Despite the fact that these tariffs affect only a narrow sliver of the U.S. economy and are quite modest in size, response to the tariffs from defenders of the globalization status quo has been hyperbolic. Critics of the tariffs reference a 2018 study by Francois and Baughman of The Trade Partnership. The study claims that the tariffs would increase U.S. employment in iron and steel and in nonferrous metals (primarily aluminum production) by 33,464, but result in a net loss of 146,000 jobs, with “five jobs lost for every new one created” (Timmons 2018). This EPI report explains why the actual economic impact of the tariffs will be quite minor, and why Francois and Baughman’s 2018 study should be treated as an odd outlier in studies of tariffs, and not as a study to guide policy decisions. Our key findings are:

• The Francois and Baughman (2018) results are driven overwhelmingly by a nonstandard modeling assumption: that growth in the U.S. economy is constrained by aggregate demand. This is not how the vast majority of trade modeling analyses are done.
• Even with the assumption of demand-constrained growth, the Francois and Baughman (2018) results are totally implausible. There is no credible evidence that these tariffs could drag on growth in demand anywhere near enough to generate employment losses as large as the authors report.
• Though we would welcome broader methods of trade modeling if done in good faith, the use of demand-constrained growth in trade modeling only when it supports arguments against tariffs undermines those arguments.
  • In many contexts, one could see the introduction of demand-constrained growth as a useful advance in trade modeling. However, Francois and Baughman (2018) embrace this assumption of demand-constrained growth when it drives up net employment losses in their model but ignore its implications otherwise. In fact, nearly all of the positive arguments in favor of trade liberalization (i.e., low tariffs) rely on assumptions that the economy is not demand-constrained and sits at full employment.
  • Previous efforts to look seriously at what demand-constrained growth could mean for trade policy have been ignored by the same analysts and writers claiming that steel and aluminum tariffs would significantly harm U.S. employment. Capaldo at al. (2016), for example, allowed for demand-constrained growth in a model of the Trans-Pacific Partnership (TPP) and estimated that the TPP would slow U.S. growth measurably in such a model. Yet their model was either ignored or actively criticized as unrealistic by many who now tout the Francois and Baughman (2018) results and criticize the steel tariffs.

• Relaxing the assumption on demand constraints in the Francois and Baughman (2018) model and putting their model on an apples-to-apples footing with the vast majority of trade policy modeling reduces their estimate of job losses by roughly 97 percent—dropping estimated jobs lost from 146,000 to under 5,000.

Background

While Francois and Baughman (2018) look at the effects of raising tariffs on steel and aluminum, the textbook case for arguing that lowering tariffs will boost economic efficiency relies on the assumption that the economy operates at full employment, meaning that overall economic growth is constrained only by growth in the economy’s productive capacity and not by spending decisions made by households, businesses, and government. This means that economic growth is not constrained by too-slow growth in aggregate demand. This full employment assumption lies behind the vast majority of analyses of trade policy and is a necessary condition for many of the findings that lower tariffs boost economic efficiency.

Such full employment modeling would imply extremely modest economic losses from the steel and aluminum tariffs. The standard rule-of-thumb for converting tariff increases into economic losses is:

[0.5*(t/(1+t))^2*m*e]

Here, t is the percentage tariff, m is the share of imports in the nation’s gross domestic product (GDP), and e is the elasticity of demand for imports with respect to price. Given a 25 percent tariff, a steel imports share of the economy of 0.2 percent, and a generous elasticity of demand of 3, this implies that the steel tariffs would lead to an economic loss of roughly 0.01 percent of GDP. Given a rough rule of thumb for converting GDP gains or losses into jobs that says each job “costs” roughly $150,000 of GDP, this implies job losses of about 15,000, or about one-tenth the size of those estimated by Francois and Baughman (2018).

This kind of rule-of-thumb analysis cannot totally substitute for more detailed modeling, but it should give some sense of reasonable orders of magnitude to expect. Given this, it seems reasonable to ask, “How did Francois and Baughman (2018) generate job loss numbers that are ten times as large?”

Inflating job loss estimates: Nonstandard modeling assumptions and inflated parameters

Examination of the assumptions used by Francois and Baughman (2018), a review of closely related studies on the economic effects of the 2002 steel safeguard (Section 201) tariffs, and reviews of other related research reveal that Francois and Baughman (2018) have effectively put their thumb on the scale to generate distorted estimates of the jobs displaced by steel and aluminum tariffs.

Francois and Baughman (2018) used a computable general equilibrium model (CGE) to estimate the employment impacts of steel and aluminum tariffs. As noted earlier, such models usually assume that the economy is at full employment and examine the impacts of trade policy changes on output (GDP), welfare, and the distribution of employment across industries. In contrast, Francois and Baughman (2018) assume that wages are “sticky,” “meaning that changes in demand for labor (positive or negative) are first reflected in changes in employment rather than changes in wages (Francois and Baughman 2018, 5).” This opportunistic shedding of the traditional full employment assumption has the effect of maximizing estimated job losses in their CGE model.

The importance of this assumption can be seen by running the exact same model as Francois and Baughman with the traditional full employment assumption. In this case, fewer than 5,000 net jobs are lost due to steel and aluminum tariffs, a 97 percent reduction in Francois and Baughman’s 2018 estimate that the steel and aluminum tariffs will eliminate 146,000 U.S. jobs.

As we noted earlier, abandoning the full employment assumption is not standard practice in trade policy evaluation—it is only done quite rarely. Further, once one abandons the full employment assumption, the case that tariff cutting is efficient cannot be axiomatically proved.1 One could make a case that the entire field of trade policy modeling should start incorporating the possibility of demand-constrained growth. But this should be done carefully and with well-reported results on how this new assumption affects all aspects of economic outcomes of tariff changes. In contrast, the Francois and Baughman (2018) is a short issue brief that only highlights the job outcomes; it doesn’t even report the change in GDP stemming from the tariffs.

This failure to report the GDP change is telling. To support their claim that the proposed tariffs would reduce jobs by 146,000, they need a reduction in GDP of roughly $18 billion stemming from the tariffs. This is extremely unlikely, for two reasons. First, the tariffs are small relative to the overall economy. Second, tariffs do not just reduce demand by putting upward pressure on import prices, they also boost demand by inducing consumers of steel and aluminum raw and finished goods to switch from purchasing foreign-produced goods toward purchasing domestically produced output (expenditure switching). These cross-cutting effects mean that tariffs could well boost, not reduce, aggregate demand. The size of the implicit “tax increase” stemming from the tariffs is roughly $7–10 billion. Macroeconomic multipliers on taxes rarely exceed 1.2 Further, this drag on demand from higher taxes will be counterbalanced by boosted demand for domestic rather than foreign steel. All of this means that a GDP response large enough to be consistent with the Francois and Baughman (2018) job estimates is implausible. In summary, Francois and Baughman (2018) adopt nonstandard methods and far-too-large parameters linking tariff increases to changes in aggregate demand. In the next section we discuss how the Francois and Baughman (2018) results continue a history of the authors providing inflated estimates of the effects of steel tariffs.

Previous research on the employment impacts of steel and aluminum tariffs

In March 2002, President George W. Bush imposed broad “safeguard restraints” on most steel imports, including (in the first year) a tariff rate quota on steel slab (with tariffs of 30 percent above the quota), a flat tariff of 30 percent on most basic steel products (plate, hot- and cold-rolled steel, coated steel products, and hot- and cold-bar steel), and tariffs of 8–15 percent on most downstream products (rebar, tubular and other welded products, fittings, and stainless products, other than oil country tubular goods) (USITC 2003, 1–3). Trade restraints were initially imposed for a period of three years, but were abolished in December 2003 after the European Union prevailed in a World Trade Organization dispute resolution against the United States (Scott 2018).

The U.S. International Trade Commission (USITC 2003) has previously examined the effects of tariff response under the 2002–03 Section 201 tariffs. The ITC found that the Section 201 steel tariffs had negligible economy-wide effects, ranging from a welfare gain of 0.0006 percent of GDP to a welfare loss of 0.0011 percent of GDP.3

Francois and Baughman (2001) prepared a study of the economic impacts of steel trade restraints similar to the proposed Section 201 steel tariffs.4 This report is quite similar to their 2018 study of the impacts of steel and aluminum tariffs, but differs in one important respect. Two alternative employment impact scenarios are presented in the 2001 study. The first assumes “flexible wages and full employment,” while the second assumes “limited labor market flexibility and unemployment… where wages are held fixed and employment levels adjust” (Francois and Baughman 2001, Appendix A-4). Comparison of the results under these two scenarios allows us to precisely examine the impacts of assuming high unemployment in their model, holding all other data and assumptions used in the model constant. These employment results are discussed below.

Regarding the overall impacts of the 2002 trade restraints, and Francois and Baughman’s preliminary assessment of the costs of trade restraints in 2001, a more sophisticated model by Lee and Van der Mensbrugghe (2005) found a net welfare gain of 0.0025 percent of GDP and that real GDP decreased by -0.0006 percent.5 Thus, the estimated effects on the U.S. economy were extremely small. Given GDP growth and the greater diversification of industries, particularly in high-tech and service sectors that do not consume significant amounts of steel, a tariff would likely have an even smaller impact on the broader economy today.

Lee and Van der Mensbrugghe note, “The magnitudes of our results are significantly smaller than those obtained by Francois and Baughman (2001), who estimated that U.S. GDP would fall by $500 million to $1.4 billion (.0049 percent to .014 percent of actual U.S.GDP in 2000). This was because they evaluated the effects of the imposition of 9.2–20.7 percent tariffs on steel imports, which were much higher tariff rates than used in our study.”

As noted above, the USITC (2003) also used a CGE model to estimate the economic impacts of the steel tariffs (which were in effect from March 2002 through December 2003). The USITC estimated that “the effect of the safeguard measures on the U.S. welfare ranged from a welfare gain of $65.6 million to a welfare loss of $110 million…and an estimated annual GDP loss of $30.4 million” (emphasis added) (USITC 2003, ix). Thus, the Francois and Baughman (2001) GDP estimates are several orders of magnitude larger than the official estimates of the USTIC (2003).

Employment impacts of the 2002 Section 201 steel tariffs

Using its own CGE model, the USITC found a net decline in labor income of $386 million, equivalent to the loss of 10,365 jobs (Ferry 2018).

