If there’s one thing that nearly all economists agree on, it’s that getting rid of trade restrictions is generally good for a country’s economy.
Doing so leads to a higher national income, faster economic growth, higher productivity and more competition and innovation. Freer trade also tends to lower prices and improve the quality of the goods that are particularly important in the budgets of poorer families.
But you certainly wouldn’t know it from the current political landscape. Hillary Clinton has repudiated the Trans-Pacific Partnership (TPP) she once hailed as the gold standard of trade deals. Donald Trump would go much further and not only tear up the North American Free Trade Agreement (NAFTA) but consider withdrawing from the World Trade Organization (WTO) as well.
So what has made free trade – which still gets the support of most Americans – such a political pariah?
A major explanation is that there are losers as well as winners from its effects. The winners may be far more numerous, yet the impact on the losers, from lost jobs and lower wages, is more intense and personal.
I’ve been a steady and vocal proponent of the view that freer trade’s benefits far outweigh its costs. When the former president of the United Auto Workers, Owen Bieber, called me “that free-trade bitch at GM” in the early 1990s, I took it as a compliment. While I still believe the research (mine included) supports lowering restrictions on trade, we haven’t called enough attention to the “losers,” partly because we underestimated how much they’d be hurt.
Where liberalizing trade went wrong
Both Trump and Bernie Sanders have made opposition to freer trade key to their platforms, often citing the loss of over 4.5 million manufacturing jobs since 1994.
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Recent research indicates that China’s unforeseen emergence in the 1990s as a global competitor in the world markets can be blamed for at least 20 percent of that, significantly more than earlier estimates.
A just-published paper that estimates the effects of NAFTA on blue-collar workers, not only in goods industries but service industries as well, found similar results. Particularly vulnerable were the footwear and oil and gas industries and the states of North and South Carolina.
Both studies suggest that the American labor market is not as fluid and flexible as we thought. Job losers were not able to find new ones as quickly as expected nor command the same level of wages when they did. This finding is consistent with other research indicating that the in-country mobility of blue-collar American workers has been falling.
In other words, while the overall welfare effects of trade liberalization are generally positive, the impact on some subgroups, particularly the less well-educated, are negative and much larger.
And the United States is less generous than other rich countries in providing both reemployment assistance and income support to workers hurt by these changes.
The primary U.S. program aimed at mitigating this negative impact is known as trade adjustment assistance (TAA). That its intended recipients call it “burial insurance” sort of sums up its image problem.
Softening the blow of free trade
Trade adjustment assistance has gone through a variety of forms since its origins in the 1950s, but today it provides displaced workers with relocation assistance, subsidized health insurance and extended unemployment benefits. A typical condition of aid is that recipients have to enroll in a job training program.
The idea came in 1954, when the head of the Steelworkers Union first suggested helping workers adversely affected by imports. Eight years later, Congress turned the idea into law as a crucial carrot to win the backing of the AFL-CIO for the Trade Expansion Act, which gave the president the unilateral authority to cut many tariffs by up to 50 percent over a five-year period.
All the aid provision did, however, was provide workers with temporary and severely delayed supplements to their unemployment compensation. It was little used because the eligibility requirements were so strict.
The TAA program was formally established as part of the Trade Act of 1974, which created the so-called “fast-track” process limiting Congress to a simple up-or-down vote on negotiated trade deals and set up a permanent trade office. The program eased eligibility requirements, specifying only that “imports contributed importantly” to a job loss, and offered expanded unemployment insurance. As a result, the number of petitions under the program surged, mainly from the auto, steel, textile and apparel industries, and most were certified for payment.
Despite this, the trade assistance earned the epithet “burial insurance” by many in the labor movement. As a Republican senator put it in 1978:
“Adjustment assistance has often been scornfully, but accurately, called burial assistance – arriving only in time to dispose of the victim.”
Ronald Reagan put the program high on his hit list when he became president in 1981. The size of individual payments was reduced and capped at 52 weeks, joining a training program became a requirement for aid. And far fewer petitioners received aid.
TAA limps on
Over subsequent years the program (including various offshoots) grew and shrunk but continued to be used primarily to win congressional authorization of various trade agreements.
The Clinton administration created NAFTA-Transitional Adjustment Assistance – for those who lost jobs, hours or wages due to increased imports from or shifts of production to Mexico or Canada – to win labor votes for the North American trade deal.
That helped NAFTA win narrow approval in 1993, but the main result of the new program was overlap and confusion with the original and led to declining support for free trade throughout the ‘90’s.
President George W. Bush reformed the assistance programs as he tried to muster support for a new round of trade negotiations early in his first term. The Trade Act of 2002 eliminated NAFTA-TAA as a separate program, reauthorized the fast-track process and established a health tax credit and partial wage insurance for older, lower-paid displaced workers who found new jobs but at less pay than the old ones.
These changes – which made TAA the most generous and expensive it’s ever been – failed to satisfy organized labor, which still tended to see the program as burial insurance and unable to make up for the loss of “good manufacturing jobs.” A study commissioned by Congress concluded that workers who took trade assistance fared no better, in terms of employment and earnings, than those who got regular unemployment insurance.
Another big change came in 2009 when for the first time trade assistance was reauthorized on its own, rather than in conjunction with other trade initiatives, as part of the American Recovery and Reinvestment Act. It expanded the program, most notably by extending it to service sector workers.
Since then, it has been reauthorized several times, usually as part of a trade package. Most recently, a 2015 bill restored fast-track for President Barack Obama – aimed at helping him seal the TPP trade deal he was working on – and also reauthorized the TAA program through 2022, but included “sunset” provisions.
Rethinking trade adjustment assistance
The TPP, which was agreed to earlier this year by 12 Pacific Rim countries, is aimed at reducing tariffs but, much more significantly, it would remove other national barriers to finance and investment as well as trade in goods, services and digital transactions. Among these changes are harmonization of national regulations and protection of intellectual property.
That agreement, which still requires ratification by the Senate, is now on the rocks after the populist candidacies of Trump and Sanders seized on anti-trade sentiment and gave it a powerful voice.
While this won’t save the TPP, rethinking how we assist those hurt by free trade is important so that at a minimum – once the anti-globalization views now ascendant have attenuated and the U.S. budget can accommodate increases in discretionary programs – future agreements don’t leave so many workers feeling left behind. Tinkering isn’t enough.
It starts with crafting policies that encourage a more flexible labor force, while at the same time providing a safety net for those who have to do the flexing. The Danes have coined a word for such policies: “flexicurity.” Rather than trying to protect jobs toppled by economist Joseph Schumpeter’s “winds of creative destruction,” government policies should ease and speed the transition to new and sturdier ones.
So in terms of the TAA, a crucial change would be to make training and other programs for the reemployment of displaced workers more effective and wage insurance for those who have found new jobs but at significantly lower salaries than the old ones more generous, in both amounts and duration. It is also critical to extend such measures to all workers displaced by change – such automation and changes in consumers’ tastes – not just trade.
Marketing will also have to play a role, from changing the name to delinking such provisions from political horse-trading over trade deals.
That way, perhaps government assistance for the losers from free trade could be thought of as something that lifts them up rather than puts them in the ground.
About The Author
Marina v. N. Whitman, Professor of Business Administration and Public Policy, University of Michigan