Home > Uncategorized > Six lies on trade

Six lies on trade

from Dean Baker

After 500 days of Donald Trump’s presidency, it is clear that any relationship between his statements and the truth are purely coincidental. He even boasts about his lack of interest in the truth, touting the fact that he had no idea what our trade deficit was with Canada when he confronted Canadian Prime Minister Justin Trudeau over our “$100 billion trade deficit.” (The actual figure is around $20 billion.)

But Donald Trump’s contempt for the truth should not cause the rest of us to become liars also. In fact, it is more important than ever that progressives ground arguments in reality.

This is especially the case with trade, where lying was standard fare long before Donald Trump entered politics. Here are six common lies which deserve major pushback any time they appear.

1. Everyone gains from trade.

This is not even the textbook story. The textbook tells us there are winners and losers. In the standard story, the winners gain more than the losers lose. This means that the winners could compensate the losers so that everyone is better off. In the real world, this compensation never takes place, so the losers just lose.

If this is hard to understand, suppose we arranged for 300,000 highly qualified doctors from other countries to start practicing in the United States. This influx would probably lower our doctors’ pay by around $100,000 a year each to roughly European levels. This would save us close to $100 billion annually ($700 per family) on health care costs. That’s a big gain to the rest of us, but a big loss to US doctors. That’s basically the story of trade, but the competition has been for manufacturing workers. 

2. The loss of manufacturing jobs was due to productivity growth, not trade.

This is a classic economist’s sleight of hand. Manufacturing productivity typically increases at the rate of 2-3 percent annually. (It has been much slower in the last dozen years.) This is also roughly the rate of growth of demand, which means that increased demand for goods typically offset the jobs lost to productivity growth.

The data are clear. In the three decades from December 1970 to December 2000, manufacturing employment only fell by 100,000, less than 1 percent. By contrast, we lost more than 3.4 million manufacturing jobs from 2000 to 2007 (before the crash), which was more than 20 percent of total employment.

This was due to the explosion of the trade deficit in these years, which peaked at almost 6 percent of GDP in 2005 and 2006. That would be equal to $1.2 trillion annually in today’s economy. There were benefits from getting cheap imports, but it is incredibly dishonest not to acknowledge the enormous job loss associated with the expansion of the trade deficit in those years.

And of course, over the last 50 years, many more manufacturing jobs were lost to productivity than trade. This is true, but completely irrelevant.

3. It is inevitable that less-educated workers lose jobs to the developing world.

This is a great example where the classism of our elites obstructs clear thinking. It is absolutely true that there are hundreds of millions of people in the developing world who are willing to work in factories at a fraction of the wages that US manufacturing workers receive. This means that opening to trade puts downward pressure on the wages of US manufacturing workers, and less-educated workers more generally, as they either accept large pay cuts or lose their jobs.

The complication is that there are also tens of millions of very smart hard-working people in the developing world who would be happy to work in the United States as doctors, dentists, lawyers or as other highly paid professionals at a fraction of the pay of our professionals. They could train to our standards and learn English where necessary. This would drive down the salary in highly paid professions, and thereby lead to savings to consumers, but we don’t allow it. Trade deals have been about lowering the pay of less-educated workers, while highly paid professionals continue to enjoy protection from international competition.

4. Trade deficits don’t cost jobs.

It is very popular among pundits to claim that trade deficits don’t cost jobs by pointing to our current 3.8 percent unemployment rate, even as the deficit is on a course to exceed $600 billion (3 percent of GDP) this year. While it is true that a trade deficit does not necessarily cost jobs, in a period where we are below full employment, a $100 billion increase in the trade deficit reduces demand and employment in the same way that a $100 billion reduction in investment would reduce demand and employment.

The large trade deficit in the last decade was certainly a big factor in the weak labor market recovery from the 2001 recession. We eventually filled the demand gap from the trade deficit with the demand generated by the housing bubble. This is hardly a good model for the future.

5. It is important that other countries respect “our” intellectual property.

This is a line that has come up repeatedly in Trump’s trade war with China. We have been told that we have an interest in making China pay for the intellectual property of US corporations that it allegedly steals.

Okay, it is clear that Pfizer has an interest in having its drug patents respected by China, as does Microsoft with its software copyrights and patents. But what about the vast majority of us who don’t own lots of stock in these or other companies that have intellectual property claims at risk?

The standard trade theory tells us that if China and other countries have to pay less money to Pfizer and Microsoft due to patent and copyright monopolies, they have more money to spend on other items we produce. In other words, the money they pay to these companies increases the trade deficit in other areas.