Francois and Baughman (2001) prepared two estimates of the employment impacts of steel trade restraints, as noted above (assuming full employment, and assuming sticky wages and high levels of unemployment). Each assessment includes three types of job displacement, as shown in Table 1, which also includes comparable estimates of the employment impacts of the proposed Section 232 steel and aluminum tariffs of 2018, discussed below.

Table 1

The first component of the employment impact is the direct effect of trade restraints in the steel industry (or steel and aluminum, aka “metal,” in Francois and Baughman 2018), which are positive (import restraints boost domestic production of the competing like products). Note that the direct employment impact is slightly higher under full employment, presumably based on higher levels of underlying domestic demand for steel products.

The second component of the employment impact is the indirect effect on steel-using industries such as fabricated metals, motor vehicles and parts, other transportation equipment, electrical machinery, and construction (the only nonmanufacturing, major steel-consuming sector). Note that jobs displaced in steel-consuming sectors are about 70 percent higher in the “less-than-full employment” scenario (column 2), 19,021 versus 32,414 jobs, presumably as a result of weaker labor markets. This factor is considered below in the analysis of Francois and Baughman’s 2018 assessment of the employment impacts of the proposed Section 232 tariffs.

The third line in table 3 is the “difference” or net impact of trade restraints—the sum of the direct plus indirect effects. The fifth line in the table (for the “less-than-full-employment” scenario) includes estimates of the net job effect economy-wide (Francois and Baughman 2001, Table 3b, 10). The table note indicates that this line includes “jobs lost elsewhere in the economy as income losses in the steel using-sectors feed back through the rest of the economy.” We present this “induced effect” in line 4 in Table 1; it is simply the imputed difference between the total, economy-wide impact of the trade restraint and the “difference.” The induced effect is zero in the full-employment model.

It is important to note that the induced effect in the “less-than-full employment” scenario in Francois and Baughman (2001) implies a “respending multiplier” of 4.0, which is quite large (that is, there are 4 additional jobs for each direct or indirect job displaced). The typical range for macroeconomic respending multipliers estimated by the Congressional Budget Office is in the range of 0.2 to 1.8 (Bivens 2014, Table 4, 19).

Thus, Francois and Baughman (2001) generated an extremely wide range of estimates of the likely impacts of steel trade restraints, ranging from 15,347 jobs displaced assuming full employment (quite similar to the USITC estimate of 10,345 jobs displaced) up to 144,060 net jobs displaced (Table 1, column 2, line 5). Furthermore, most trade policy models assume full employment and flexible wages, as Francois and Baughman (2001, Table 3a, 9) note in their table summarizing their full employment analysis: “Total employment effect on the economy as a whole would be zero because the economy is assumed to be at full employment.”

Employment impacts of proposed steel and aluminum tariffs

The employment impact assessments in Francois and Baughman 2001 provide a very useful framework for evaluating their estimates of the employment impacts of proposed Section 232 steel and aluminum tariffs. One of the major problems with Francois and Baughman’s 2018 study is that it fails to explain “a number of modeling choices” (Ferry 2018), including key modeling parameters such as substitution elasticities (see, for example, Francois and Baughman 2001, Appendix Table A-1, 7) and basic model input data. Comparison of the results of the two employment scenarios in Francois and Baughman 2001 provides a helpful framework for analyzing the factors contributing to the large job loss estimates in Francois and Baughman 2018. Table 1 provides the information needed for this analysis.

The direct effect of the 232 tariffs will support 29,998 steel and aluminum jobs, as shown in column 3 (reproduced from Francois and Baughman, 2018)). Indirect effects should include jobs lost in steel-using industries that see cost increases that reduce demand for their output, as well as the net effect on “induced” jobs. These induced jobs are the result of abandoning the full-employment assumption, and include jobs in the economy that rely on spending by steelworkers newly employed because of the tariffs as well as spending by workers in steel-using industries who are displaced by the steel tariffs.

If we make an extreme assumption that all job losses in the rest of manufacturing and construction are strictly “using-industry” losses, this yields a loss of steel-using jobs of roughly 61,000 jobs. The direct plus steel-using effects hence sum to roughly 31,000 jobs lost. The rest of the estimated jobs displaced in Francois and Baughman (2018)—115,000 jobs—appear to be the result of pure “induced” or “respending” effects (line 4).6 Thus, there are 3.7 “respending” jobs for every “direct and indirect” job displaced in the less-than-full-employment” model. This means that at least 78.8 percent of the estimated 145,870 jobs displaced are due to Francois and Baughman’s assumption on demand-constrained growth, and to their excessively high parameter choice for “respending” multipliers.

However, looking at their previous work it becomes clear that even more of the total job loss is driven by their assumptions on demand-constrained growth. Our analysis above assumed that all jobs lost in manufacturing sectors aside from steel and aluminum, as well as all jobs lost in construction, were the result of steel tariffs raising costs in steel-using industries. But some of these losses were likely themselves induced, and not the result of cost pressure. In their earlier work, Francois and Baughman (2001) estimated that about 70 percent more jobs would be lost in steel-using industries at less-than-full employment (columns 1 and 2).

This means that making the conventional full employment assumption would reduce job losses in steel-using industries from 60,923 jobs to 35,750 (or approximately 41.2 percent), as shown in row 2, columns 3 and 4. In addition, slightly more jobs would be supported in steel and aluminum industries, assuming a fully employed economy.

Thus, fully adjusting the Francois and Baughman (2018) results to eliminate the effects of less-than-full-employment bias could reduce estimated job losses by nearly 97 percent, as shown in column 4. Hence, by using nonstandard labor market adjustment assumptions, Francois and Baughman (2018) would appear to overstate potential job losses associated with steel and aluminum tariffs by a factor of 30:1.

Conclusion

Prior research by the U.S. International Trade Commission (2003) and by Lee and van der Mensbrugghe (2005) has shown that Francois and Baughman’s prior estimates of the costs of steel trade restraints in 2001 vastly overstated the costs of the 2002 steel trade restraints. Additional analysis of the employment impact assessments in Francois and Baughman (2001) is developed here to show that the vast majority of the estimated employment impact of both the 2002 steel safeguard measures, and of the proposed 2018 Section 232 tariffs, are the result of nonstandard assumptions regarding constraints on economic growth and subsequent modes of adjustment in the labor market (in particular, assuming that wages are sticky and that economic growth is demand-constrained). Bringing this assumption into line with standard trade policy modeling reduces estimated job losses by nearly 97 percent.

The results reported here provide additional support for the findings of Ferry (2018), which conducted additional research into the impacts of using alternative “closures” (flexible wages with full employment vs. sticky wages with flexible employment) that can be used to specify a CGE model. These results show that with a “flexible wage” closure, job gains in steel and aluminum production largely offset job losses in steel and aluminum using industries, “leading to no net change in national employment levels once equilibrium is reached.”

As we noted previously, if the Francois and Baughman (2018) adoption of nonstandard modeling assumptions on demand-constrained growth were part of a larger agenda to bring intellectual diversity into trade policy analysis, it could be a welcome step forward. But it would need to be a much deeper analysis to serve this goal; at a minimum it should report on effect of the tariffs on national income, not just employment. Further, there is a strong overlap between those touting the Francois and Baughman (2018) results on steel tariffs and those who criticized or ignored earlier analyses that examined trade policy under demand constraints (such as Capaldo et al. [2016]) and found that trade treaties could reduce U.S. income and employment. This does not seem to us, then, like a step forward in doing more sensible trade policy analysis—instead it simply seems like opportunism.

Acknowledgments

The author thanks Josh Bivens, Thea Lee, and John Schmitt for comments, Zane Mokhiber for technical and research assistance, and Lora Engdahl and Krista Faries for editing assistance. This research was made possible by support from the Wiley Rein LLP.

Endnotes

1. For an acknowledgement of the necessity of assuming full employment for proving the gains from trade, and for probably the best defense of including this full employment assumption, see the online essay by Paul Krugman, “Ricardo’s Difficult Idea,” available at web.mit.edu/krugman/www/ricardo.htm.

2. See Batini et al. 2014 on this point.

3. The welfare gain or loss is a measure of the increase (or decrease) in economic efficiency as a result of the imposition (or removal) of a tariff or other form of a trade restraint. It is usually measured as a share of GDP. The approximate economic losses associated with the steel tariff that are estimated in the background section, above , are an example of a welfare loss calculation.

4. Francois and Baughman (2001) estimated the impact of the “Steel Revitalization Act of 2001,” which would have imposed quotas on imports sufficient to reduce imports by approximately 25.5 percent (Table 2 at 7), and imposed an across the board tax on all domestic and imported steel products of 1.5 percent (to fund steel health care and other adjustment costs).

5. Welfare gains in Lee and Van der Mensbrugghe were due to terms of trade effects, reflecting the fact that the U.S. is a large country, and the reduction in steel imports reduces global steel demand and import prices.

6. Through “reduced spending for food, clothing and shelter from unemployed steel-using sector workers ultimately would have negative effects on employment in agriculture” and service industries “when the economy is not at full employment” (Francois and Baughman 2001, Table 3b, 10).

References

Batini, Nicoletta, Luc Eyraud, Lorenzo Forni, and Anke Weber. 2014. Fiscal Multipliers: Size, Determinants, and Use in Macroeconomic Projections. International Monetary Fund Technical Guidance Note.

Bivens, Josh. 2014. The Short- and Long-Term Impact of Infrastructure Investments on Employment and Economic Activity in the U.S. Economy. Economic Policy Institute.

Capaldo, Jeronim, Alex Izurieta and Jomo Kwame Sundaram. 2016. “Trading Down: Unemployment, Inequality and Other Risks of the Trans-Pacific Partnership Agreement.” Global Development and Environment Institute at Tufts University (GDAE) Working Paper.

Ferry, Jeff. 2018. “Steel & Aluminum Tariffs Produce Minimal Impact on Jobs, GDP: CPA Economic Model Refutes Alarmist Trade Partnership Study.” Coalition for a Prosperous America Working Paper, March 20.

Francois, Joseph, and Laura M. Baughman. 2001. Costs to American Consuming Industries of Steel Quotas and Taxes. The Trade Partnership, April 30.

Francois, Joseph, and Laura M. Baughman. 2018. Does Import Protection Save Jobs? The Estimated Impacts of Proposed Tariffs on Imports of U.S. Steel and Aluminum. The Trade Partnership, March 5.

