How Trade Works
May is World Trade month and normally a time when we highlight the benefits of trade to the American economy. The fact is the US economy benefits enormously from trade. If you are following the political campaign you will know there has been a lot of debate about trade and its impacts on our economy.
From an economic standpoint virtually all economists agree (one of the rare areas of agreement) that trade stimulates economic growth and raises incomes across an economy. But they also acknowledge not everyone benefits and there are real costs associated with job and career transitions in some affected industries. But most believe that those costs are small compared to the long-term benefits to the economy.
Economists point out the impact of trade is really about the re-distribution of jobs throughout an economy – with more jobs being created in the sectors that the US excels in – and there are many of those – and fewer jobs in sectors where other countries are more competitive. This adjustment, over time, makes the US economy stronger, more productive and more competitive globally.
A recent study looked at potential workplace adjustments in the labor force related to TPP and found under the most realistic scenario the number of jobs affected would be a tiny fraction of the normal job transitions in the US economy. Under this same scenario TPP’s benefits will outweigh its costs by over 17:1 during the ten year period of adjustment. After the adjustment period, the benefit-cost ratio rises to over 356:1, according Robert Lawrence, the study’s author.
The fact that trade creates adjustments in the workforce is not a flaw – that is what is supposed to happen. If there is a flaw, and many economists believe there is, it is that the US labor market is too rigid – it is not easy to change jobs and to get re-trained to take advantage of the new opportunities produced by the global economy.
Labor market rigidity does two things: 1) it prolongs the pain for those transitioning jobs or careers, especially those in the second half of their working lives; and 2) it limits the economic benefits of our trade policy because the reallocation of jobs towards the more competitive sectors does not happen as fully or as quickly as it should.
Making the US job market more fluid and flexible – and better able to adjust to inevitable evolution of the global economy should be one of our top economic priorities. What would be helpful is a comprehensive and balanced review of US labor and tax laws, as well as our education system, to come up with a modern and effective set of measures to help workers transition and get the training and education they need to take on the new jobs that our economy is producing. There are millions of jobs that go unfilled today because we don’t have people with the right skills.
These kinds of initiatives would help the U.S. better realize the gains from trade and increase the public support for trade. This is actually how trade is supposed to work – some small portion of the benefits is used to help those most affected.
There can be no doubt that protectionism is the wrong solution. Raising tariffs hurts the economy, especially the middle class, by raising prices, reducing choice and limiting competition. The fact is the U.S. economy became the strongest, most innovative and most competitive economy in the world because we embraced trade and rejected protectionism. That’s a platform for success that we should all embrace.
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