We do have to support innovation, but that is a separate issue. There are far more efficientmechanisms than patent and copyright monopolies for financing innovation in the 21st century.

6. The developing world needed to kill US manufacturing to allow people to escape poverty.

Hundreds of millions of people in the developing world have seen huge improvements in living standards over the last three decades, especially in China. These people went from living near or below poverty levels to enjoying middle-class living standards.

This is indeed a great story, but it is not true that this rise in living standards had to come at the expense of manufacturing workers in the United States and other wealthy countries. In the 1990s, the countries of East Asia (the big success stories) had even more rapid growth than they did in the last decade. This was a period in which they were running large trade deficits, with the important exception of China, which had nearly balanced trade.

In principle, there is no reason these countries could not have continued on a path where domestic demand fueled growth and was funded by foreign investment flows. However, the East Asian financial crisis hit in 1997. The United States led the bailout organized by the International Monetary Fund (IMF) and essentially required that these countries run large trade surpluses as a condition of getting aid.

The shift from running trade deficits to running trade surpluses was a requirement of the IMF, not a law of economic development. If these countries were allowed to continue to be importers of foreign investment (the standard textbook model), and sustained the 1990s growth path, they would be far richer today. In fact, countries like South Korea and Malaysia would now be richer than the United States on a per person basis.

In short, it is simply not true that the pain to factory workers, who lost their jobs in the United States, was somehow a necessary condition for hundreds of millions of people in the developing world to escape poverty. Other paths would have allowed for even more rapid growth in these countries.

Getting to a Reality-Based Trade Policy

It seems likely that Trump’s trade war will go down in flames when Trump eventually loses interest and goes back to the hunt for President Obama’s Kenyan birth certificate. His reckless actions deserve all the ridicule and contempt they have received.

However, we should not go back to a trade policy that was based on lies. We need a trade policy that is about raising the living standards of working people in the United States and the developing world, not just giving all the money to the rich.

See article on original site

  1. Prof Dr James Beckman, Germany
    July 11, 2018 at 9:15 am

    From the 1990’s onward each year the millions of cargo containers + large numbers of vehicles, both from Asia, entering Los Angeles/Long Beach Harbors from Asia offered products made largely by WORKERS. I lived there & saw this almost daily on the railways & highways.
    That said, the intermediate products saved on total production costs here, while the overall lower prices to ultimate users were going increasingly to those in services, from professional involving advanced degrees to manual working with cash registers, elder care, construction tools, etc. A changing world, seen as a threat by some but also as an opportunity by many, it seems.

    • Yok
      July 14, 2018 at 3:33 pm

      Professor. I see a lie in what you said. “Lower overall prices….going increasingly to those in services…. manual working with cash registers, elder care, construction…. A changing world, seen as a threat by some but also as an opportunity by many, it seems.” Well. An opportunity by many. You know the manual laborers and low skill jobs. Well in point of fact the standard of living of the bottom 60 percent of income structure hasn’t increased in forty-five years. They haven’t gotten a raise and the trade hasn’t benefited them. But in that period of time the national income share to the top 1 percent has gone form 9 % to 22 % Exploding inequality. Can you see the threat? Can you see the injustice? Probably from where you’r sitting, one of the elite, what you see and experience has never been better.
      The lie is in the spreading out of prosperity to the people who haven’t shared in it. You make a false association.

  2. Justin Lim
    July 11, 2018 at 9:55 am

    Could we get some proof that East Asian economies would, in fact, be better off if they continued running trade deficits from ’97?

    Thanks

    • Matt Kim
      July 11, 2018 at 3:07 pm

      Seconded. This is a very intriguing statement, echoes of it have been heard but I want to learn more.

    • Yok
      July 16, 2018 at 8:35 pm

      If I may step in here. The East Asians still had many opportunities for productive investment, investment opportunities were not exhausted. For countries with limited ability to provide for all the investment opportunities, capital inflows allow more rapid development, investment, growth.

  3. Jan Milch
    July 11, 2018 at 3:37 pm

    Harley Davidson start production in Sweden of all places i read!Move out from US step by step it seems.With much more costs in labor etc.”We will be there market is” they say HD..Good for Sweden of course,but do Trump know what he do?The New York inheritad brooker?

  4. Craig
    July 11, 2018 at 9:25 pm

    “However, we should not go back to a trade policy that was based on lies. We need a trade policy that is about raising the living standards of working people in the United States and the developing world, not just giving all the money to the rich.”