Lee, Hiro, and Dominique van der Mensbrugghe. 2005. “The Impact of the U.S. Safeguard Measures on Northeast Asian Producers: General Equilibrium Assessments.” In Restructuring of the Steel Industry in Northeast Asia, Hiro Lee, Eric D. Ramstetter, and Oleksandr Movshuk, eds., 152–176. Palgrave Macmillan.

Scott, Robert E. 2018. Trump Must Act Now to Protect U.S. Steel and Aluminum: Administration Delays Have Already Heightened the Import Crisis for Tens of Thousands of Steel and Aluminum Industry Workers. Economic Policy Institute.

Timmons, Heather. 2018. “Five US Jobs Will Be Lost for Every New One Created by Trump’s Steel Tariffs.” Quartz , March 5.

U.S. Department of Commerce, Office of Public Affairs. 2018. “Secretary Ross Releases Steel and Aluminum 232 Reports in Coordination with White House” (press release). February 16.

U.S. International Trade Commission (USITC). 2003. Steel: Monitoring Developments in the Domestic Industry, Steel-Consuming Industries: Competitive Conditions with Respect to Steel Safeguard Measures. Publication No. 3632.

White House. 2018a. Presidential Proclamation on Adjusting Imports of Aluminum into the United States. March 8.

White House. 2018b. Presidential Proclamation on Adjusting Imports of Steel into the United States. March 8.

• Failing to secure any reasonable compensation for those on the losing end of globalization
• Failing to address currency misalignments that have led to large trade deficits and hemorrhaging employment in manufacturing
• Passing trade agreements that have consistently aimed to undercut workers’ economic leverage while carving out ample protections for corporate profits

The effects of globalization and our failed policy response to it are not just a problem for white manufacturing workers in the Rust Belt, but in fact affect the majority of workers and likely fall disproportionately on the wages of nonwhite workers.

Why it matters: Intentional policy decisions have amplified the costs of globalization to American workers on its losing end. Globalization has been used as a tool to shift economic leverage and power away from low and middle-wage workers, and this has contributed to the anemic wage growth for this group.

What can be done about it: To remedy the situation, the United States can:

• Use domestic policy to compensate (offset the losses to) negatively affected workers—but the first step is acknowledging the large scale of these losses.
• Stop pursuing new omnibus trade agreements that protect returns to capital while undercutting wages.
• Reorient international policy away from regressive trade agreements and toward measures that will benefit workers in the U.S. and in other countries—addressing currency misalignments; developing international policies to enable countries to tax capital income, including clamping down on abusive tax havens; instituting an international financial transactions tax; and harmonizing national policies aimed at combating global climate change.

Executive summary

This paper provides the economic background necessary to forge a progressive response to the challenges posed by globalization. A progressive response should focus on the class-based distributional conflicts that are inherent not only in globalization writ large but also in the trade agreements and behavior of policymaking institutions that constitute the “rules of the game” governing it. A progressive response to globalization has the potential to boost living standards for low- and moderate-income Americans.

Conversely, responses to globalization and its rules based on a corporatist nationalism will be far less effective in boosting low- and moderate-wage workers’ incomes. If globalization is viewed as a competition between nations, little in the way of help for low- and middle-wage workers will emerge. If instead globalization and the rules that govern it are correctly recognized as just another set of tools that have mobilized in recent decades in an intentional effort to shift bargaining power away from low- and middle-wage workers and toward corporate owners and managers, then a genuinely useful response might emerge.

Given the themes around trade policy that emerged over the course of the 2016 presidential campaign, one overarching point falling out of this underlying economics is worth mentioning upfront: the economic losses stemming from globalization and our regressively structured trade agreements are not a niche issue affecting only white working-class manufacturing workers in the upper Midwest. That group is only a tiny sliver of the overall losses. The losses are in fact much more widespread and actually fall disproportionately on communities of color. Choosing to worry about the impact of globalization and trade agreements on American workers is not prioritizing the concerns of white working-class workers in the upper Midwest; it is focusing on an issue of importance to all working-class workers.

The pressure globalization has put on American workers’ living standards has been significantly amplified by policy choices

Globalization of trade and capital flows was always likely going to be hard on tens of millions of American workers. Theory predicts and evidence validates that while growing trade (particularly but not exclusively) with poorer nations leads to overall national income gains, it also leads to so much upward redistribution of income that most workers are made worse off. The gross losses inflicted by globalization are not small, and they are widespread. One cannot measure the scale of losses by the number of jobs lost in manufacturing (though these are the most acute losses). Globalization has weighed down wage growth for tens of millions of American workers, if not a hundred million or more.

The damage wrought to many American workers by globalization has been amplified by the profound policy mistake of ignoring exchange rate misalignments. Policymakers have allowed the dollar to rise to levels that have hamstrung the competitiveness of U.S. exporters in global markets. The resulting (and entirely predictable) trade deficits have been a primary driver of job loss in manufacturing in recent decades, and these losses have amplified the regressive redistribution caused by trade.

Trade agreements in recent decades have also amplified the upward redistribution of income from globalization, through a number of channels. They have undercut American workers’ bargaining power with employers and eroded protection for American workers’ ownership claims on American institutional and organizational capital, but have increased protection for corporate managers and shareholders in a range of industries—particularly those that rely on enforcement of intellectual property claims (pharmaceuticals, software, and entertainment, particularly). In short, they are not free trade agreements; they are agreements that decide whose protection from economic competition will be eroded and whose protection will be enhanced.

The net effect of these agreements is that little to nothing has been done to help boost the volume of American exports—particularly in manufacturing. The failure of predictions that signing the agreements would reduce U.S. trade deficits has become conspicuous.

The decision to sign trade agreements that were the result of corporate capture of the treaty-crafting process and the decision to not protect U.S. manufacturing employment against misaligned exchange rates were visible and regressive insults to large swaths of workers already feeling the wage-suppression effects of globalization. These agreements and currency misalignments have made for poisonous politics in the effort to secure class-based solidarity in economic policy debates. Given the extraordinarily modest national economic gains that are estimated to result from these treaties, it seems hard to imagine that they were worth the political fallout.

What can be done to redress the harm to workers?

A standard idea for responding to this problem of trade-induced redistribution—using nontrade policy tools to compensate those on the losing end of expanded trade—has never been tried on any serious scale. It should be. But this compensation is a much heavier lift than commonly thought, for two reasons: the net national gains from trade are much smaller than commonly advertised, while the gross losses to workers on the losing end are much larger.

The wage-suppressing effects of globalization for workers on the wrong end of it, amplified by trade agreements, has been significant, but do not explain anywhere near all of the upward redistribution in recent decades. Purely domestic policies are capable of fully compensating for the downward wage pressure of expanded globalization and even for the amplifying effects of trade agreements. For example, policy change that managed to restore collective bargaining rights to American workers would likely boost their economic leverage enough to fully offset the past drag of globalization.

But even though progressive domestic policy could hold American workers harmless in the face of globalization, there is no virtue to preserving the trade policy status quo. Recent trade agreements have not led to faster growth, and, despite occasional genuine, good-faith efforts to write “better” agreements, the process of writing and enforcing these agreements is completely captured by corporate interests. There is no winning the game of trying to write a worker-friendly omnibus trade agreement, so a new game needs to be played.

Trade policy going forward should abandon the pursuit of ever more omnibus trade agreements and should instead focus on just three things: enforcing aspects of existing agreements and trade law when this will benefit American workers; reducing specific, identifiable trade costs when they are imposing large, regressive costs on Americans; and preserving open access to the U.S. market for poorer countries.

It is clearly true that a number of key economic challenges are best met at the international level and that a retreat to isolationism will not further progressive goals. Examples include international coordination to tax capital and close tax havens; the institution of a global financial transactions tax that could provide funding for pressing social needs; harmonizing climate change policy across countries to ensure that emissions are not just chased out of one country and into another; and ensuring that beggar-thy-neighbor currency misalignments are addressed in a fair and transparent way.

The economics of globalization

In this paper we define globalization as the growing share of trade and capital flows scaled against national income. For the purposes of assessing the effects of globalization on American workers, it really does not matter what underlies the trend of globalization—whether it has been driven by policy reductions in barriers to these flows, or whether it has been driven by the decisions of American trading partners to enter the world trading system. Either one of these scenarios has the same effect on American outcomes.1

Trade-induced losses affect a majority—not a minority—of American workers

The challenge of globalization for American workers is often painted as a problem of industrial workers losing their jobs to imports. Because manufacturing employment is now a small share of overall employment, these trade-induced losses are often described as “small and concentrated.” If it were true that globalization’s losses were concentrated on and borne by only a small group of workers, the politics would not be so challenging for progressives—small groups are easy to compensate. But this assessment of the situation is wrong—growing trade (particularly with poorer nations) actually inflicts losses on the majority of the American workforce.

This is not some heterodox stance. The most conventional textbook economics actually argues for surprisingly radical conclusions regarding the effects of globalization in the U.S. economy. When people say that economics teaches that expanded trade is a “win-win” proposition, this means only that trade is “win-win” for total national income in each partner country.2 But textbook economics does not predict that expanded trade will be a win-win for all groups within those countries.

To see the logic of why this is so, take the case of China and the U.S. Reducing barriers to trade allows each country to specialize in what they do relatively more efficiently.3 But this specialization means that domestic resources need to be reshuffled between sectors domestically. Because China is likely to specialize more in labor-intensive production while the United States is likely to specialize more in production that uses capital, skills, and credentials (“capital” henceforth) more intensively, this reshuffling will, in the end, reduce demand for labor and boost demand for capital in the United States. Because it can be shown that the sum of capital’s gains exceeds labor’s losses, globalization remains “win-win” at the country level. Within the U.S., however, there is nothing “win-win” about it; labor loses not just in relative terms, but can suffer absolute income losses as well.4

Importantly, these losses are not the damage stemming from the adjustment cost of manufacturing workers’ temporary unemployment spell as they move between sectors after being displaced by imports. This temporary adjustment cost is not even factored into the considerations above (in the real world, they should be). Rather, the big damage is the permanent wage loss resulting from America’s new pattern of specialization that requires less labor and more capital. Further, this wage loss is not just suffered by workers in tradeable goods sectors who are displaced by imports; it’s suffered by all workers who resemble these workers in terms of credentials and labor market characteristics. A simple way to say this is that while landscapers may not be displaced by imports, their wages suffer from having to compete with apparel (and auto, and steel) workers who have been displaced by imports.

