Sub-headliner: America’s economy benefits hugely from trade. But its costs have been amplified by policy failures
Since the 1980s, America’s economy has gradually opened up to cheap imports. This accelerated in 1993, when President Bill Clinton signed the North American Free-Trade Agreement (NAFTA) with Mexico and Canada. The deal, America’s first broad trade accord to include a poor economy, eliminated most tariffs on trade between the three countries over a decade. Coincidentally, within a year of the start of tariff reductions, the peso collapsed, making Mexican imports cheaper still. Excluding fuel (which America had to buy from somewhere) imports from Mexico grew by about five times between 1993 and 2013, according to the Peterson Institute, a think-tank. Exports to Mexico grew by about three-and-a-half times. As a result of the disparity, a bilateral trade deficit worth $23 billion (then, 0.2% of America’s GDP) opened up within five years.
Many blamed the yuan’s peg to the dollar for creating a trade imbalance. By 2014 China had accumulated nearly $4 trillion in foreign currency to sustain the peg. Economists have always struggled to formalise the allegation that China manipulates the yuan. Over time, higher wage inflation in booming China should undermine the advantage of a weak currency. Wages have indeed risen much faster in China than in the West. China’s current-account surplus, which reached 10% of GDP in 2007, is often cited as proof of fiddling. But Chinese surpluses and American deficits are—as a matter of accounting—the difference between saving and investment in those countries. So China’s vast surpluses in part reflected its extraordinary propensity to save.
In any case, cheap imports were a windfall for American consumers. Excluding food and energy, prices of goods have fallen almost every year since NAFTA. Clothes now cost the same as they did in 1986; furnishing a house is as cheap as it was 35 years ago. More trade brought more choice, too. Robert Lawrence and Lawrence Edwards, two economists, estimate that trade with China alone put $250 a year into the pocket of every American by 2008. The gains from cheap stuff flowed disproportionately to the less well-off, because the poor spend more of their incomes on goods than the rich.
For other economists, the impact of trade on jobs was a growing concern. The sharp decline in American manufacturing employment began in 2000, just as Chinese imports took off (see chart). Yet on the extreme assumption that every dollar spent on imports replaced a dollar spent employing an American, Mr Lawrence calculates that between 2000 and 2007 Chinese imports caused, at most, 188,000 of 484,000 annual manufacturing-job losses. A recent, more detailed, estimate by Daron Acemoglu, David Autor and others chalks up about 1m of 5.5m manufacturing jobs lost between 1999 and 2011 to Chinese competition (with similar-sized job losses in other industries).
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How does this bear on today’s trade-policy debates? Economists were wrong to think in the 1990s that the concentrated costs of trade, which textbooks always predicted, had somehow been avoided. It is now clear that they can be, in fact, worse than first thought. But the gains from trade, which are larger still, were never an illusion. Trade sceptics sometimes seem to suggest that workers were better-off before the 1980s, because protectionism was rife but growth stayed high. Yet living standards today are far higher. Trade barriers, which prevent such advances, are a futile, self-defeating way to help the unskilled.
But many workers displaced by Chinese imports did not simply find another job. Mr Autor and his colleagues have shown that, at local level, employment falls at least one-for-one with jobs lost to trade, and that displaced workers are unlikely to move to seek new work. The lowest-skilled who do find new jobs tend to move to similar, and thus similarly vulnerable, employment. One reason for this immobility could be that the economy is now an unwelcoming place for jobseekers without a university degree. The housing collapse of the late 2000s, which left many Americans trapped in negative equity, may have made things worse. This new strain of research has lent support to the claim of Dani Rodrik, a globalisation sceptic, that “If you are of low skill, have little education, and are not very mobile, international trade has been bad news for you pretty much throughout your entire life.”
In any case, cheap imports were a windfall for American consumers. Excluding food and energy, prices of goods have fallen almost every year since NAFTA. Clothes now cost the same as they did in 1986; furnishing a house is as cheap as it was 35 years ago. More trade brought more choice, too. Robert Lawrence and Lawrence Edwards, two economists, estimate that trade with China alone put $250 a year into the pocket of every American by 2008. The gains from cheap stuff flowed disproportionately to the less well-off, because the poor spend more of their incomes on goods than the rich.