    Precisely. And Globalization has always been the profit making wet dream of finance, and also the way for it to accomplish the final coalescence of its monopolisitic paradigm of Debt/Burden/Additional Cost post retail sale Only. And a paradigm being an utterly integrated reality means it is an inherent one, so the only way to actually and effectively change that reality is to integrate a new primary paradigm into the system(s) laboring with the old and problematic one.

  5. July 12, 2018 at 12:45 am

    All Internal and the External Markets of the TNCs (Labour, resources, all skills and specialisms, etc.) are vast vertically and horizontally and, by definition, extend globally. Any competition amongst them is based on an old Marxist concept with which all are familiar. To each according to need and from each according to ability, except internally or externally. By the same token, the same thing would apply to credit unions!

  6. Helen Sakho
    July 12, 2018 at 12:53 am

    All Internal and the External Markets of the TNCs (Labour, resources, all skills and specialisms, etc.) are vast vertically and horizontally and, by definition, extend globally. Any competition amongst them is based on an old Marxist concept with which all are familiar. To each according to need and from each according to ability, except internally or externally. By the same token, the same thing would apply to credit unions!

  7. July 12, 2018 at 2:30 am

    A good trade policy must be based on two things: (1) the economic reality (including long history of international trade) and (2) a good theory of international trade. The latter is in reality a theory of the world economy.

    There are full of erroneous “explanations” disseminated in the world as we see in Baker’s list. Most of them are results of bad theories of international trade. There are among the mainstream economics four generations of trade theories: (1) (textbook) Ricardian model, (2) Heckscher-Ohlin-Samuelson theory, (3) new trade theory (Krugman, from 1980’s) and (4) new new trade theory (Meltiz, from 2004). Roughly speaking, they have two common defects: (1) they cannot treat input trade [trade of intermediate goods] and (2) (except Ricardian model) they assume that wage rates of all nations are equal (can you believe it?). It is evident that theories with these characteristics cannot analyze the actual globalized economy or produce an appropriate trade policy.
    To obtain or to produce a good trade policy, we need a new theory. It seems that Baker and commentators do not know that there already exists such a new theory. It is a big loss that they do not know it. Please see my paper: A New Theory of International Values: an Overview.

    This was published in a book in 2017 from Springer, but anybody can download and read the draft version in ResearchGate:
    https://www.researchgate.net/publication/304717720_The_New_Theory_of_International_Values_An_Overview

  8. Helen Sakho
    July 12, 2018 at 7:00 pm

    My apologies for double posting above.

  9. Patrick
    July 13, 2018 at 9:40 am

    You are just as “fact picking” in this article than the people you criticize and on a few points you are simply wrong.

    (1) The dentist point: This logic works for workers where they would earn very low wages in their native countries and high enough wages in more developed countries to compensate for substantially higher living costs. And in order to be able to save and send money back to families, these workers often accept dismal living conditions even in western countries.
    Now this logic does not really work for skilled professions, as (a) there often is a shortage of these in their own countries, meaning they can extract very good rents at home and on a PPP basis have no incentive to move, or at least in lot lower numbers. (and would probably want to live somewhere nice in western countries as well)

    (2) The workers/trade deficit point: This also doesn’t really work out with facts. You fully ignore the job creation from trade and its deficit which easily exceeds the 20% manufacturing jobs lost to trade. Productivity does indeed explain almost all job losses. You cite the 3-4% per year figure but that is simply wrong. productivity gains in manufacturing were substantially higher than that in the period you mentioned as loads of tasks got replaced by robots. Please visit the newly built factories in those years (they are almost empty of people). You cite no empirical evidence whatsoever to sustain the claim that the trade deficit si a factor. In fact, looking at thinks today, the trade deficit is reaching a new spike, without losing a lot of manufacturing jobs. That has nothing to do with Trump, but simply is a spike in American consumption and the exhaustion of robotisation in factories in terms of labour replacement.

    (3) The “killing US manufacturing point, well in terms of output as everyone knows that just simply didn’t happen.

    (4) The persistent US trade deficit: This can largely be explained by the USD as a reserve currency (which is literally keeping the country alive) as it keeps demand up for Dollars and thus somewhat artificially inflates the Dollar’s value. Now I am not sure that you would want to reverse this as the US runs gigantic public deficits, further exacerbated by a (macro-economically speaking) useless tax cut which creates another pile of debt that the next generation can pay interest on for a close to nil growth benefit. Also private indebtedness regularly spikes with each cycle and the Dollar prevents a currency crisis, but also creates this double deficit. What Americans underestimate though is the quite spectacular performance of US Investments abroad, which thanks to the Dollar’s inflated value have somewhat offset these deficits and enriched well often the 1%.

