communities affected by import surges have better defences. Under
current WTO rules, aggrieved parties must show that increased imports have caused, or
threaten to cause "serious injury" to a domestic industry. The country applying the escape
clause must also offer compensation with equivalent concessions in foreign trade. This is a
tall order. No one should be surprised that the preferred route has been anti-dumping
complaints and countervailing duties, which, because they are unilateral and because
"dumping" is almost impossible to define, pose a much greater threat to open trade.

Third, treat trade adjustment as part of a broader social agenda to help ensure that
working people stay out of poverty, and are given opportunities of advancement. This
agenda would include, among other things, better public schools for children from
lower-income families, a larger and more generous Earned Income Tax Credit, a higher
minimum wage, and more affordable health care. A comprehensive approach is necessary.
Mere job training or "trade adjustment" assistance is not enough.

Finally, the international community should agree to certain common norms of economic
behaviour. If Americans were confident that other nations were playing by the same basic
rules, some of the present concern would be mollified. By "norms" I do not mean that other
nations must pay their workers the same wages as in the US or guarantee them the same
working conditions as American workers. Poorer nations cannot and should not be
expected to do such things. I am referring to more fundamental and universal standards,
such as the rights codified by the International Labor Organisation against slave labour,
forced labour, and the right to free association.

For over a century, trade has been an issue of sharp contention. But recent advances in
technology have speeded global integration and caused trade to become even more
contentious. Trade creates losers, along with an even larger group who fear they may join
the losing camp. Unless or until we take their problems seriously, opposition to free trade
will grow more intense.

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