Home > Uncategorized > The trouble with trade: people understand it

The trouble with trade: people understand it

from Dean Baker

Ever since Donald Trump was elected there has been a huge backlash among elite-types against those blaming trade for their problems. Major news outlets have been filled with misleading and dishonest stories claiming that the real cause of manufacturing job loss has been automation and that people are stupid to worry about trade.

In fact, people are exactly right to be concerned about the impact of our trade policies on their living standards. It is the fact that people are right that is worrying our elites. Trade is just one of the areas in which politicians of both parties have promoted policies to redistribute income upward. It just happens to be the area in which the impact is most recognizable and therefore people have mounted an effective resistance.

The story with trade is simple. When a manufacturing worker in the US is placed in direct competition with a worker in Mexico, China or some other developing country, who earns one-tenth of their pay, it puts downward pressure on their wages. Either their jobs go away or they are forced to take substantial pay cuts to keep their job.

This competition has cost a huge number of manufacturing jobs in this century. It has also put downward pressure directly on the wages of manufacturing workers and indirectly on the wages of less-educated workers more generally, as displaced manufacturing workers sought jobs in other sectors.

Elite media types have tried to deny these facts by claiming that the source of job loss is automation (i.e. productivity growth), not trade. This claim deserves to be met with the same sort of derision as the claims of climate change deniers.

The data are very clear. From December of 1970 to December of 2000 we lost 130,000 manufacturing jobs, less than one percent of the total. There was plenty of productivity growth in manufacturing over these three decades. While manufacturing employment did fall as a share of total employment, there was little change in the absolute number of manufacturing jobs over this long period.

By contrast, manufacturing employment dropped by more than 3.4 million, or more than 20 percent, in the seven years from 2000 to 2007. This was trade. The trade deficit exploded over this period to almost 6 percent of GDP, which would be more than $1.1 trillion in today’s economy.

The people in the states hit the hardest like Michigan, Ohio and Pennsylvania are absolutely right to believe that trade has hurt them, their friends and communities. The trade denialists would have us believe that if we had something close to balanced trade, we could produce another trillion dollars a year worth of manufactured goods without employing any workers. Sorry folks, that one does not pass the laugh test.

But denialists are right in saying that trade is far from the whole story. The elites have been pursuing policies in a variety of areas to redistribute income; the difference is that the policies are less visible in other areas.

For example, the Federal Reserve Board deliberately keeps the unemployment rate from falling too low in order to keep workers from gaining too much bargaining power. This is ostensibly a hedge against inflation, but the people who pay the price in this war on inflation are workers at the middle and bottom of the income distribution. It is worth noting in this respect that the champion inflation fighter was Paul Volcker who President Carter appointed as Fed chair.

The leadership of both parties has supported stronger and longer patent and copyright protection. The Hepatitis C drug Sovaldi has a list price of $84,000, instead of the free market price of $200, because of its government granted monopoly. This protectionism transfers more than $350 billion a year ($2,500 for an average family) from the rest of us to the drug industry alone.

And the reason that CEOs can pocket tens of millions of dollars a year is a corrupt corporate governance structure that allows their friends who sit on their board of directors to determine their pay. It is incredible that supposed supporters of the free market fiercely resist reforms that would give shareholders — the owners of the company — more control over what they pay top management.

But these and other policy areas are where the rules have been rigged in ways that can be difficult for the public to understand. After all, most people have little or no knowledge of the Federal Reserve Board and monetary policy or the rules on corporate governance. They can see, however, their factory being shut down and moved to Mexico.

This explains the harsh reaction of elite types. In the case of trade, the public is onto the game. And elites are doubling down to hide the truth. Therefore we can expect to see a continuing flow of dishonest news stories and columns, mixed in with plenty of name-calling, all to discredit the truthful claim that trade has been a major factor undermining the living standards of the middle class.

See article on original site

  1. robertreno
    February 16, 2017 at 3:29 pm

    What do you think American society will look like Dean when the same thing done to the blue collar workers is done to the white collar workers? I am puzzled why the fact you always speak to only manufacturing (i.e., blue collar workers) while ignoring the ongoing onslaught against white collar workers effectively doing to them what has already been done to blue collar workers in the outsourcing of manufacturing, except it is being done right here on US (UK, CA, etc.) soil via so-called “staffing” companies servicing the “contingent” recruiting industry. Increasingly big tech companies are laying off workers and then rehiring them as “contingent” staff through so-called “preferred vendors” that are really body-shops that extract wage scalping rents off the top of the direct bill rates paid by the big tech companies. this predatory middle tier is doing right on US soil to white collar high tech workers what has already been done to blue collar workers. They use technology smoke screens to carry out their manipulation and deception as they lie to potential job candidates about both minor and major issues all with the goal in mind of recruiting them to work as W-2 employees for a body-shop that treats them as slave labor. Lisen here: https://soundcloud.com/user-295952651/sets/indian-call-center-agents

  2. February 16, 2017 at 3:37 pm

    Dean:

    This is third blog on this subject. Have read all three with pleasure.

  3. frank peters
    February 16, 2017 at 3:37 pm

    Dean concedes that ‘denialists’ are right to say that “trade is far from the whole story”.

    But this denialist denies it is trade at all. To use his key dates, manufacturing’s share of US merchandise exports went from 66.7% in 1970 to 77.6% in 2007 (World Bank data). Hard to see here how trade is responsible for the hollowing out of manufacturing jobs, even if the share did peak 82.7% in 2000.