    This model goes far further than a simple goods trade discussion, and as mentioned in point (4), not sure that it is such a great idea to reverse this.

    • Yok
      July 14, 2018 at 3:20 pm

      Patrick. On your dentist point – you just don’t know what you’r talking about. I happen to know a couple, an engineer and doctor, from India. They told me engineers make more than doctors in India. In point of fact I could go to India, buy a basic medical book and start a practice among the poor, write prescriptions. Otherwise the poor have no medical care at all.
      When I was young I wondered, “why are so many doctors foreign?”. About 20 percent. Here 40 years later the proportion is the same. Why? Americans are smart enough. The government could turn out more if it wished. But it doesn’t wish. The medical and dental professions with the government decided how much they should earn and then implement the policies to achieve that. You see, the immigrants play the same role as in other parts of the economy, but they are titrated in. It doesn’t make sense for us to turn out more doctors – they would just congest at the coveted places, lucrative clients, teaching universities, research universities – where the money and prestige are. These gems wouldn’t go to the national backwaters to do the grunt medical work. So we carefully allow some foreigners inside and direct them to pay their dues by serving at roles the elite US doctors don’t care to fulfill.

    • Yok
      July 14, 2018 at 9:56 pm

      Patrick. You just don’t know what’s going on. I’m sorry. Any country running a persistant trade deficit, things being equal, will be suffering from a loss of jobs that the country would otherwise have. Foreign production is substituted for domestic production. All production requires some human effort as an input. The effort we should be putting in on our own behalf we acquire from foreign effort, the foreign jobs.

    • Yok
      July 14, 2018 at 10:06 pm

      Patrick. Once again. No 4. I agree, the trade deficit is a consequence of the reserve status of the dollar. But once again you have things backward. The reserve status of the dollar is a burden to this country, not a benefit. That burden, placed only on the working people of this country, buys cooperation from foreign countries. China and Japan could be meaningful reserve countries. All the lies. All they have to do is allow it, and they won’t. They won’t allow foreigners to hold domestic assets, displace domestic industries, build up claims, in any significant way. That’s their respective government policies.

  10. Helen Sakho
    July 15, 2018 at 2:58 am

    I sense some degree of tension again? I could be completely mistaken and naively caught between econometrics “truths” and “lies” again. I shall confine myself to telling a “white lie” which is also the honest truth and it does relate to smoking! But, I do know that some Americans have perfectly white teeth, as fluoride is/was injected into tap water in some parts.
    Personally, I am into roll ups and classified by dentists as a “trivial” smoker. So, on the smoking, which is a genuinely inherited addiction on and off, I would love to know how to order a box of old style “Happiness is a cigar called hamlet, which does appear to have disappeared from the tobacco markets. So, I am now rolling with “cutters Choice Original”, which is really far too strong with unknown tobacco toxicity. And it was ordered through Amazon, but can also easily be purchased on the counter. The actual degree of toxicity is still unclear, all are covered under the general umbrella of Smoking Kills. The latter statement is certainly true. So, one does have a choice: die of lung cancer, or other common smoking-related deceases “happily ” or regret not having the last puff before dying while trying to whitewash that last dark lie that one believed before one’s last breath!
    For me, that last” lie” will definitely lie mainstream Economists.
    They really have nothing new to say, nothing to learn or to teach, nothing to perpetuate by an endless stream of toxic waste, multiplying itself all over the global at the speed of light.
    When will all this stop? Nobody needs to go hungry anywhere. Somebody’s gain was, is and will always be somebody else’s gain. The real issue remains abject poverty.

  11. Helen Sakho
    July 15, 2018 at 3:00 am

    “Happiness”

  12. Helen Sakho
    July 16, 2018 at 2:46 am

    In response to comments by colleagues regarding “Happiness” and smoking and other killer marketing skills by giant TNCs such as “Coca Cola” and “Pepsi Cola” I can only advise readers to look up the deadly history of these two in China, the Americas, and the rest of the world.

    I remember teaching this stuff just as one of the trade wars that were going on fiercely, as one example of what Globalisation had to offer humanity globally, proving in theory and in practice that more and worse was yet to come on a foundation course, decades ago.

    And while we are at it, let us also compare and contrast the new entrants, the so called “Virgin” ones in other parts of the world, and the connection of these with above example and all their connections with other industries such as oil, mobiles, and so on. Do also read about genuine virgins who single-handedly discredited them.

    The only thing that is “new” is NOTHING. Perfectly predictably, every single symbol of a healthy family lifestyle, every ancient legend has and will be mimicked until total or, if we are lucky enough, near total erosion. Honestly! Who are we kidding?

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