Of the many dangerous trends in the 2016 election, the revolt against free trade that has captured both parties could do the most long-term damage. That’s because protectionism would undermine future growth of the U.S. economy and subvert America’s role as global leader.Globalization has undeniably hurt some American workers and cost some manufacturing jobs. But there’s strong evidence that trade has benefited the U.S. economy and created whole new industries in which America is dominant. That’s the essence of the “creative destruction” that makes a market economy so potent: It relentlessly pushes innovation and change.
Rather than shooting at trade agreements with a blunderbuss, as both Donald Trump and Bernie Sanders have done (dragging their rivals along with them), candidates should be talking about how to protect the workers who are harmed by foreign competition. The debate should focus on trade-adjustment assistance, job training and better education at all levels. President Bill Clinton two decades ago spoke about “building a bridge to the 21st century” for all Americans. That’s still the issue.
The free trade argument feels like a rerun of what I covered in my first reporting job in Pittsburgh in the late 1970s, when foreign competition began to challenge the steel industry. Management and labor joined forces to plead for protection, arguing that lower-cost foreign steel was being “dumped” in the United States by the Japanese and others. But that argument wasn’t true. Japanese mills had lower costs because they had innovated – building new, superefficient blast furnaces and rolling mills while the American industry slumbered. If the protectionists had won back then, they would, in effect, have imposed a tax on all American consumers to support bad management and high costs in the steel business.
The protectionists failed, and the steel industry collapsed. People suffered in the transition: The population of Allegheny County got smaller, older and poorer from 1980 to 1995, as steel jobs vanished and workers moved or retired, according to the University of Pittsburgh’s University Center for Social and Urban Research. The region’s real median household incomes were also stagnant or declining.
But over time, the disruptive whirlwind of change created new jobs and greater incomes, thanks to dynamic new businesses that spun up around the University of Pittsburgh Medical Center and Carnegie Mellon University.
Census Bureau data show that in the Pittsburgh metropolitan area, per-capita incomes roughly doubled from the beginning of steel’s downturn in 1978 to 2014. In inflation-adjusted constant dollars, average personal income rose from $23,239 in 1978 to $45,231 in 2014. Over that time, average incomes in the Pittsburgh area grew faster than in Pennsylvania and the U.S. as a whole.
The bipartisan protectionism of Trump and Sanders has focused its attacks on the Trans-Pacific Partnership, the trade deal the Obama administration negotiated with 11 other countries. Economists who have studied the TPP carefully argue that this assault is badly misplaced. In a new paper published by the Peterson Institute for International Economics, Robert Z. Lawrence and Tyler Moran estimate that between 2017 and 2026, when TPP would have its major impact, the costs to displaced workers would be 6 percent of the benefits to the economy – or an 18-to-1 benefit-to-cost ratio. So focus protection on that 6 percent.
Even economists who think free trade has harmed U.S. manufacturing see benefits in the TPP. David Autor, David Dorn and Gordon Hanson argued last year that although import competition helped produce a “momentous decline” in U.S. manufacturing, “We believe blocking the TPP on fears of globalization would be a mistake.” They note that the pact would promote trade in knowledge industries where the U.S. has a big advantage, and that “killing the TPP would do little to bring factory work back to America.”
Trump, the businessman, seems weirdly out of touch with real economic trends. He speaks of Japan as if it were an economic powerhouse, when it has actually suffered a two-decades-long slump; he describes a surging China, when the numbers show its growth is sagging.
Trump is a real estate guy and hotelkeeper. So maybe he doesn’t realize that because of low energy costs and high productivity, the U.S. is “seeing ... evidence of an American manufacturing renaissance,” according to the Boston Consulting Group. The number of U.S. executives who plan to add production capacity at home has increased by about 250 percent since 2012, according to BCG.
Trump and Sanders are swinging a wrecking ball on trade. The right answer is to help workers who are being hurt as the economy evolves, not to shut down the global trading system.
David Ignatius is published twice weekly by THE DAILY STAR.