Trade “Experts” Don’t Follow Their Own Dots

The presidential primary campaigns of both parties have exposed widespread voter anger over US global trade policies. The candidate have responded: Trump, Clinton and Cruz have joined Bernie Sanders in opposition to the proposed Trans Pacific Partnership, which the Obama Administration has negotiated with eleven more nations.

In response, hardly a day has recently gone by without the New York Times, the Washington Post and other defenders of the status quo lecturing their readers on why deregulated foreign trade is good for them. The subtext is always the same – that voters should leave complicated issues like this to those more qualified to deal with them. So much for democracy.

Trade experts, according to Binyamin Appelbaum of the Times have been “surprised” at the popular discontent over this issue. Their surprise only shows how disconnected the policy class is from the way most people actually experience the national economy.

The United States has always been a trading nation. But until the 1994 North American Trade Agreement, trade policy was primarily an instrument to support domestic economic welfare and development. Starting with NAFTA, pushed through not by a Republican president, but by the Bill Clinton in 1994, it became a series of deals in which profit opportunities for American investors were opened up elsewhere in the world in exchange for opening up U.S. labor markets to fierce foreign competition.

As Jorge Castañeda, who later became Mexico’s foreign minister, put it, NAFTA was “an agreement for the rich and powerful in the United States, Mexico and Canada, an agreement effectively excluding ordinary people in all three societies.”

For 20 years, leaders of both parties have assured Americans that each new NAFTA-style deal would bring more jobs and higher wages for workers, and trade surpluses for their country. It was, they were told, an iron law of economics.

What actually followed were outsourced jobs, wage declines, shrunken opportunities and rising trade deficits. The result has been a dramatic weakening of the bargaining power of American workers.

So it should come as no surprise when the large parts of the U.S. workforce now conclude that these trade deals may have had something to do with the redistribution of income from their pockets to the bank accounts of the top 1% who own and manage large top end multinational corporations.

Given this embarrassing record, the policy class has modified its arguments. To promote the proposed TPP for example, they now put more stress on geopolitics, claiming that the deal is essential for maintaining American political influence in Asia — which of course is also something that should be left to the “experts.”

And its economic case has downshifted– from the claim that workers lives will be better to assuring them that they won’t be worse. The main point now is to deny that the trade deficits generated by the TPP and similar deals will have any harmful effect on jobs and incomes.

It’s a hard sell. To accept this argument, one also has to accept the following contradictory logic:

  1. Trade deficits do not cost jobs.The central evidence for this assertion is that “most economists” believe it. True, but only because most economists are trained to think about trade in stylized models in which laid-off workers instantly find new jobs (typically at lower wages).

Thus, the lobby for TPP regularly cites “studies” which define the problem away — by assuming permanent full employment (and then concluding there will be no job loss).

Eduardo Porter of the New York Times adds some circular reasoning to the debate. Sending jobs to Mexico under NAFTA, he writes, may have avoided sending more jobs to China where labor costs are even cheaper than they are in Mexico. (Of course, that wouldn’t be a problem if Bill Clinton hadn’t made a similar trade and investment deal with China a few years later.)

Unfortunately for many self-described trade experts, this argument also stumbles over Economics 101. Growth, the generator of jobs, is measured by changes in the Gross Domestic Product. A component of GDP is the trade balance. When imports exceed exports, GDP drops by that amount. That, by the way, is an iron law of economics.

  1. If trade deficits do cost jobs, it doesn’t matter. Why? Because, as Neil Irwin of the Times tells it U.S. consumers get cheaper goods in exchange for dollars. Economic theory considers merely IOUs to be paid back, maybe, sometime in the future.

But, even credit card addicted Americans have a hard time believing that you never have to pay back borrowed money. Moreover, polls regularly show that most voters think jobs are more important than cheap underwear and I-phone. But, what matters to most people is apparently not what matters to most economists.

    3.  if trade deficits do cost jobs and it does matter, don’t blame it on trade. Paul Krugman, as part of his relentless critique of Bernie Sanders, writes that total trade is an even greater share of GDP in some of Sanders’ favorite democratic socialist countries like Denmark. Yet, Danish living standards remain high. Why? Because they are protected by government and promoted by unions.

Thus, according to Krugman, the fundamental problem is not trade; it is the lack of appropriate domestic policies in the United States.

But Krugman fails to tell his readers that, unlike the United States, Denmark runs trade surpluses. Still, he has a point. Trade deficits would not have such a negative impact here if we had social policies like they have there.

But liberal free traders have been saying this for decades. Perversely, Krugman’s argument has been used for over two decades to rationalize the cynical alliance between Democratic presidents and Republican congresses to pass investor-privileged trade deals.

Before each vote, there are promises that this time it will be different. Generous assistance will be provided to help older workers adjust and make sure younger workers get new opportunities — later.

“Later,” of course, never comes. As everyone should know by now, Republicans have no intention of supporting government programs to bolster income and job security – ever.

It is therefore left to liberal Democrats to express their sorrow that things haven’t quite worked out, and to “feel the pain” of the ex-steelworker who is mopping floors at Burger King and the college graduate waiting on tables, as they remind them that, sadly, the United States is not Denmark.

It is long past the time when Krugman and other liberal “free-traders” should have connected the dots of their own analysis. If the problem is not trade, per se, but the lack of domestic progressive policies to adjust to global markets, then the rational response is to force the investor class and their Republican agents to the political bargaining table.

Thus, Democrats should be demanding an immediate freeze, and where possible a rollback, of trade agreements until the other side of the aisle is ready to accept programs similar to those in Denmark that will allow workers to share the benefits of expanded trade.

Until that happens, we can expect American voters to become more protectionist, while the country’s policy elite remains disconnected from the lives of ordinary Americans — and continually surprised that so many of them feel betrayed.


The (April 18, 2016); (April 21, 2016