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How to make free trade really work
Let's be honest: There are countless swathes of the Western world that have become economically depressed as jobs have moved to China. Here's what to do.
As a conservative, I've always been a huge believer in free trade. I still am, but the truth is that the protectionists have some things right.
The idea at the heart of free market economics is that economic activity is a positive-sum game. People don't get that rich by taking from other people. People get rich by making other people better off, which means they can buy more things the economy offers, which makes everyone better off. If the free enterprise system is a positive-sum game, then the more who play, the merrier.
And protectionism in general is a form of cronyism. It's all well and good to talk about trade barriers in the abstract, but in reality protectionism means specific barriers that protect specific industries. And the way it usually works out is that those barriers are designed to help special interests, and they remain up at the behest of those special interests, and for the benefit of those special interests. The McKinley Tariff of the 1890s may have been intended to help nurture U.S. manufacturing industries, but voters rightly saw it as mostly just a gift to the country's wealthy industrialists, who then ended up controlling the U.S. political system.
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And free trade is also humanitarian. The single most astonishing development of the past few decades has been the industrial growth of India and China, which has lifted hundreds of millions of people out of dire poverty. That's incredible news.
I've just given you the standard argument for free trade, the one we've all heard a hundred times. And yet, the drawbacks of free enterprise system are familiar to all of us.
There are countless swathes of the Western world that have become economically and socially depressed as jobs have moved to China and elsewhere.
As an important new paper from the National Bureau of Economic Research indicates, there's one point on which the standard story has been wrong. The standard story says that even if jobs get offshored, people will adapt and move on to other things. But, to simplify, they haven't. As the authors of the study put it:
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Adjustment in local labor markets is remarkably slow, with wages and labor-force participation rates remaining depressed and unemployment rates remaining elevated for at least a full decade after the China trade shock commences. Exposed workers experience greater job churning and reduced lifetime income. At the national level, employment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize. [National Bureau of Economic Research]
And what's more, as National Review's Reihan Salam points out, as the jobs go and aren't replaced people may rely more on welfare. Lower employment prospects for males lead to more divorce, more out-of-wedlock births, more drug abuse, and more suicide.
Advocates for free trade respond that the argument was never that it wouldn't make anybody worse off, just that it would make us all collectively better off, and so some losers should be expected, and the problem isn't with free trade; it's with governments that don't implement policies that help people get better jobs when there's free trade. There's merit to this argument — we could have way better policies to help people bounce back — but it's mostly disingenuous.
So what do we do about it?
There's a lot that government could do to just help people compete more. In a previous column, I wrote about the importance of wage subsidies in making employment more competitive, and energy policy in reducing the cost of manufacturing.
The supposed training that was supposed to help people find more opportunities has largely been a joke. Instead of saddling people with large student debt to get degrees they don't need, we should let one of the pieces of the economy that does work, Silicon Valley, fix it: incentivize startups to provide more online education and be rewarded by the government if such education leads to good jobs.
It also can't be overstated the extent to which occupational licensing depresses employment, particularly in low income communities. The federal government doesn't really control this, but it should put together a program, similar to "Race to the Top," which pays states for education reforms, whereby the feds bribe local and state governments to eliminate occupational licensing rules.
And finally, one smart way to set up a trade barrier, without the cronyism, is to devalue your currency. This is something the U.S. should do anyway, as it doesn't have inflation and has depressed employment. This has been China's trick — it has been devaluing its currency to boost its exports. Several can play this game, and it's a trade war everybody would win.
Pascal-Emmanuel Gobry is a writer and fellow at the Ethics and Public Policy Center. His writing has appeared at Forbes, The Atlantic, First Things, Commentary Magazine, The Daily Beast, The Federalist,Quartz, and other places. He lives in Paris with his beloved wife and daughter.