For other economists, the impact of trade on jobs was a growing concern. The sharp decline in American manufacturing employment began in 2000, just as Chinese imports took off (see chart). Yet on the extreme assumption that every dollar spent on imports replaced a dollar spent employing an American, Mr Lawrence calculates that between 2000 and 2007 Chinese imports caused, at most, 188,000 of 484,000 annual manufacturing-job losses. A recent, more detailed, estimate by Daron Acemoglu, David Autor and others chalks up about 1m of 5.5m manufacturing jobs lost between 1999 and 2011 to Chinese competition (with similar-sized job losses in other industries).
Trump is right..
Why trade deals hurt Americans | PBS NewsHourIn conventional economic theory, the free market should resolve such trade imbalances by adjusting the exchange rates until the deficits vanish. But it has failed to do so, most notably, because China is eager to send us its products for I.O.U.s and has kept its currency artificially low so that its products remain inexpensive. That’s not a free market. That’s a rigged market. And we’ve stood by and allowed the rigging to continue. That’s not in the comparative advantage theory either.
Advocates of free trade often argue that America benefits from foreign trade. But in counting benefits, they add the dollars gained and dollars lost, without looking at who gained and who lost. So if one person gains $10 million dollars and 300 people lose $30,000 each (for a total loss of $9 million) that would be counted as a gain of $1 million, even though those who lost money outnumber those who gained by 300 to 1. That does not sound very democratic. And of course, if the $10 million goes to someone who is already a millionaire, his or her life-satisfaction would not increase substantially, but for the 300 people who lost money, their losses could very well be their livelihoods and mean a devastating decline in their living standard. The accounting of gains and losses should be done in a more democratic fashion.
The buy-now-pay-later strategy has been a weapon of mass destruction across the Rust Belt, destroying neighborhoods and annihilating millions of jobs. Detroit and Baltimore are two key examples. As a trophy of urban blight there are now 17,000 homes (or 8 percent of the housing stock) unfit for habitation and abandoned in Baltimore. Detroit has 70,000 abandoned houses and 90,000 vacant lots, and 40 percent of the street lights do not work. The Soviet Union was not powerful enough to do such damage; nor were our other enemies, the Empire of Japan or the Third Reich. China, however, has outsmarted U.S. by turning our capitalist-free trade ideology into a weapon against us. A brilliant move for which we were unprepared—welcome to real world economics.\
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We know that standard economic theory is not working. We know very well that slogans about growing the economy are not working. We know that the U.S. underemployment rate is still 11 percent and among African Americans it’s about 22 percent. We know that median household income has shrunk by $5,000 since 1999. We know that the economy shrank in the first quarter of this year. How long are we going to wait before we actually do something about it? It’s high time to stop stimulating the rest of the world’s economy with our dollars. We need to keep the purchasing power at home, which will create millions of jobs. Giving the President fast-track authority to negotiate the Trans-Pacific Partnership is a dead-end policy. Instead, Congress should insist on fair trade that is balanced trade.
Living standards have gone up, yes, but more due to increases in technology, than due to the buying power of the average american.
Also, how many hours are we working now to maintain our higher standard of living?
I know that my parents never worked as much as I do. I know that daycare is increasing in demand such that they can nearly charge whatever they want. But those are just my personal observations.
Living standards have gone up, yes, but more due to increases in technology, than due to the buying power of the average american.
Also, how many hours are we working now to maintain our higher standard of living?
I know that my parents never worked as much as I do. I know that daycare is increasing in demand such that they can nearly charge whatever they want. But those are just my personal observations.
We know that standard economic theory is not working.
This is why I subscribe to The Economist.
John Komlos is a professor emeritus of economics and of economic history at the University of Munich, and the author of the new textbook, “What Every Economics Student Needs to Know and Doesn't Get in the Usual Principles Text.” He’s also taught at Harvard, Duke and the University of Vienna.
why so you can cut and paste articles when you cant make an argument yourself? Why not try to tell us what the point of the article was???
Because there would be no point to that.
yes better to cut and paste magazine articles that you cant understand
I'll be sure to think of you if I ever cut and paste from The Economist.
so what is most important point of article?
Free trade creates dislocations but is on balance a positive thing.
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