Economics

Free Trade on Trial: Trade and Labor Markets

Despite political angst, free trade policies are consistent with a robust labor market and even job security

Image credit: Iron and Coal by William Bell Scott, English (1811–1890), National Trust via Wikimedia Commons

This is the first in a series of four articles that will examine the most common arguments against free trade. The second piece talks about the relationship between trade and national security. The third piece discusses how free trade boosts healthcare security.

US trade policy has often been a point of contention in past US election cycles, but it promises to be more prominent than usual as we enter the final campaign stretch from Labor Day to Election Day 2020. At issue is nothing less than America’s postwar commitment to pursuing lower tariffs at home and abroad and deeper economic integration with the rest of the world.

If the past is any guide, the indictment of expanding trade will focus on anxieties about security—job security, national security, public health security in a time of COVID-19, and economic security in the face of “unfair trade.” The sharpest differences on trade this election are not so much between the two major party nominees for president, but within each party, and between party leaders and the general public they seek to lead.

Ironically, despite the claim of populist anger toward trade, the general public—at least until the COVID-19 crisis—was more sanguine about trade than at any time in the past 25 years. In February, Gallup released a poll under the headline “Americans’ Vanishing Fear of Foreign Trade.” The poll found that nearly four out of five Americans view foreign trade “more as an opportunity for economic growth through increased U.S. exports” than as “a threat to the economy from foreign imports.” By contrast, Gallup found, “Fewer than one in five consider trade an economic threat, an all-time low.”

Yet anxieties about trade persist in certain segments of the electorate, anxieties exploited by politicians seeking votes. Those worries center on legitimate concerns about job displacement, national security, public health, and foreign trade practices. Evidence shows each of those concerns is more effectively addressed through means other than trade barriers, but the temptation is all too real for politicians to scapegoat trade. In the coming weeks, I’ll be examining each of these four major anxieties and explaining why international trade in each case is part of the answer, not the problem.

Perhaps the most common worry about trade is that it eliminates jobs, most directly in manufacturing if not in the overall economy. “Reshoring” manufacturing and supply chains has been the stated goal of Trump trade policy, while Democratic nominee Joe Biden has sounded similar themes, promising in his acceptance speech last month to create 5 million new manufacturing and technology jobs.

Unfortunately, the leaders of both major parties fail to understand the basic fact that trade is not about more jobs or fewer jobs but about better jobs, whether in manufacturing or the service sector. Like technology, trade allows the US economy to shift workers and investment to sectors where we are relatively more productive. That generally means producing goods and services that play to our strengths as an advanced economy, such as airliners, semiconductors, and financial services, and making fewer goods and services that workers in other nations can produce more competitively.

The belief that trade has somehow aggravated overall unemployment and decimated the US manufacturing sector is a myth that does not stand up to examination. Before the COVID-19 crisis hit the US economy hard in March, the unemployment rate had reached a 50-year low of 3.5 percent, job growth was steady, and real wages were rising for the large majority of US workers, including those on the lower end of the wage scale. And all this was achieved with pre-Trump, postwar trade policies. Through 2019, the old North American Free Trade Agreement was still in full operation, China had yet to implement any of the reforms demanded by the Trump administration, and the US trade deficit was 20 percent higher than it was in 2016.

US manufacturing was also thriving, at least through the first two years of the Trump presidency, but again not because of any change in US trade policy. In fact, according to the US Bureau of Labor Statistics, the economy added a net 185,000 manufacturing jobs in 2017 before any of Trump’s special tariffs on steel and Chinese goods were imposed. Another 264,000 were added in 2018, but the growth slowed sharply in 2019 as US tariffs against China and the predictable retaliation kicked in with full force.

In fact, as the tariff war accelerated in 2019—disrupting supply chains and curbing exports—US manufacturing activity decelerated and actually entered something of a recession by year’s end. Real manufacturing output, according to the US Federal Reserve, shrank 1.1 percent in 2019 (December to December) after growing more than 2.5 percent in each of the previous two years.  The sharp slowdown in manufacturing occurred after the Trump tariffs came into full force but before anyone was even talking about COVID-19.

Our recent experience demonstrates what economists have been saying since Adam Smith: tariffs are a kind of quack medicine for the economy, including the manufacturing sector. Import taxes can temporarily boost employment in the protected sectors, such as steel or washing machines, but they cost jobs in other sectors as they raise the cost of production in more competitive industries. For instance, protecting domestic steel or aluminum producers from foreign competition ends up increasing the prices of their products, increases ultimately born by other American companies who use steel and aluminum in their products, such as cars or airplanes. Further damage is done to American exporters because tariffs invite foreign retaliation against our more competitive export sectors.

In the long run, tariffs even discourage domestic consumption of “protected” products by raising their price, encouraging substitutes. Protected industries, such as steel, sugar, and shipbuilding, find themselves losing market share to alternatives in a limited domestic market. The protection may lift the compensation of their top executives, but to the detriment of the nation and eventually their own industry. Trade conflicts also stoke economic uncertainty, further depressing imports, exports, and foreign investment.

By contrast, expanding trade and growth of global supply chains have played a major role in lifting the well-being of US workers. Real hourly compensation, including wages and benefits, has risen for most American workers in the past 30 years. Real median household income is up. Workplace deaths and injuries are down. Foreign direct investment, the flip side of the trade deficit, has created 7.3 million well-paying jobs for Americans at majority-foreign-owned affiliates in the United States, including 2.5 million in manufacturing.

A strong labor market is perfectly consistent with expanding trade and, yes, a persistent trade deficit. The best job security for American workers is not a “protected” domestic market but investment in worker skills, a flexible domestic labor market, and a free and open economy that creates new opportunities for ever more productive work.

The lesson for candidates and voters alike as we approach another national election is that a trade policy of maintaining low tariffs and seeking free-trade agreements has served the interests of the large majority of American workers, and that an alternative policy of rising tariffs will not promote job creation but in fact will create more disruption and uncertainty.

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