The rising political opposition to open trade from both the left and the right is an instance—one among many—of how today’s policy debates become decoupled from reality. On this Labor Day week, recognizing how our current trade and investment arrangements generate broad benefits for workers and consumers matters, lest the growing anti-trade faction unwittingly unravels them.
A recent essay by Robert Reich, an attorney and well-known former Democratic official, illustrates the uninformed views that now plague our discourse on trade. In an op-ed, “Biden is Turning Away from Free Trade—and It’s a Good Thing,” Reich, who demonstrably is not an economist, mischaracterizes the dramatic expansion of international trade. Like many critics from the Jacobin Left to the Trumpian Right, Reich sees the last 30 years of trade agreements as mere rules “about which assets will be protected and which will not,” In this view, trade accords stack the deck for multinational corporations and their shareholders. Since the United States has been the driver of multilateral trade agreements for more than a half-century, the rules unfairly favor American multinationals.
This is wrong on multiple accounts. Developing countries have been enormous beneficiaries of these arrangements, underwriting historic increases in trade flows, investments from abroad, and economic growth. As a result, developing nations now trade at levels comparable to advanced nations. From 2000 to 2022, annual exports by low and middle-income countries averaged about 28 percent of their GDP versus 29 percent for high-income countries. Developing nations also now attract foreign direct investments at levels comparable to advanced countries: Over the same period, the annual net inflows of foreign direct investment as a share of GDP averaged 2.5 percent for low and middle-income countries compared to 2.9 percent for high-income countries.
These burgeoning trade and investments have transformed the developing world and the lives of their people: From 2000 to 2022, the world’s developing and emerging economies grew at an average annual rate of 4.2 percent, compared to 1.6 percent for the G-7 countries. As a result, according to the World Bank, the global poverty rate plummeted from more than 29 percent in 2000 to 8.5 percent in 2019.
Most American critics of trade, such as Reich, do not seem interested in rising living standards in developing countries. They pass over Third World benefits and focus instead on how global trade purportedly promotes the destruction of U.S. jobs by American multinationals. In the Reichian view, subsidiaries in developing countries churn out exports to the U.S. that undercut prices for similar goods made by Americans. Many Americans share that view, but it’s simply incorrect: Those imports are a very small part of much larger global import and export dynamics that—on balance—support U.S. employment.
Here are the facts. In 2019, 45 percent of U.S. imports valued at $1,067 billion involved “related parties,” which covers the imports from foreign subsidiaries of U.S. companies that can cost jobs here and the imports for U.S. subsidiaries of foreign companies that American workers use to produce goods sold here or exported abroad. And the imports by U.S. subsidiaries of foreign companies are far more significant than those from the foreign subsidiaries of U.S multinationals. Focusing on American companies producing goods abroad while ignoring Mercedes and BMWs made in America is obtuse or intellectually dishonest.
In total, $699 billion of “related party imports” to the U.S. in 2019 went to U.S. affiliates of foreign multinationals that employ about 8 million Americans, compared to $368 billion in imports from foreign affiliates of U.S. multinationals. As a result, the U.S. subsidiaries of foreign companies accounted for 28 percent of total imports or nearly twice the 15 percent share from the foreign affiliates of U.S. companies. On top of that, those U.S. subsidiaries of foreign companies used many of those imports to produce $384 billion in goods they exported from the U.S.—more than all the imports from foreign subsidiaries of American companies. Reich and like-minded critics have it backward. The multinational import dynamics they deplore are a net plus for U.S. jobs.
To be sure, the foreign subsidiaries of U.S. companies employ more people around the world than the affiliates of foreign companies do in the United States—in 2019, 14.1 million compared to 8 million. However, imports to the U.S. from those foreign subsidiaries of U.S. companies accounted for only 5.5 percent of their global sales in 2019. American companies have built global networks of subsidiaries not to produce cheap imports for Americans but to sell into foreign markets without bearing transportation, customs, and other costs that would make them uncompetitive. None of this seems to matter to knee-jerk critics of trade.
Reich also jumbles the economics of growth when he claims that Bill Clinton’s trade opening initiatives mainly enriched shareholders by driving up the stock market. The stock market did soar under Clinton—Reich was Clinton’s Labor Secretary in his first term—but not because of NAFTA or the Uruguay Round. It surged because 1992 to 2000 saw the longest U.S. expansion on record, with real GDP growth averaging more than 4 percent annually, 9 percent average annual gains in fixed business investments, especially in new technologies, and yearly productivity gains averaging 2.4 percent. The bottom line for Americans was a 14.5 percent increase in the real median income of households from 1992 to 2000—and 445,000 new jobs in U.S. manufacturing, purportedly the prime victim of Clinton’s trade policies.