There is widespread agreement that domestically driven compensation policies could undo this damage—so why haven’t such policies been implemented?

We could in theory solve this problem through domestic compensation—using nontrade policy tools to progressively redistribute income even as expanded trade regressively redistributes it. But we have not. One reason why we have not is that there has not been any real agreement on the size of the group losing from expanded trade or the economic heft of their losses. Instead, there has been a concerted effort to define the group as “small and concentrated” and to pretend that policies often advertised as “compensation” for trade deals (Trade Adjustment Assistance [TAA], for example) are all that’s needed. But even at its peak, TAA was too small—by orders of magnitude—to fully compensate for trade’s gross losses.5

A relatively wonky point is that because the net national gains stemming from expanded trade are the outcome of much larger gross winnings and losses, the political economy of securing compensation is difficult. Basically, one would have to deny the winning group about 80 percent of their expected benefits from trade to mitigate the damages to the losing group.6 And some of the mechanisms needed to effect a transfer this large (e.g., tax and transfer policies) are (at least in textbook analysis) potentially as distortionary to markets as trade barriers. In short, the “liberalize and then compensate” philosophy is nice in theory, and would be a clear improvement over the status quo for most American workers, but it has very little obvious economic advantage for domestic workers over a baseline of enhanced protectionism.7

Finally, given the intense focus on the plight of manufacturing workers in the 2016 presidential campaign, it is worth stressing one more time how widespread the losses from globalization really are—they are absolutely not confined to manufacturing. Listening to analysis of the presidential election, one would think that concerns about globalization and trade agreements are relevant only to white workers in a small handful of Rust Belt states. This is wrong. The wage-suppressing effects of globalization hit all workers without college degrees, across the country. Workers of all races and ethnicities are affected, and communities of color are disproportionately harmed. The harm of globalization is absolutely not a niche issue affecting only white working-class workers in the upper Midwest.

Globalization can also drag on workers’ bargaining power

The textbook analysis of the effects of trade on wage suppression discussed earlier assume that these effects run through trade flows that shift the relative demand for different types of labor. But trade’s effects on wages could run through other channels as well. After all, in the real world, wages are not set in perfectly competitive labor markets solely through shifts in demand and supply curves. Rather, the relative bargaining power of employers and employees matters greatly for wage-setting, and the threat effects of growing globalization surely hamstring this bargaining power for many American workers. In previous eras, the only fallback position for employers in the face of a breakdown in wage bargaining was to stop production. Now employers have the option of setting up production facilities abroad. This improved fallback position boosts employers’ bargaining power vis-à-vis their American employees, and this can lead to substantial downward pressure on wages.

As is always the case, measuring bargaining power at all, let alone its ebb and fall, is difficult, so the precise empirical impact of this channel of globalization’s wage-suppressing effects is hard to gauge. But there is growing evidence that these effects could be significant. Bertrand (2004), for example, shows that import competition tears down the protection that incumbent workers’ wages have traditionally enjoyed against rising unemployment. Senses (2007) finds that offshoring is associated with greater elasticity of labor demand—implying that wage gains will cut more sharply into employment gains. Bivens (2006) finds evidence that industry-level rent-sharing is eroded by growing import shares. Jayadev (2007) finds capital account openness associated with a shift from labor to capital income shares across countries, and attributes this finding to the bargaining channel. Anderson, Tang, and Wood (2006) construct a model of globalization eroding American workers’ privileged access to institutional and human capital and lowering wages through this channel. They find empirically that greater ease of movement of high-credential, high-skill managers leads to wage declines for American labor, supporting the predictions of their model.

Recognizing the bargaining power channel of globalization’s impact on wages also highlights why a class-based progressive response to trade is more likely to help low- and middle-wage workers than an approach based on corporatist nationalism. A class-based approach to economic policymaking in general should specifically target measures to boost workers’ bargaining power, both in the design of trade policy and through nontrade policies that can be used to compensate workers for the bargaining power erosion induced by globalization and trade policy. A corporatist approach instead just aims to keep foreign pressure from damaging U.S. workers (for example, the Trump threat/payoff approach to keeping the Carrier plant in the U.S., as noted by Bivens [2016]) but is fine with American corporate owners and managers pressuring the pay and jobs of American workers. Evidence of this last point includes the Trump administration nomination of Andrew Puzder for labor secretary, given that Puzder favors a suite of policy changes that would predictably damage the economic leverage and bargaining power of American workers relative to their American employers (McNicholas 2017).

New, growing evidence means nobody can claim they don’t know about trade’s wage impacts

This clear prediction that growing trade will boost inequality and place downward pressure on the wages of most American workers is bolstered by real-world evidence. In earlier rounds of the “trade and wages” debate, Feenstra and Hanson (1999) find that up to 40 percent of the rise in the college premium can be explained by growing trade flows. Bivens (2013) also finds that the implied wage effects of trade expanded rapidly after 1995, as trade with lower-wage nations (particularly Mexico and China) picked up significantly. Bivens (2013) also finds that, by 2013, trade flows with low-wage nations were likely reducing wages for workers without a four-year college degree by roughly 5.6 percent. For a non-college-degreed worker making the median hourly wage and working full time, full year, this translates into just under $2,000 annually.

This estimate is quite close to what Autor, Dorn, and Hanson (2013) have found in a series of now-famous papers measuring the impact of growing trade with China. The Autor, Dorn, and Hanson (2013) results are that each $1,000 in imports per worker reduces American wages by roughly 0.7 percent. Given that Chinese imports in 2016 stand at roughly $4,000 per worker, this translates into a 2.8 percent wage reduction. And the Autor, Dorn, and Hanson (2013) results indicate that the impact on American wages of a given volume of imports from other low-wage countries is no different from the impact of Chinese imports. Imports from all low-wage countries in 2016 stand at roughly $8,000 per worker, implying a wage reduction of roughly 5.6 percent, or about $2,000 annually, for a full-time worker earning the median wage.8

The wage damage caused by trade is not ‘concentrated’

Again and again, the damage done by expanded trade to American workers is described by economic writers as being “concentrated”; the typical worker hurt by trade is assumed to be a manufacturing worker who has lost her job to import competition. While trade-displaced workers clearly face the largest individual losses among those suffering harm, in the aggregate the costs of these job losses are dwarfed by the wider effects of downward pressure on wages. Globalization does not just hurt manufacturing workers; it also actively weighs down the wages of workers in nontradeable sectors.

Often, the Autor, Dorn, and Hanson (2013) results are invoked to justify the claim that this damage is “concentrated.” They do not. Autor, Dorn, and Hanson (2013) show that their measure of trade exposure—imports per worker—varies by roughly a factor of four between the 90th and 10th percentile of geographic locations in their data (from the years 2000 to 2007).9 As noted above, the Autor, Dorn, and Hanson (2013) results indicate that workers in the area with the median level of trade exposure have suffered wage declines of roughly 5.6 percent, or $2,000 in annual earnings, due to the level of Chinese imports. Because the 90th percentile geographic areas—those areas that have greater trade exposure than 90 percent of all geographic areas—have double the trade exposure as the median area, this implies a $4,000 wage reduction in those areas. But even the 10th percentile geographic areas—those areas that have less trade exposure than 90 percent of all geographic areas—have fully half the trade exposure of the median area, and this implies a $1,000 wage reduction even in these low-trade areas.10 To the extent that these are nontrivial differences between areas with greater and lesser trade exposure, one might call trade’s wage costs “concentrated.” But the fact that even in the least-exposed areas the typical worker likely sees wage declines of $1,000 per year stemming from trade argues strongly that these wage costs are in fact quite widespread.

Autor, Dorn, and Hanson (2013) interpret their results as showing that labor market “adjustment” to trade shocks is slow. That is a more-than-reasonable interpretation for some of the employment effects by geographic area, as mainstream economic theory argues that flexible labor markets tend to absorb all willing workers unless some labor market friction keeps this from happening. But a key part of employment generation in the face of a negative relative demand shock is that wages must decline to support employment growth, so the downward wage pressure found by Autor, Dorn, and Hanson (2013) could (indeed likely would) just get worse as labor markets fully “adjust.”

The wage damage caused by expanded trade is not ameliorated by lower prices

Often, proponents of expanding trade argue that its benefits are progressive because it lowers the prices of goods that are disproportionately consumed by low- and moderate-income households.11 This, however, looks at only one narrow facet of trade’s impact: lower prices for consumers stemming from cheap imports. But these lower prices for consumers are the gross benefits of expanded trade, so of course focusing solely on them would show trade helps everybody. One also has to examine the other effects of trade—those that impose gross costs as well.

For example, while expanded trade lowers prices for imports, it also raises domestic prices for exported items.12 At the national level, because imports are more likely than exports to be consumption goods, this does mean that trade’s net effect is to lower prices faced by consumers. But it is possible that exported items are also disproportionately consumed by low- and moderate-income households. Take an obvious example: the U.S. exports a lot of food products (grain, beef, etc.). If it did not export a lot of these food products, their prices would be cheaper in the United States. Given that lower-income households likely spend a higher share of their income on food than higher-income households, expanded trade of food exports could well have regressive effects.

Further (and much more importantly), looking only at prices misses the effect that growing trade has on wages. The same fall in import prices that benefits consumers also leads to lower wages for most workers. Essentially, as growing imports lower prices of import-competing goods produced in the United States, domestic production of these import-competing goods becomes less profitable, and so this production shrinks. As this domestic production shrinks, resources displaced from this sector have to try to find employment in more capital-intensive sectors. This leads to a reduction in demand for labor (as well as bidding up the price of capital), and this in turn triggers adverse wage effects. The more imports drive down domestic prices for domestic goods, the worse the wage effect is. This wage effect, again, harms most workers, not just those located in particularly trade-exposed regions.

It is clear that the decline in wages stemming from this process will be larger than the decline in prices.13 This means that falling import prices are not a net benefit from trade for the majority of American workers on the wrong end of globalization’s distributional conflict.

Finally, the estimates of wage declines caused by growing trade in this paper are real, inflation-adjusted wage changes—that is, they fully price in the effect of price declines driven by trade (or by anything else). So it is absolutely clear that these workers are losing, regardless of price declines.

Unaddressed currency misalignments have amplified globalization’s challenges

The theoretical case for expanded trade pulling down wages for most American workers generally assumes this wage drag would occur even in the presence of balanced trade. But the United States has run persistent trade deficits, particularly from the late 1990s onward. These deficits, and the sharp job loss they have caused in manufacturing, have amplified the regressive effects of growing globalization.

