The U.S. economy is an evolutionary organism that changes, not just in size but in structure.
Each day, we see the introduction of new products and services; companies go out of business while others are born; industries change. The economy also evolves spatially as globalization shifts economic activity to different regions of the world. Indeed, over the last two decades, spatial “evolution” has played a key role in U.S. economic evolution as some economic activity has shifted out of the United States, while others have either shifted in or grown organically to serve global markets.
Unfortunately, like an increasing number of other policy areas, the Washington trade policy debate suffers from Manichean thinking: the belief by many on the left that trade and globalization is largely a force for ill and by many on the right that it is a brilliant and liberating force.
For most liberals, trade is about offshoring, factory closures and job loss for the working and middle class. They see it as anything but the product of immutable forces and therefore advocate for policies to slow U.S. global integration. For them, there is no reason America should lose even low-wage jobs in industries like textiles or call centers.
Processes of global integration are simply too disruptive and painful. Better to work toward a “steady state” environment where workers are sheltered from disruption. Indeed, to slow down spatial evolution, many on the left seek to recreate the conditions of the pre-1980s U.S. economy. If we can just close out the option of moving offshore by limiting trade—especially with low-wage nations that have weak labor and environmental standards—then, they believe, America’s workers can once again thrive.
This is an appealing notion, especially if one takes an unflinching look at the economic pain inflicted by dislocation due to trade. But this strategy is fundamentally devolutionary, not evolutionary. While policy can slow spatial de-concentration by spurring productivity and innovation and fighting predatory foreign mercantilism, forces of global integration are inexorable, and the “natural” components of spatial loss are evolutionary and positive. To use an example, the United States should probably not be making plastic toys given out by fast food restaurants; rather, we should be inventing and producing advanced, cutting edge polymers.
Indeed, global integration can better enable the United States to increase its specialization in high value-added, knowledge-based production. Moreover, because innovation-based industries have declining marginal costs, the larger markets coming from global integration result in lower costs and higher revenues, leading to a positive cycle of increased investment in research and development (R&D), which in turn generates more innovation.
But if the left sees spatial evolution as overwhelmingly negative, the right (as well as virtually all of the Washington trade policy establishment) sees it from the exact opposite perspective.
They assume that all offshoring and manufacturing loss reflects the positive evolution of the U.S. economy, and that there is no way the U.S. economy could have experienced “devolution” from trade, especially to its manufacturing sector.
For example, the American Enterprise Institute’s Kevin Hassett states that “manufacturing has been on a more-or-less-steady decline as a share of national output for decades, part of the natural evolution of the U.S. economy” and that trade played no role in its decline.
Former White House economic adviser Lawrence Summers also argues that “America’s role is to feed a global economy that’s increasingly based on knowledge and services rather than on making stuff.” Meanwhile, the Peterson Institute’s Theodore Moran and Lindsay Oldenski torture the data to obscure the reality that U.S manufacturing has declined in the last 15 years because of loss of U.S. global competitiveness.
For the Washington trade policy establishment, spatial loss is evolutionary, not devolutionary, because it benefits consumers and frees up resources to enable America to concentrate on its “true” competitive advantage.
But they equate welfare only with short-term consumer welfare (consumers benefitting from cheaper TVs, toys, etc.), and ignore the negative impact to welfare from reduced production capability, especially higher value-added production. And their definition of competitive advantage is self-reinforcing—whatever we lose is by definition lost because we didn’t have comparative advantage.
However, by assuming that all lost jobs from trade are positive evolution, these advocates avoid the hard work of really understanding the causes of the loss of an industry. No need to worry that high U.S. corporate tax rates caused this because we should have lost the industry anyway, and after all, we don’t even compete with other nations. No need to worry about unfair, predatory foreign trade practices. It’s all just free trade and welfare-enhancing Ricardian comparative advantage working its way out.
The reality that neither side in this debate wants to acknowledge – because it muddies the purity of their arguments – is that some of the spatial loss from globalization has been evolutionary and good for the U.S. economy (albeit often bad for the individual workers who lose their jobs, at least in the short term), but some has been devolutionary, especially the loss of higher value-added, knowledge based jobs.
The appropriate way to think about the impacts of trade and globalization on the U.S. economy is to move away from Manichean thinking and differentiate between industries (and segments of industry) that die (e.g., move offshore) for “natural” reasons and those that die from “unnatural,” preventable reasons. For the former, the appropriate policy response is to help the workers and affected communities transition to new jobs and industries.
To address the preventable losses, we need more concerted national trade and competitiveness policies. This means more aggressively combatting foreign predation (e.g., mercantilist policies like currency manipulation, production subsidies, and forced technology transfer).
It’s one thing to lose an industry when we have no real competitive advantage in it. It’s quite another when that loss is due to unfair foreign trade practices. It also means taking the needed steps to make the U.S. economy more globally competitive. To imagine that globalization will work for America when we don’t even bother to craft a competitiveness strategy is sheer fantasy. As ITIF has detailed, such a competiveness strategy would include steps like supporting pre-competitive manufacturing research, reducing not just statutory corporate tax rates but effective rates, boosting workforce training, and expanding Export-Import Bank spending authority.
In short, it’s time to end unproductive Manichean thinking about globalization and trade, which only serves to stymie needed policy action. For the left, this means embracing U.S. integration into global markets and accepting “natural” loss from trade.
For the free trade right and center, it means recognizing that trade is not always welfare maximizing, and that the U.S. economy can be hurt from it.
And both sides need to put their shoulder to the political wheel and advocate for a new national trade enforcement and competiveness strategy that will enable enterprises in the United States to win in global competition.
[Cross-posted at Republic 3.0]