Trade Trumps Trump

During Sunday night’s Presidential debate Trump pursed his lips, perched his hand and demonstrated his poor understanding of trade once again. “We have to renegotiate our trade deals, and we have to stop these countries from stealing our companies and our jobs,” he claimed. His basic argument is correct—when governments lower barriers to trade, low-skill positions drift toward cheaper labor. However, his argument is also fatally shortsighted. Trade is not the primary culprit of booting low-skilled jobs from the country, and reversing trade agreements will therefore fail to effectively address unemployment.

The loss of manufacturing jobs is real and difficult—about 5 million US manufacturing jobs disappeared in the past 15 years. These losses translated into devastation for families and communities and states once reliant on industry because the shock left many unprepared to transition into new industries. However, trade is a sidekick to this tragedy. It is the failure to effectively anticipate and respond to innovations in both technology and production that has carved the gouge between the losers and winners of the modern economy.

Yet Trump remains confused about the causes of American job loss. He calls NAFTA a “trade war against the American worker,” but NAFTA was signed in 1993 and the uptick in manufacturing job loss only started in 2000. NAFTA and dramatic US job loss are not even directly correlated; qualifying the trade agreement as pure causation for the shift in the US job market is irrational. Trump also aggressively attacks China for currency manipulation, claiming the country pushes down the value of the Renminbi in order to make Chinese goods cheaper and therefore increase exports to the US by facing American manufactures with unfair competition—wrong again. While China does control the movement of its currency (as every sovereign state has the autonomy to do), the country is propping up the value of its currency, actually helping American manufacturers be more competitive.

In large part, the problem is not that manufacturing is leaving the US, but rather that the nature of US manufacturing is changing. US manufactures still heftily contribute to the economy—$2.17 trillion in 2015. If the US manufacturing sector were a country, it would be the seventh richest nation on the globe. The contradiction of relatively impressive US manufacturing performance and US manufacturing job loss is explained by the fact that productivity improvements (not trade) caused an estimated 85 per cent of job losses in manufacturing from 2000 to 2010.

Moreover, as a businessman, Trump should understand that protecting uncompetitive industries hurts the American economy in the short and long run. Trade barriers are extremely expensive. For example, the Peterson Institute estimates that in 2011 it cost American consumers $900,000 for each, single job saved by protecting the tire industry—a total cost of about $1.1 billion to protect only 1,200 jobs.

Rather than inefficiently subsidizing specific industries, America should use those funds to robustly invest in workforce training in new technologies, and even entrepreneurship. Workers displaced by trade can apply to Trade Adjustment Assistance (TAA), which offers retraining and some money and benefits. TAA programs still need serious improvements but at least offer those whose jobs relocate overseas the opportunity to take the first step into new industries. However, there is no similar program for those displaced by innovation—the group that composes, again, about 85 per cent of those who have lost their manufacturing jobs.

Of course it would be ideal to provide jobs that could not be taken away by trade or innovation; however, with the new dramatic rate of change in the global economy those types of positions are unicorns. But Americans have overcome economic transition before. In 1790, agriculture absorbed 90 per cent of the US labor force, but by 1900 that figure was only 41 per cent, and today agriculture employs less than 3 per cent of workers in the US. Like the American labor force shifted away from agriculture due to innovations in productivity, they must shift again.

The pace of the modern economic transition will undoubtedly be faster than previous changes in economic activity and will require businesses, governments and workers to respond quickly to rapid shifts in output modalities. America can, and should, control economic transitions based on trade by building transitional time frames into agreements, lowering barriers only after specific timeframes are well-communicated to players in affected industries. However, all nations will be unable to control how quickly innovations in technology and production efficiencies will disrupt existing labor market structures.

Economies will evolve with or without the US. In order to remain a superpower, America must have the courage to recognize the employment crisis is not a product of trade, but rather a result of American failure to keep pace with productivity increases. The key to progress is not in the industries which supported America’s grandparents. The US can only move forward by embracing innovation and figuring out how to best harness its benefits. Innovation is here to stay, but America’s position of global influence will not be if politicians and business people keep blaming trade for unemployment and the nation does not better prepare its workers for the new global economy.

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