These deficits have been driven largely by exchange rate misalignments—the result of policy choices that have kept the value of the U.S. dollar too high to be consistent with balanced trade. A strong dollar makes U.S. exports expensive and U.S. imports cheap, and this results in trade deficits. It also means that the United States absorbs more imports than it would otherwise, pushing workers out of import-competing sectors into nontradeable sectors and leading to a reduction in relative labor demand, thus amplifying the wage-depressing effects of trade flows. For this and other reasons, failure to keep the value of the dollar close to its trade-balancing level has been a key policy mistake in recent decades.

Manufacturing job loss is not inevitable

Occasionally it is claimed that manufacturing job loss is inevitable and has more to do with fast productivity growth—the ability to produce more goods with fewer workers, thanks to technology/automation—than with trade deficits.14 This is clearly wrong. From 1965 to 2000, employment in manufacturing hovered between 17 and 19.5 million, depending on the phase of the business cycle. After 2000, it began falling, reaching its trough of under 11.5 million in 2010, and it hovers below 12.5 million today (EPI 2016). Yet the pace of productivity growth from 1965 to 2000 was notably more rapid than the pace has been since 2000.15 In short, it is not the pace of technological change that coincided with the decline in manufacturing employment; it is instead the emergence of large trade deficits sandwiched between two steep recessions.

The fact that manufacturing employment was steady for 35 years in the face of rapid productivity growth often gets muddled when people focus on manufacturing’s share of overall employment. Here it is true that faster productivity growth in manufacturing has clearly contributed to net employment growth occurring in other sectors. But manufacturing’s share of total employment has fallen post-2000 much faster than it would have absent the rise of large trade deficits. In the end, a falling manufacturing share of employment over time is indeed to be expected, but the absolute hemorrhaging of employment levels in manufacturing we have seen over the past 16 years is not. This relatively recent manufacturing employment implosion is much more attributable to rising trade deficits than to productivity growth.

Trade deficits are—by definition—caused by currency misalignments

Trade deficits are, by definition, evidence of a currency that is too strong to balance trade flows. Further, they can only be reduced with a currency depreciation.16 Sometimes people point to other issues in trade policy and claim that these can drive trade deficits: subsidies for exports, for example, or labor rights violations that keep wages artificially low, and argue that these, not currency values, are the source of trade deficits. But as concerning as these other policies may be for other reasons (and the violations of labor rights are deeply concerning), the effect they have on the trade deficit can be entirely neutralized by an exchange rate that is free to adjust to a level that balances trade. But the U.S. exchange rate has not balanced this trade in recent decades, and the result is large trade deficits that have strangled any recovery in manufacturing employment after the 2001 recession and have even placed a drag on recovery from the Great Recession.

Sometimes the too-strong American dollar over the past two decades was the result of private capital flows, and sometimes it was the result of intentional mercantilist currency management on the part of American trade partners. In the end, though, the source of this currency misalignment is irrelevant; the macroeconomy does not respond to why the dollar is strong, only to the fact that it is. In recent years, the debate over exchange rates has focused too strongly on the issue of currency management (or “manipulation”). This in turn has led to it being framed as an issue of a virtuous United States being victimized by predatory trading partners. This moralizing is irrelevant and misleading. A strong dollar vis-à-vis the Chinese yuan, for example, creates both winners and losers within the United States and within China. And while official currency management by China has largely relented in recent years, this does not mean, contra many supposed experts, that the U.S.–China exchange rate is no longer an economic problem. It just means it is a problem now exacerbated by private capital flows rather than official ones. But again, the macroeconomy does not care who is inflating the value of the dollar, only that it is inflated.

The economics of trade agreements

As noted in the previous section, the integration of the U.S. with the poorer global economy was always likely going to put some drag on wage growth for most American workers. But the regressive consequences of this within the United States have been amplified by the structure of specific trade agreements we have signed in recent decades.

Recent decades’ trade treaties have gone far beyond simple tariff-cutting (which would have by itself put some drag on wages, through the mechanisms described above). Many of the non-tariff-related innovations in trade agreements began enhancing protections for corporate interests while undercutting workers’ wages. For example, trade agreements in the 1990s began including investor-state dispute settlement (ISDS) provisions. These ISDS provisions made it much safer and more profitable for international corporations to invest in export facilities abroad by providing enhanced legal protection for corporate assets abroad.

This investment abroad lowers costs in trading partners’ export industries and leads to cheaper imports coming into the United States, which pressures American wages through standard Stolper-Samuelson channels. The ISDS provisions can also hamstring American workers’ bargaining power. One way to view these provisions from the American perspective is that they purposefully eroded American workers’ implicit monopoly on the legal and institutional capital that made employers confident about investing in the United States.17 In a sense, business environments in other nations that were either more worker-friendly or capitalist-risky helped boost American wages. Trade agreements have tried to level this previous advantage, thereby undercutting American wages.

From our trading partners’ perspective, these ISDS provisions have often been used aggressively by American companies to not just enforce uncontroversial property rights claims, but to attack any policy change—including prudential regulatory changes—that threaten profits. These provisions are the starkest example of how class-based approaches can highlight areas where workers here and abroad have common interests. American workers have an interest in keeping ISDS provisions from making it easier to send production overseas and erode their stake in institutional capital that keeps their wages up. But foreign workers have an interest in keeping ISDS provisions from allowing their governments to undertake corporate-friendly restructuring of their economies—which might not be politically popular—in the name of adhering to trade agreements while claiming that these agreements will provide benefits through access to the U.S. market.

Despite the fact that trade agreements erode protections for U.S. workers’ wages, it would clearly be wrong to label recent trade pacts as “free trade” agreements, as these ISDS provisions provide increased protections for investors. Further, many specific provisions of recent decades’ trade agreements have clearly increased protections for specific corporate interests. For example, these agreements universally force other countries to meet much higher levels of protection for intellectual property claims of American companies than they had to meet formerly. Essentially, poorer countries are forced by these treaties into spending resources to act as domestic bill collectors for companies like Pfizer, Microsoft, and Universal. Given that the beneficiaries of enforcement of these amped-up intellectual property claims are shareholders and corporate managers of these companies, it is obvious that these provisions just magnify the regressive consequences of trade flows.

Often debates over trade agreements get muddied by proponents’ insistence that the damage done by trade to the majority of American workers is somehow unrelated to the trade agreements we have signed in recent decades. It is certainly possible that we would have seen a sharp increase in international trade and capital flows even in the absence of trade agreements over the past 20 years. But a range of new research indicates that these agreements themselves boost trade significantly more than was previously thought.18

More importantly, this “hate the trade, love the trade agreements” argument is largely a dodge. The entire point of these agreements has been to increase trade and capital flows. If you think these flows put pressure on American wages and yet you work to maximize these flows by passing trade agreements (that contain no measure of compensation), you cannot claim to be innocent of doing anything bad to American workers.

How should a progressive policy respond to all of this?

From the perspective of the majority of American workers, expanded trade—amplified by trade agreements—has the primary effect of dragging on American wage growth. And wage growth for the typical American worker has lagged far behind overall productivity growth in recent decades. This growing wedge between productivity and pay is the root cause of the rise in income inequality over this time.19 It is important to note that globalization does not explain all, or even most, of this growing wedge between productivity and pay. But it does play some role.

As a society we could have decided that the best response to the regressive redistribution of income caused by globalization was to use other policy tools to reverse this effect. So, for example, we could have responded to the trade-induced wage losses by improving labor standards or using taxes and transfers to hold workers’ take-home pay constant. And it is clear that any comprehensive policy aimed at boosting American wage and income growth should indeed do most of these things.

In short, we could have given American workers a relatively prosperous life with growing opportunities even as we signed regressive trade agreements. But why should we even bother with the “regressive trade agreements” part of this equation?

Some would object to the idea that trade agreements must, by definition, be regressive. They would argue that the next trade agreement could be better for American workers if we just tweaked the rules to get them right. But by now it is clear that the entire process of pursuing large, omnibus trade agreements has been captured by corporate interests. This capture has happened with every agreement since the North American Free Trade Agreement (NAFTA). Each new agreement has text that has been tweaked for better (U.S.–Jordan) or worse (the Central American Free Trade Agreement [CAFTA]). But the constant is that the highest priorities of the corporate sector (ISDS and intellectual property protection) are given the most attention while efforts to use trade agreements to serve progressive goals largely fail.

Others would argue that the benefits to overall national income from trade agreements are so large as to justify undertaking the agreements. But these benefits are generally far oversold. Take, for one example, widely cited estimates from the Peterson Institute for International Economics on the potential growth payoff for the United States from the Trans-Pacific Partnership negotiated by the Obama administration. Their most aggressive growth forecast was that the TPP would provide a one-time level shift in U.S. gross domestic product of 0.4 percent after 10 years.20 Essentially, the U.S. economy with TPP was forecast to reach an income level by September 2016 that it would have reached in December 2016 without TPP, and then to grow at the same pace afterward. Importantly, these estimates only examined the provisions of TPP that liberalized trade; they made no attempt to quantify the growth drag resulting from the increase in protectionism included in some portions of the treaty.

The US should stop pursuing new trade agreements

Given the regressive insult that recent decades’ trade agreements have layered on top of the regressive injury caused by globalization writ large, our perpetual pursuit of ever more trade agreements should be stopped, once and for all. One institutional change that a president could make to halt the perpetual pursuit of these agreements is to announce that under the current administration, the office of the United States Trade Representative (USTR) would no longer be in the business of negotiating treaties. Instead, it would simply focus on enforcing provisions of existing trade law that benefit American households.

This does not mean that there is no possible scope for (genuine) trade liberalization to be used as a tool to help American households. But this liberalization should be targeted in areas and sectors where it would relieve genuine economic challenges. For example, a clearly pressing problem for most American households is the high cost of health care. Health care costs in recent decades have been driven in part by the rising cost of pharmaceuticals. Given that drugs cost much less in many other countries than they do in the United States, genuine trade liberalization could provide some relief to American households by allowing drug reimportation. But the larger point is that efforts to liberalize trade should be driven by the desire to solve actual problems facing American households; it should not be driven by an assumption that the pursuit of ever-more trade deals is good in and of itself.

How should the US renegotiate existing trade agreements if the opportunity arises?