Even Reich acknowledges that Americans benefit from trade “as consumers—gaining access to lower-priced goods,” especially from China. Yet he doesn’t mention how much Americans have benefited from those lower prices. In fact, the rewards are substantial: A rigorous study from the Bureau of Labor Statistics found that Chinese imports lowered overall consumer prices here by a cumulative 1.97 percent from 2000 to 2007. On that basis and the data on consumer spending, Chinese imports saved the average household $1,708 by 2007 or $2,580 in 2023 dollars. Again, the critics of open trade from the right and the left seem to pass over its substantial benefits for Americans and the developing world.
Instead, the bottom line for reflexive trade critics is that the prevailing trade regime has cost Americans innumerable jobs and billions in lost income, primarily through our trade with China. As Reich puts it, “The trade deals caused millions of American jobs to be lost, and the wages of millions of Americans to stagnate or decline. Between 2000 and 2017, a total of 5.5 million manufacturing jobs vanished. Automation accounted for about half of the loss. Imports, mostly from China, the other half.”
But Reich’s case relies on sleights of hand. First, the proper measure here should be real median household income, which increased from 2000 to 2017, albeit by only 3 percent. Moreover, Reich deceives or at least misleads by using 2017 as his endpoint and 2000 as his starting point. Extend the analysis to 2019 or just before the pandemic, and real median household income increased by 10 percent—hardly stagnating or declining incomes. Similarly, 2000 was the last year of the Clinton boom, just before the 2001 recession and the problems of the years leading up to the 2008 financial crisis and the period immediately after it. Starting in 2012, once the crisis and ensuing recession had passed, real median household income jumped 12 percent by 2017 and more than 20 percent by 2019.
Reich also uses selective dates to distort what happened to manufacturing jobs. The 5.5 million job losses “between 2000 and 2017” all occurred from 2001 to 2009, one-third of them during the 2008-2009 Great Recession. So, he doesn’t mention that since that recession ended—and despite steadily rising U.S. imports—manufacturing employment increased every year from 2010 to 2022 except in pandemic-pummeled 2020. His claim that trade “mostly from China” accounted for half of the decline in manufacturing employment from 2000 to 2017 is also hard to accept since manufacturing jobs grew by more than 1.5 million from 2010 to 2022, during which U.S. imports from China rose 32 percent.
Pressure from Chinese imports did contribute to manufacturing job losses from 2001 to 2009, but nowhere near the 50-percent mark cherrypicked from an Economic Policy Institute report. More rigorous studies by economists at the University of Chicago, MIT, and Harvard University attribute at most one-quarter of the 5.5 million jobs lost to the abrupt increase in imports from China in the early 2000s. At the same time, factors unrelated to trade accounted for most of the losses—especially broad adoption by U.S. manufacturers of technologies that made their operations more productive but required fewer lower-skilled workers and the depressed demand during the 2008-2009 recession. So, the 1.5 million new U.S. manufacturing jobs created since 2010 have offset the job losses associated with trade with China from 2000 to 2009.
Not all trade agreements are equal. Some do a better job opening markets, protecting intellectual property, and establishing sound ways to settle disputes. Indiscriminate opposition to trade agreements denies administrations the chance to negotiate the best deals possible, which is one reason why the Doha trade talks broke down in 2011, and the U.S. withdrew from the Trans-Pacific Partnership in 2017. In this magazine, Wesley Clark, former allied supreme commander of NATO, has advocated much closer economic integration with the European Union and the United Kingdom to match our military cooperation and praised the Biden administration’s efforts in this direction.
The earlier job losses did lead to suffering, less than Reich asserts but pain, nonetheless. We have a responsibility to provide meaningful support for Americans who lose their jobs to trade—or, for that matter, because of a mismatch between their skills and the application of new technologies, an economic crisis, a pandemic, or the regular downside of the business cycle. For example, temporary financial support can address the latter three circumstances through generous unemployment benefits. But jobs lost to import competition or a skills mismatch require more far-reaching measures, such as free access to community college training programs and assistance moving to places with more available jobs.
And erecting tariff walls rarely works. They can be an effective tactic in retaliating to another country’s tariffs on our goods or services, but tariffs to weaken competition from imports are almost always self-defeating. Economists at the Federal Reserve and the World Bank, for example, found that Donald Trump’s steel and aluminum tariffs cost more jobs than they saved because they raised prices in hundreds of industries that used the targeted metals as inputs and triggered retaliatory tariffs—just as the U.S. tariffs on basic textiles from the 1960s to the mid-1990s ended up raising prices and reducing exports. They also failed to preserve jobs in the parts of the industry targeted by the tariffs.
The good news is that even as anti-trade fever is growing, Americans still recognize the benefits of international trade. A recent Gallup survey found that 32 percent of Americans now see trade as a threat, up from 18 percent in 2019, but 62 percent see it as an opportunity. Most Americans know a good deal when they see it.