    The US (led by finance) embarked on a programme of global deregulation and destruction of trade barriers long before 2000. However, from 2000 onwards US investment slowed to a crawl. Annual GFCF growth averaged 1.7% in 2000/07 having been 3% in 1970 to 2000. The former probably isn’t enough to create Net FCF.

    It is this concurrent slump in investment, not the much earlier move towards freer trade which is responsiible for the crash in US manufacturing jobs. NAFTA came into force in 1994, after all.

    • patrick newman
      February 16, 2017 at 4:16 pm

      Is that 77.6% of an increased or reduced volume of mechandised exports in 2007 in real terms?

      • frank peters
        February 16, 2017 at 5:06 pm

        In 1970 real goods exports were $120bn. in 2007 they were $1,141bn (OECD). So a bigger slice of a vastly increased pie.

  4. antireifier
    February 16, 2017 at 4:37 pm

    NAIRU is alive and well despite denials to the contrary. “…the Federal Reserve Board deliberately keeps the unemployment rate from falling too low in order to keep workers from gaining too much bargaining power.”

  5. Lord
    February 16, 2017 at 7:29 pm

    When they do admit the loss of manufacturing jobs, they feign surprise as if no one could have anticipated it rather than a strategic foreign policy play to move China into the trading system expecting political liberalization to follow. Not quite the bet it turned out to be.

  6. February 16, 2017 at 7:49 pm

    Trade achieves two things: It moves prices towards commodity prices depressing workers’ income, and it makes available a greater variety of goods from which consumers can select the best. How do we keep the variety effect while resisting the price effect? In other words, if you live in Rome it’s worth paying for shirts made in Italy so long as you don’t have to suffer Italian laptops or phones.

  7. February 16, 2017 at 8:53 pm

    I think one really needs an objectve and cooperative analyses of these statistics. (i have my own view—for example, alot of US manufacturing exports are ‘parts’ that go to mexico, and then reassembled into thin gs like ‘cars’ and reimported to uSA. people in USA dislike buying ‘made in china goods’ but they love the low prices at walmart (half the goods there are made in china). den baker–who i met a few months ago at a local place (used to be an abanonded street sroner due to homicides and drugs) –wa very slow to endorse something like a basic income. he says stuff like US economists are way overpaid, so we should let non-americans come in to do economics and other jobs. i agree but you have underemployed people right here in wash dc who are able to do
    economics as well as dean baker. But we have a different focus.(and dont get any ford foundation grants)

  8. February 18, 2017 at 6:22 am

    Let’s leave economic theory out of this for now. Humans have traded for almost 10,000 years. They didn’t need economists or economic theories to do this. The traders sought out trade that was advantageous, not just in terms of money or wealth. But in terms of getting things needed at home or for enhancing the security/power of their homelands. They used many merchants, guides, and moneylenders to carry out this trade. In the year 1000 western Europe was not a place to which most would choose to immigrate. Western Europe had only one real city, Cordorba, but it was actually a Muslim city. Western Europe was also violent, poor, and subject to long periods of chaos. Luxuries (silks, perfumes, spices) were mostly absent and very expensive. It was these that flavored an otherwise bland (sometimes inedible) cuisine and made close personal contacts a great deal more pleasant. To get these Europe had to trade with Middle Eastern merchants. Selling the few goods from Europe that interested these merchants. Mostly furs and slaves. The trade was so vital to Europe that in times of shortages of slaves, European traders might find themselves delivered into slavery to seal a deal.

    600 years later Europe controlled this trade, as well as the trade with the New World. The history of this evolution provides a thousand insights into how trade among nations and regions is created and changed. Today’s traders could learn a lot from study of this history. Much more in my view than the study of economic theories.

  9. February 18, 2017 at 8:59 pm

    “Elite media types have tried to deny these facts by claiming that the source of job loss is automation (i.e. productivity growth), not trade. This claim deserves to be met with the same sort of derision as the claims of climate change deniers.”

    And by extension, climate scientists have a pretty genuine gripe against economists for eroding the public’s faith in science.

    “This competition has cost a huge number of manufacturing jobs in this century. It has also put downward pressure directly on the wages of manufacturing workers and indirectly on the wages of less-educated workers more generally, as displaced manufacturing workers sought jobs in other sectors.”

    It is even worse than that. Mexico’s workers don’t see wages go up, which is the neoliberal’s typical defense against this claim. Workers on both sides of the border have less job security, and companies on both sides of the border that pay people too much represent value waiting to be unlocked.

    Building production is easy – take a few million and build a factory. Building consumption is much harder, which is why only a small handful of countries have developed to their potential. When you open boarders to trade and reduce friction to zero, what you are really doing is importing inequality. Whatever country has the middle class with the worst leaks will get the most economic activity.

    • February 20, 2017 at 6:02 am

      jeff1089, two things struck me about your response, and are great concerns of mine. First, companies … pay people too much represent value waiting to be unlocked” is a frightening summary of corporate desires. The “value” represented here is I assume greater monetary earnings for the corporation, not human welfare and understanding. Problem is the former is transitory while the latter is what makes human societies work. Second, the “race to the bottom” you mention in trade has been happening inside the US for decades. And the winner of this race is the same in each instance. Corporations. They manipulate and take advantage of government (federal, state, and local), consumers, and the processes of democratic governance by requiring them to meet the earnings needs of the corporation. I’m not anti-corporation or anti-business. But I am anti rigged games. The US doesn’t need the Russians to destroy its government and economy. Corporations ostensibly American but now actually international are killing us already. And they’re successful so far. Very successful. “Supreme excellence consists in breaking the enemy’s resistance without fighting.” ~Sun Tzu

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