Most of the current presidential candidates have been making sweeping negative statements about U.S. agreements for freer trade. Both Republican Donald Trump and Democrat Bernie Sanders have made this opposition a main talking point. While Trump talks about “losing to every country” that has out-bargained us, Sanders prides himself on having voting against every “disastrous” free trade agreement because they lead to American job loss and declining earnings.
The reality of trade is much more complex. While trade does contribute to job loss and lower earnings, its effect is much smaller than many believe. And those negatives are offset by clear gains, both for the United States and other countries. A real debate on trade should look at winners and losers and compare the effects of trade for each.
Manufacturing job loss is a good case in point. As Figure 1 shows, the share of employment in manufacturing reached a high of 35 percent in 1948 and declined steadily thereafter.
After World War II, the General Agreement on Tariffs and Trade went into force on January 1, 1948. In the decades that followed, growth was very strong throughout the most advanced economies. Between 1948 and 1977, we ran trade surpluses – our exports were greater than our imports – in almost every year. Hence, the 13 percentage-point loss in manufacturing’s share of employment over these years can hardly be attributed to trade.
Over the next 16 years, manufacturing’s share of employment continued to decline and was at 15 percent in 1993, the year NAFTA was signed. This means that three-quarters of the decline in manufacturing since 1948 occurred before our second round of large free trade agreements. And part of the decline following 1993 seems part of a long-running trend of decline in manufacturing that predated current trade policies.
What about the broader labor market? If freer trade harmed our labor market, rising trade deficits (which result when the amount of goods and services we buy from abroad is more than what we sell to other countries) should be correlated with rising unemployment. Figure 2 shows the opposite story. For most of the post-NAFTA period, the trade deficit and unemployment rate have moved in opposite directions.
There is no doubt, however, that trade does lead to some job losses. One study showed that rising trade with China cost America at least 2 million jobs, and Robert Scott of the pro-labor Economic Policy Institute has found that the net job loss due to trade and currency manipulation could be as high as 5.8 million jobs. On the other hand, Robert Lawrence finds that manufacturing employment without a trade deficit would have been 2.6 to 2.9 million jobs higher in 1998 but that it would have declined by the same 6 million jobs in the ensuing 12 years. The bottom line is that there are many factors that determine total employment. For example, in the late 1990s, we had both rising trade deficits and rising employment (declining unemployment rate).
While all of these numbers represent a substantial numbers of jobs, Trump and Sanders seem to speak about the effects of trade of being much larger. Often critics of trade downplay the fact that export employment is growing and the fact that the balance of payments (which includes capital movements and capital income) must always be in balance. This means that the trade deficit is offset by a net flow of foreign money moving into our capital market, which has a mild simulative effect on employment. Consequently, the major employment effect of trade is not that total employment goes down significantly but that particular workers lose their jobs. And since these jobs tend to be concentrated in specific areas, this job loss has wider community effects.
Over the long run, the decline in manufacturing share since 1948 has been driven by productivity growth, which means greater output with fewer workers. Even in more recent years, David Autor and coauthors estimate that 80 percent of the decline in manufacturing since 2000 is due to productivity growth and 20 percent due to trade.
Opponents of trade also argue that freer trade depresses earnings among less-skilled workers and leads to rising inequality. But it is important to realize that there are many factors other than trade that have also led to rising inequality. For example, Claudia Goldin and Lawrence Katz and a number of other scholars show that rising demand for high-skilled workers is the main reason for rising inequality. Other researchers have modified this argument a bit and have looked at the ability of computer-driven systems and machines to replace routinized tasks as the basis for job loss and stagnant earnings. Finally, the decline of unionization and the failure of the federal minimum wage to keep up with inflation are also cited as a brake on earnings gains for the bottom half of the earnings distribution.
In a series of papers, Anthony Carnevale and I moved away from a manufacturing-centric approach and defined the high-end service economy as workers in offices, health care, and education. In a 2015 study, we showed that the high-end service economy employed 62 percent of all workers, generated 72 percent of all earnings, and employed 81 percent of those with a four-year degree and 91 percent of workers with a graduate degree. Again, rising inequality is tied more to structural changes in the economy rather than trade.
On the positive side, global trade increases global specialization, which leads to lower prices on many consumer items. The size of this effect is hotly debated: Gary Hufbauer and other researchers at the Peterson Institute for International Economics argue that America’s gross domestic product (GDP) is more than $1 trillion dollars higher because of trade. By contrast, David Autor speculated that the gain from trade could be 3 percent of GDP or just above $500 billion. Finally Broder and Romalis use an unusual data set on the specific purchases of millions of households and finds that the purchasing power of the poorest ten percent of the income ladder benefit disproportionally from the lower prices of Chinese imports.
Paradoxically, consumer behavior is one of the driving forces on companies to cut costs throughout their supply chain. The internet is full of sites that compare prices of similar goods and services. It is not unusual for someone to spend hours planning a vacation trip to find the cheapest air fares, hotels, and rental car. Few realize the consequences on the whole production process when consumers are so price conscious.
The other advantage of U.S. trade is the benefits it has for our international relations. The success of Japan and the Asian Tigers (Singapore, Hong Kong, Taiwan, and South Korea) in moving from low to high income countries was based on their ability to sell goods abroad. First, they started with low value products and eventually moved up the product ladder until their domestic incomes were high enough to sustain a high standard of living. Further, the decline in global poverty by several hundreds of millions of people is based on the success of India and China to sell goods to the advanced industrial countries.
Balancing these four factors makes clear that our trade policies have not been “disastrous” for American workers. Even Robert Reich, a strong opponent of free trade agreements, admits that greater trade has “given us access to cheaper goods, saving the typical American thousands of dollars a year.” A lot of what is driving employment trends is structural changes in the economy. There are winners and losers, and the best policy is to find a way to help the losers get back on their feet quickly.