Abandoning the perpetual pursuit of omnibus trade agreements will stop additional harm, but it won’t undo harm that’s already been done. The Trump administration seems to be proposing to undo or renegotiate past trade agreements, starting with NAFTA. In looking at NAFTA, the first thing to note is that the U.S. and Mexican manufacturing sectors have become tightly integrated in recent decades. One need not like the new equilibrium to which this integration has led our economies to recognize that ripping this integration apart could well impose new costs on American workers. Undoing a treaty like NAFTA, even if done intelligently with a progressive focus, would be challenging. Undoing it rashly, with a simple-minded aim of declaring American victory over Mexico, will most certainly provide no help to American workers.

All of this said, removing the ISDS provisions and putting enforceable labor and environmental standards in the body of the treaty (such standards are currently in toothless side agreements) would be welcome changes to NAFTA.21 Further, provisions harmonizing intellectual property protection and financial regulation could be scrapped as well, with little downside. It seems hard to imagine why Mexico and Canada would object to this latter change, especially if the U.S. agreed to allow changes those countries wanted (perhaps some enhanced agricultural protection in Mexico).

In essence, the goal in any reform of NAFTA, and in all trade talks going forward, should be to make access to the U.S. contingent on basic respect for the labor and environmental standards rather than contingent upon the adoption of a range of corporate-friendly domestic policy preferences. How closely the Trump administration’s priorities overlap with this goal will be a key tell as to how much help their trade policy reorientation will actually give American workers.

The US should pursue international cooperation on economic policy to solve these problems

Are calls to abandon the modern process of pursuing omnibus trade agreements tantamount to isolationism? Not at all. There are numerous challenges facing the United States and other countries that can only be solved through international cooperation. We should reorient our international economic policymaking to focus on these challenges, not on the problems allegedly addressed by current trade agreements. Below are a few ways the international community can work together to forge solutions with widespread benefits.

Coordinate globally to enable countries to tax capital income and to clamp down on abusive tax havens. Capital is mobile internationally, and capital incomes are extremely concentrated at the top of the income scale (in all countries). If progressive taxation is seen as a desirable policy, then countries must be able to tax capital without it simply fleeing (either for real or on paper) to low tax rate havens. Zucman (2015) has documented how enormous the problem of untaxed capital is.

Institute a global financial transactions tax (FTT). A particularly good way to tax capital is through FTTs. But FTTs would be far more effective—both in curbing speculative excess in finance and as revenue generators—if they were instituted internationally, rather than in any one specific country.

Harmonize national policies aimed at combating global climate change. At the moment, some of the benefits of any single country undertaking policies to increase the cost of carbon emissions are lost when carbon-intensive production migrates to countries without a climate policy. This carbon “leakage” makes the policy less effective and implicitly penalizes workers in tradeable goods sectors that live in countries with aggressive climate change policies. This is a terrible dynamic with serious international economic policy implications.

Coordinate internationally to address exchange rate misalignment. Perhaps most relevant to debates over trade, international coordination on exchange rate misalignment would be of huge help to workers around the world. For most of the past 20 years, the value of the U.S. dollar has been too high to balance trade. In some periods, this misalignment was driven by private capital flows (for example, a large appreciation versus the Euro during the U.S. stock market bubble in the late 1990s, as foreign investors reached for dollars to invest in American companies). In other periods, this misalignment was driven by intentional policy decisions of trading partners (for example, the very large accumulation of official currency reserves by the Chinese government from the late 1990s to roughly 2012). Whatever the source of exchange misalignments, they are damaging. In the United States in the 2000s, these misalignments sapped aggregate demand through net export channels, while the capital inflows associated with them kept long-term interest rates low, propping up demand through home-building. This constellation of demand was eventually unsustainable and contributed to the Great Recession. Conversely, China throughout the 2000s was not demand-constrained, so benefits from net exports were minimal and could have been achieved with other instruments besides managing the value of its currency. Using international coordination to keep misaligned exchange rates from causing damage around the world should be a much higher priority than pushing more business-as-usual trade agreements.

Conclusion

Finally, it is worth noting how odd it is that recent decades’ trade agreements have so often been championed by Democratic presidential administrations. Again, the textbook understanding of trade liberalization is that it will boost national income overall while redistributing enough income regressively to leave most workers worse off. In this sense, it is quite similar to the textbook effects of cutting top marginal tax rates and financing these cuts with across-the-board cuts to government transfer payments like Social Security or Medicare.23 Yet almost no Democratic president would champion such a tax-cut-cum-transfer-cut strategy. So why would a Democratic president champion trade liberalization without compensation that leads to the same outcome? Most Democratic members of Congress seem to understand the regressive effects of trade liberalization. While the major trade agreements of recent decades have tended to be supported by Democratic presidents and a majority of Republican lawmakers, most Democrats in Congress have opposed these agreements.

Of course this does not mean that Democrats must never support a decent trade agreement (should one be found); instead it means that their role in this debate should be to insist upon good agreements and compensation sufficient to restore the wage growth prospects of the huge number of workers that will be harmed. This compensation should come in the form of broad-based, large domestic interventions that restore bargaining power or boost incomes for low- and moderate-wage working people and their families. A full menu of policies to do this can be found in Mishel and Eisenbrey (2015).

Relying only on domestic compensation to deal with the effects of trade on American workers, however, assumes that the trade agreements we have signed in the past 20-odd years have been exercises in good-faith liberalization of trade that have greatly expanded access of the world’s poor to U.S. markets. But, in fact, they have not been. They have instead been the result of corporate capture that has engaged in selective and regressive protectionism while restricting the policy space of our trading partners. This is not how we should be engaging in the world, and it is not retreating into isolationism to recognize this. We can do better by both America’s workers and the workers of our trading partners.

About the author

Josh Bivens joined the Economic Policy Institute in 2002 and is currently the director of research. His primary areas of research include macroeconomics, social insurance, and globalization. He has authored or co-authored three books (including The State of Working America, 12th Edition) while working at EPI, edited another, and has written numerous research papers, including for academic journals. He often appears in media outlets to offer economic commentary and has testified several times before the U.S. Congress. He earned his Ph.D. from The New School for Social Research.

Acknowledgments

This research was made possible by support from the Alliance for American Manufacturing.

Endnotes

1. As long as the increase in trade flows is exogenous, it is straightforward to map out its effects on American wages. In theory, trade flows could have increased because American wages were changing, but very few professional participants in the trade and wages debate consider this possibility a serious hurdle to assessing trade’s impact on wages.

2. Of course, even this claim that expanded trade is “win-win” between countries is subject to all sorts of caveats. The most important one is that it assumes full employment in both countries. Samuelson (2004) identifies other important caveats as well.

3. “Relatively” is the crucial word here—even if production costs were lower in China for both clothing and aircraft (they are not—and U.S. productivity advantage in the latter dominates the wage costs), it would still make more sense for China to specialize in the former, as their cost advantage is naturally much greater in more labor-intensive industries. Think of a lawyer who types faster than her secretary—will she decide to cut back on the legal services she provides to do more typing? Of course not—she’ll concentrate on the activity where her relative (not absolute) advantage is greater.

4. Those familiar with trade theory will recognize this as a description of the Stolper-Samuelson theorem. This theorem says that expanded trade will see the return to a country’s abundant factor of production increase, while the return to its scarce factor will decline. What’s key in this description is that “abundant” and “scarce” are relative terms that compare the U.S. to the global economy. So, while workers without a four-year college degree constitute the majority of the U.S. workforce, they constitute the scarce factor of production for the U.S. because they represent a smaller fraction of the U.S. workforce than the global workforce. There is a longstanding debate in the international economics realm about whether this Stolper-Samuelson theorem is precisely correct. For a good sampling of this debate, see Davis and Mishra (2007) and Wood (2009). While the strict mapping of factor prices and product prices may well not hold in the real world, there is ample supporting empirical evidence that the bundle of imports and exports in the United States economy really does lead to excess supplies of labor and deficient supplies of capital relative to the nontraded economy. It is hard to see how this would not translate into lower returns for labor and higher returns to capital. As Wood (2009) argues, “narrow” versions of Stolper-Samuelson that work through textbook, perfectly competitive markets that allow precise mapping of product and factor prices will likely fail. But “broad” versions that simply say trade leads to lower demand for labor and higher demand for capital in the United States will almost surely hold. Finally, there is a temptation to say that because the first versions of Stolper-Samuelson predicted relative increases in the Global South, and this has not generally happened, that it cannot be relevant for the United States. This is far too facile an argument. For one, it could be that Stolper-Samuelson effects are indeed at work in the Global South, but are simply being swamped by other determinants of wage growth (growing productivity, the move from rural to urban labor markets, etc.). For another, since Feenstra and Hanson (1997), there has been a modified form of Stolper-Samuelson that argues for trade and offshoring in a continuum of goods (not just two) that pushes all countries’ factor demand toward capital and away from labor, as globalization allows every country to “take a step up” the value chain.

5. For this comparison of globalization-induced redistribution and various policy initiatives, see Bivens (2008).

6. This is based on the rough rule of thumb that trade redistributes about five to six times more income than it creates.

7. Securing better market access for workers in developing countries is a persuasive reason why “liberalize and compensate” is a better overall strategy if one is also concerned (as one should be) with the welfare of workers outside of the United States.

8. See Bivens (2013) for how imports from low-wage countries are measured.

9. The specific geographic areas they examine are “commuting zones,” or “CZs.” In 2000, the Census Bureau identified 709 CZs across the United States.

10. This implicitly assumes that all other developing country imports have the same dispersion across geographic locations as imports from China.

11. An example of this is Matt Yglesias’s recent claims on the Vox podcast regarding trade, wages, and prices: “[Trade protection] is not really a transfer from fancy coastal people who don’t really spend that high a share of their income on import goods, but a transfer from residents of places like Eastern Kentucky and Mississippi to residents of not-rich but more-affluent areas like Wisconsin, Michigan, and Pennsylvania” (Vox 2016).

12. The intuition for this is relatively simple: as trade barriers fall or as incomes abroad rise, there is greater competition to buy the output of American producers. As exports rise, American consumers are in effect competing with foreign consumers for purchasing this output, hence prices rise.

13. The intuition is that the cost of producing something can be broken down into the constituent price of inputs. Since trade leads to prices for one of these inputs falling (labor) while the other input’s price rises (capital), the percentage fall in labor’s price (wages) must be greater than the percentage change in prices.

