You Can’t Be Pro-Jobs Without Being Pro-Trade

(Bloomberg Opinion) -- Senator Elizabeth Warren, a likely 2020 presidential contender, recently laid out her vision for foreign policy in a speech at American University and an essay in Foreign Affairs. The Massachusetts Democrat was highly critical of traditional U.S. trade policy.

She writes that the trade deals negotiated by leaders of both political parties “mainly lifted the boats of the wealthy while leaving millions of working Americans to drown." Her conclusion: "Policymakers were willing to sacrifice American jobs in hopes of lowering prices for consumer goods at home and spreading open markets abroad.”

Supporters of free trade would disagree with this characterization, of course. But they might agree that among the main benefits of trade are, as the senator says, lower-priced goods in U.S. stores and new markets around the world for American business.

But what about jobs?

From President Donald Trump’s bleak inaugural vision of American carnage to Warren’s drowning American workers, there is a growing bipartisan consensus that free trade reduces employment.

This view seems to forget that free trade should increase a country’s exports as well as its imports.

Increasing demand for imports can reduce demand for similar domestically produced goods and services. This can hurt employment opportunities and wages in those domestic industries. But the opposite is true of exports. As export demand increases, the demand for workers in those industries should rise, putting upward pressure on their wages and increasing jobs.

It’s also hard to square the trade-reduces-employment view with the existence of macroeconomic policy designed to achieve full employment. More specifically, if free trade creates a large number of unemployed workers, then the Fed will keep the economy running hot long enough to allow those workers to find new jobs.

So as a first pass, the right answer to the question is that trade doesn’t reduce overall employment. It doesn’t increase it, either. It’s a wash.

Careful research by the economist Robert Feenstra and his co-authors shows that this simple conclusion is basically correct. In one paper, they find that the U.S. lost around 3.5 million manufacturing jobs due to Chinese imports from 1991 to 2007. At the same time, export-driven job gains totaled about 3.3 million.

So the net effect was about 200,000 fewer jobs. Looking over the full two decades of the 1990s and 2000s, Feenstra finds even more balance between jobs gained due to exports and lost due to imports.

In a second paper, Feenstra and Akira Sasahara use a different method to study the effects of U.S. exports and imports on labor demand. They found that export growth led to demand for 6.6 million jobs from 1995 to 2011, including 4 million service-sector jobs, while imports reduced demand. But on net, overall labor demand increased due to trade over this time period — with increases in services and declines in manufacturing.

Of course, the level of employment is not the only outcome worth considering when thinking about the effects of trade. One is churn. Let’s take Feenstra’s estimate of 2 million fewer manufacturing jobs due to trade with China. That works out to an average loss of about 10,000 jobs per month over the 17 years in his estimate.

To put this in context, compare it to the total level of turnover in the U.S. economy for September 2018, the most recent month for which data is available. That month, 3.6 million workers quit their jobs. Companies laid off or discharged 1.7 million workers. In total, 5.7 million workers separated from their employer.

The amount of churn in the U.S. labor market is staggering. Trade causes a small share of that churn.

But trade-caused disruption does create winners and losers. Although economists have long understood this simple fact, some recent
research has demonstrated that the speed with which the U.S. economy adjusts to the disruption has been much slower than had been previously understood. This left local areas especially exposed to import competition with higher unemployment, fewer jobs and lower wages for much longer than many economists would have predicted.

And even if workers who lose a manufacturing job because of trade are able to get a job in the services sector, that doesn’t mean they will necessarily be happy about it. Those jobs often pay less, with fewer benefits, and are less stable than the job they lost to trade.

Policymakers should focus their efforts on dealing with those frustrations, and not on trade.

As we have seen, the problem with the U.S. labor market isn’t trade — trade does not have a significant impact on the level of employment or on churn in the labor market. And trade delivers a host of benefits to the U.S. economy, including a greater variety of and lower prices for consumer goods, along with productivity and efficiency gains.

But for a worker who loses his job due to trade, the macroeconomic picture hardly matters. The answer is not to erect walls around the U.S. Instead, public policy needs to do a much better job of helping workers manage the difficult adjustments that are required by a dynamic economy — whether those adjustments are driven by trade, or by anything else.

On this score, Warren’s speech and essay fall flat. Using trade agreements to go after tax havens, curtail large multinational firms and address climate change isn’t the answer. The same goes for her vague call for workers to “be meaningfully represented at the negotiating table.”

In the next two years, presidential aspirants will need to come up with policy ideas that pair global openness with support for workers. This is so difficult precisely because it is so needed, after decades of unsatisfactory attempts.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.”

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