14. See Bivens (2015b).

15. See Scott (2015) for some evidence on productivity growth, trade deficits, and manufacturing employment.

16. This is true even if one believes that the root cause of trade deficits is deficient domestic savings, a commonly expressed view. Focusing on domestic decisions about how much to save is largely a distraction in debates over trade deficits. In recent years, trade deficits have surely affected the level of saving, as income and savings have been largely driven by the level of aggregate demand, which is affected by the trade balance. Further, even at full employment the savings decisions of American trading partners (the global savings glut, for example) can have very large impacts on trade deficits. But even if one believed that increasing domestic savings is the key to reducing trade deficits, this increased savings would only translate into a lower trade deficit through an exchange rate change. And if one believes that these necessary exchange rate changes are being blocked by policy action, then one can cut right to changing these exchange rates directly.

17. A formal description of how this monopoly is eroded and affects wages is provided by Anderson, Tang, and Wood (2006).

18. Two papers demonstrating that trade liberalization might have stronger effects on trade flows than conventional measures might indicate are Pierce and Schott (2016) and Ruhl (2008).

19. See Bivens and Mishel (2015) for an extensive discussion of this pay–productivity disconnect.

20. See Bivens (2007) and Bivens (2015a) on the overselling of estimated gains from specific trade liberalizations.

21. The labor standards would mandate that all signatories respect the labor standards that the International Labour Organization (ILO) has identified as fundamental rights for workers. Failure to recognize and enforce these standards could then constitute grounds for countervailing trade protection measures.

22. This is, by the way, entirely consistent with economic theory—in mainstream trade theory (see Krugman [1993]), the benefits of “free trade” are dominated by the benefits of importing cheaper goods, and the benefits of expanded exports are very minor. And the ability to import cheaper goods is entirely at the discretion of our trading partners and not contingent on any decisions we make about market access.

23. Furman (2016) makes an excellent point that the GDP gains stemming from cuts in tax rates predicted by textbook models actually boost welfare by a much smaller amount, as these gains mostly stem from either more work (which causes disutility) or more savings (which means consumption is deferred). This criticism does not apply to the income gains spurred by textbook trade liberalization. However, more importantly, the losses from a tax/transfer cut strategy and from expanded trade are both welfare-damaging in comparable ways.

References

Anderson, Edward, Paul Tang, and Adrian Wood. 2006. “Globalization, Co-operation Costs, and Wage Inequalities.” Oxford Economic Papers vol. 58, no. 4, 569–95.

Autor, David H., David Dorn, and Gordon H. Hanson. 2013. “The China Syndrome: Local Labor Market Effects of Import Competition in the United States.” American Economic Review vol. 103, no. 6, 2121–68.

Beauchamp, Zach. 2016. “If You’re Poor in Another Country, This Is the Scariest Thing Bernie Sanders Has Said.” Vox, April 5.

Bertrand, Marianne. 2004. “From the Invisible Handshake to the Invisible Hand? How Import Competition Changes the Employment Relationship.” Journal of Labor Economics vol. 22, no. 4, 723–66.

Bivens, L. Josh. 2006. “Wages, Profits, and Rent-Sharing in an Open Economy.” International Review of Applied Economics vol. 20, 1–26.

Bivens, Josh. 2007. “The Gains from Trade: How Big and Who Gets Them?” EPI Working Paper no. 280, December 17.

Bivens, Josh. 2008. Everybody Wins, Except for Most of Us: What Economics Teaches About Globalization. Washington, D.C.: Economic Policy Institute.

Bivens, Josh. 2013. Using Standard Models to Benchmark the Costs of Globalization for American Workers without a College Degree. Economic Policy Institute Briefing Paper no. 354, March 22.

Bivens, Josh. 2015a. The Trans-Pacific Partnership Is Unlikely to Be a Good Deal for American Workers. Economic Policy Institute Briefing Paper no. 397, April 16.

Bivens, Josh. 2015b. “Yes, Trade Deficits Do Indeed Matter for Jobs.” Working Economics (Economic Policy Institute blog), May 28.

Bivens, Josh. 2016. Why Is Recovery Taking So Long—and Who’s to Blame? Economic Policy Institute, August 11.

Bivens, Josh, and Lawrence Mishel. 2015. Understanding the Historic Divergence Between Productivity and a Typical Worker’s Pay: Why It Matters and Why It’s Real. Economic Policy Institute Briefing Paper no. 406, September 2.

Bradford, S., Paul Grieco, and Gary Hufbauer. 2005. “The Payoff to America from Global Integration.” In The United States and the World Economy: Foreign Economic Policy for the Next Decade, C. Fred Bergsten, ed. Washington, D.C.: Peterson Institute for International Economics.

Davis, Donald R., and Prachi Mishra. 2007. “Stolper-Samuelson Is Dead: And Other Crimes of Both Theory and Data.” In Globalization and Poverty, A. Harrison, ed. National Bureau of Economic Research.

Economic Policy Institute (EPI). 2016. The Top Charts of 2016.

Feenstra, Robert, and Gordon Hanson. 1997. “Foreign Direct Investment and Relative Wages: Evidence from Mexico’s Maquiladoras.” Journal of International Economics vol. 42, nos. 3–4, 371–93.

Feenstra, Robert, and Gordon Hanson. 1999. “The Impact of Outsourcing and High-Technology Capital on Wages: Estimates from the United States, 1979–1990.” Quarterly Journal of Economics vol. 114, no. 3, 907–40.

Furman, Jason. 2016. “Dynamic Analysis, Welfare, and Implications for Tax Reform.” Remarks at the National Bureau of Economic Research Tax Policy and the Economy Conference, Washington, D.C., September 22.

Jayadev, Arjun. 2007. “Capital Account Openness and the Labour Share of Income.” Cambridge Journal of Economics vol. 31, no. 3, 423–43.

Krugman, Paul. 1993. “What Do Undergrads Need to Know About Trade?” American Economic Review vol. 82, no. 2, Papers and Proceedings of the 105th Annual Meeting of the American Economic Association, 23–6.

McNicholas, Celine. 2017. Puzder’s Anti-Worker Positions Disqualify Him from Serving as Labor Secretary. Economic Policy Institute Policy Memo, February 2.

Mishel, Lawrence, and Ross Eisenbrey. 2015. How to Raise Wages: Policies That Work and Policies That Don’t. Economic Policy Institute Briefing Paper no. 391, March 19.

Pierce, Justin, and Peter Schott. 2016. “The Surprisingly Swift Decline of U.S. Manufacturing Employment.” American Economic Review vol. 106, no. 7, 1632–62.

Ruhl, Kim J. 2008. “The International Elasticity Puzzle.” Working Papers 08-30, New York University, Leonard N. Stern School of Business, Department of Economics.

Samuelson, Paul A. 2004. “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization.” Journal of Economic Perspectives vol. 18, no. 3, 135–46.

Scott, Robert. 2015. Manufacturing Job Loss: Trade, Not Productivity, Is the Culprit. Economic Policy Institute Issue Brief no. 402, August 11.

Senses, Mine. 2007. “The Effects of Outsourcing on the Elasticity of Labor Demand.” Working Papers 06-07, Center for Economic Studies, U.S. Census Bureau.

Vox. 2016. “The Weeds: TPP, the Nevada Caucus, and the Great Texas Abortion Clinic Shutdown.” The Weeds podcast, February 26.

Wacziarg, Romain, and Karen Horn Welch. 2008. “Trade Liberalization and Growth: New Evidence.” World Bank Economic Review vol. 22, no. 2, 187–231.

Wood, Adrian. 2009. “A Practical Heckscher-Ohlin Model.” QEH Working Paper no. 170. University of Oxford: International Development Department.

Zucman, Gabriel. 2015. The Hidden Wealth of Nations: The Scourge of Tax Havens. Chicago: University of Chicago Press.

The United States had a global current account deficit (the broadest measure of all trade in goods, services and income) of $470 billion (2.5 percent of GDP) and a goods trade deficit of $750 billion (4 percent of GDP) in 2016. Meanwhile, a handful of countries have developed large, structural trade surpluses that reached $1.2 trillion, which have effectively transferred millions of manufacturing jobs from the United States and other countries to these surplus countries—have hampered economic recovery in much of the globe—and now threaten to destabilize the global economy again in coming years if not reduced.

Trump was elected, in part, on a promise to “make American manufacturing great again.” Eliminating U.S. trade deficits and rebalancing global trade are the keys to rebuilding U.S. manufacturing, along with a robust plan for massive infrastructure investments, which would also stimulate manufacturing investment and job creation. Achieving these goals will require a laser-like efforts to eliminate the cause of U.S. trade deficits. In doing so, we must avoid doing harm to the U.S. economy and to our international competitiveness, and clearly identify key priorities for developing effective trade and manufacturing strategies. In doing so:

• The last thing we need is to negotiate more trade and investment deals. And we should avoid raising tariffs on Mexico that will just hurt workers in both the United States and Mexico. It would be too costly to withdraw from the North American Free Trade Agreement but it could, and should, be improved.

• We do need to address the root causes of the $1.2 trillion global trade surplus that has been engineered by countries in Europe and East Asia, led by China, Germany, Japan and Korea. These problems include unfair trade policies, massive excess production capacity in a range of industries and, most importantly, significantly undervalued currencies.

• Global trade surpluses are also generating massive capital inflows that are fueling real estate and asset bubbles that could lead to another round of global financial crises. This is the hidden underbelly of a growing potential Trump-bubble in financial markets that must be addressed before it gets out of control.

Thus, it is doubly important to reduce global trade imbalances in order to rebuild U.S. manufacturing, restore order to the global economy, and eliminate the threat of yet another Great Recession.

The last thing we need is to negotiate more trade deals

Trump has claimed that he can force other countries to give us better terms on trade deals because he is a tough negotiator. During the campaign he said, “I intend to immediately renegotiate … the NAFTA [North American Free Trade] agreement.” If he doesn’t get what he wants, he will withdraw from the deal, he says.

He clearly has a point that our trade deals have been bad for American workers. And these deals have little to nothing to do with “free trade.” Instead, NAFTA and other recent trade and investment deals such as the U.S.-Korea Free Trade Agreement and the proposed Trans-Pacific Partnership (TPP) were designed to create a separate, global set of rules to protect foreign investors and encourage the outsourcing of production from the United States to other countries. These deals contain 30 or more chapters providing special protections for foreign investors; extending patents and copyrights (enriching the wealthy); privatizing markets for public services such as education, health, and public utilities; and “harmonizing” regulations in ways that limit or prevent governments from protecting the public health or environment. These rules are all enforced by special “investor state dispute settlement (ISDS) panels,” private arbitrators that transfer sovereignty from domestic courts to “independent” international lawyers (who work for multinational corporations [MNCs] one day and decide cases the next—so much for “unbiased” law). These deals do much more than cut tariffs or promote trade. They promote outsourcing and shift the balance of power from workers to investors based in the United States and other countries.

Trump is also correct that the system for creating such deals is fundamentally corrupt. Government negotiators (trade lawyers who often have their own deregulatory agendas) are, by law, advised by committees composed of hundreds of representatives of multinational corporations who, in essence, dictate the terms of these agreements. The process is fundamentally flawed. And, many of the negotiators, and leading policy makers, are part of the revolving door conspiracy where they negotiate provisions for their former employers who they often rejoin right after negotiating the sweetheart deals.

But we can’t just wave a wand and undo NAFTA because the United States, Mexico and Canada have 20 years of involvement in the deal and cancelling it would create havoc. NAFTA must be improved by raising labor standards. Mexico has some of the weakest labor laws in the world and labor rights are under attack across the United States, so workers throughout the hemisphere would be helped by a joint agreement to raise labor standards to Canadian levels. In addition, both countries could gain from measures to dramatically increase the required North American content of goods deemed to originate in the region, and by eliminating the investor-state dispute settlement system from the agreement. However, Donald Trump and his billionaires’ cabinet are unlikely to make these kinds of changes to the NAFTA.

Worse yet, slapping tariffs on Mexican imports to pay for Trump’s proposed border wall will not solve any problems for American workers. Our economy is tightly integrated with that of Mexico and Canada. Any job-creating forced from increased domestic production following the imposition of tariffs on Mexican imports would be strongly muffled by job-displacing effects of higher-priced U.S. goods—including parts used to produce other U.S. goods for export (thereby hurting U.S. exports). Imposing high tariffs suddenly would also harm workers in Mexico, and likely result in a trade war that would only escalate these costs further.

The Republican Party and the business interests it represents have been the chief proponents in the passage of these destructive trade deals. Two-thirds of the votes needed to pass NAFTA in 1993 were provided by Republicans. In fact, NAFTA was Ronald Reagan’s idea, and was first introduced and negotiated by President George H. W. Bush. More recently, 85 percent of Democrats in the House and 70 percent in the Senate opposed giving the president Fast Track authority for the TPP and other trade deals, while 87 percent of Senate Republicans gave final approval to the Fast Track bill. It was Republicans in Congress who helped these trade deals go forward. And it was Republican leaders who blocked legislation that would have given the Commerce Department tools to tackle the currency manipulation that is behind the loss of jobs to exporting nations that break the rules. This history makes us suspicious that radical improvements in U.S. trade policy that would benefit working-class Americans will occur under joint Republican control of the Presidency and Congress.

The solutions Trump himself has put forward reflect little understanding of what a smart trade regime would look like. Instead of relying on Wilbur Ross to save us from a corrupt system of trade agreements from which he personally benefitted, we should instead call a halt to the negotiation of all new international trade and investment deals. Meanwhile, instead of vague promises about “better” trade deals, we need a trade policy that forthrightly addresses the fundamental causes of growing trade deficits—deficits that are causing our trade-related job losses and depressing the wages of most working Americans.

We do need to address the root causes of the $1.2 trillion global trade surplus

Countries that engage in unfair trade practices tend to develop sustained, structural trade surpluses with the world as a whole. China, which has the largest, most persistent goods-trade surpluses in the world, is the leading example. China both subsidizes and dumps (selling below costs) massive quantities of exports. In addition, it blocks imports, pirates software and technology from foreign producers, invests in massive amounts of excess production capacity in a range of basic industries (investments that lead to dumping), often through state owned enterprises (SOEs), and operates as a refuse lot for carbon and other industrial pollutants. China has also engaged in extensive and sustained currency manipulation over the past two decades, resulting in persistent currency misalignments.

Roughly twenty countries, most in Asia, have engaged in persistent, sustained currency manipulation, by buying up massive quantities of Treasury bills and other dollar denominated assets (currency intervention), driving up the value of the dollar and driving down the yuan and other currencies. Currency manipulation acts like a subsidy to the exports of all those countries, and a tax on U.S. exports to the world. Although China has not intervened against the dollar in the past two years, the yuan remains massively undervalued, and misaligned, vis-à-vis the U.S. dollar, as do the currencies of a number of other unfair traders.

Before turning to remedies for unfair trade and currency misalignment it is important to consider how the United States should go about setting trade priorities. The Trump administration has complained frequently about NAFTA and the U.S. trade deficit with Mexico, which reached $63.2 billion in 2016. While NAFTA is seriously flawed, for reasons noted above, Mexico does not engage in widespread unfair trade practices, as do the other countries noted above. One strong indicator of this is the fact that Mexico had a significant, sustained trade deficit (current account balance) with the world which reached $32.7 billion in 2015 (latest data available), as shown in Figure A, below.

Figure A

This chart ranks countries based on their bilateral trade deficit with the United States. Thus, although the U.S. has a relatively large bilateral deficit with Mexico, that country did not contribute to global trade imbalances in 2015. Bilateral trade deficits are a poor basis for developing trade policy targets and trade remedy proposals.

The countries that maintained the largest global trade surpluses in 2015 were, in order, China, Germany, Japan, Korea and Taiwan. Those countries, and others that maintain substantially misaligned currencies, and that engage in unfair trade practices, should be top priorities for fair trade enforcement by the Trump administration.

These countries, along with other countries in Europe and East Asia, have developed a global trade surplus which reached $1.2 trillion in 2015 and 2016, as shown in Figure B, below. These countries are destabilizing global trade, and threaten to destabilize world financial markets, as well. And it is not just the United States that is suffering from imbalanced trade. Other countries with persistent, structural trade deficits, including the United Kingdom, Brazil, and Australia, are also being hurt and suffering substantial, sustained job losses. All of these countries could benefit from rebalanced global trade, and are potential allies in such efforts.

Figure B

Global trade surpluses are generating massive capital inflows that are fueling real estate and asset bubbles that could lead to global financial crises

Every trade surplus is offset by capital outflows from the surplus countries (it’s just double entry bookkeeping). Thus, the global economy is beginning to resemble that of the mid-2000s, which led to the global financial crisis and great recession. It is important to recall that one of the major causes of the last housing bubble was the great inflow into the United States of cheap capital from China and other large exporters.

Thus, one of the greatest risks to the global economy is the return of the global savings glut, which was first noted by Ben Bernanke in 2005. Capital is flowing into the United States and other countries with large trade deficits, and may be generating unsustainable asset bubbles in, for example, stock markets and real estate in the United States.

The Dow Jones Industrial Index has gained over 25 percent since December, 2013 (with half of these gains occurring in the past three months), and housing prices are soaring in many areas, especially on the coasts. If this growth continues, these asset prices may eventually become unsustainable, especially given weak growth rates in the United States (averaging 2.2 percent in this period) and in other developed economies (which are generally weaker).

Thus, the stage may be set for another great financial crisis which could derail the current, weak recovery. For these reasons, it is doubly important to reduce global trade imbalances.

Policy responses to eliminate global trade imbalances

To adequately respond to these threats, Congress and the president should enhance enforcement of fair trade laws and treaty obligations (through anti-dumping, countervailing duty, and World Trade Organization case filings) and implement better early warning systems and mechanisms for responding to import surges from China, Korea, Taiwan and other frequent violators of U.S. unfair trade statutes. In particular, the United States should begin to investigate and initiate anti-dumping, countervailing duty and other unfair trade enforcement actions on behalf of U.S. producers, workers and communities affected by widespread and pernicious violations of U.S. fair trade law and standards.

The United States should also make reducing Chinese excess production capacity a top priority in bilateral negotiations, as it is this excess capacity that fuels much of the dumping of exports from around the world in the United States (dumped raw materials from China are exported around the globe for further processing, resulting in even more dumping from many other countries). In particular, overcapacity should be addressed by reforming state-owned enterprises, barring China from all U.S. government procurement contracts, and prohibiting SOEs from foreign direct investment in U.S. manufacturing or high tech companies. The United States should also consider imposing a border-adjustable carbon fee on imports produced by energy-intensive industries. In addition, World Trade Organization nations should continue to treat China as a nonmarket economy in fair trade enforcement, because granting China market-economy status would curb the ability to impose tariffs on dumped goods and thus allow Chinese companies to undercut domestic production by flooding WTO nation markets with even more dumped and subsidized goods. Also, China should not be rewarded for its market distortions with a bilateral investment treaty.

At the end of the day, subsidies, dumping and excess production have so distorted production costs in a wide array of industries, ranging from electronic and industrial machinery to metal products of all kinds, automobiles, aircraft and other transportation equipment, and all kinds of industrial products that it will be impossible to put the evil genie of unfair trade policies back in its bottle through fair trade enforcement policies alone. Currency realignment provides the only tool available that is broad and powerful enough to provide redress for a generation or more of pervasive, widespread unfair trade policies.

Thus, last but by no means least, the United States must maintain currency vigilance. Standards for defining currency manipulation and misalignment (under the Bennett Amendment which became law in 2015) should be updated to give priority to countries that maintain large, persistent, global trade surpluses. The U.S. Treasury, which issues semi-annual reports on the currency policies of major trading partners should identify and target for enforcement the countries discussed here, including China, Japan, Korea, Germany and Taiwan, and other currency manipulators based on a history of currency misalignment and the maintenance of large, structural trade surpluses (both in absolute dollar terms, and relative to GDP), beginning with its next report in April. Although China has not intervened in currency markets in the past two years, and Germany uses the euro, which floats, the currencies of both countries are heavily undervalued and misaligned vis-à-vis the dollar. Hence, more comprehensive policies are needed to realign major currencies in order to eliminate structural trade imbalances.

For these reasons, it may soon be time to consider negotiating a new Plaza Accord to rebalance currencies and global trade. Fred Bergsten has estimated that the currencies of China, the EU and Japan, must all rise by 37 percent to 50 percent against the dollar (but substantially less on a multi-lateral, trade weighted basis) to rebalance global trade. But those estimates preceded the recent appreciation of the dollar, which has gained approximately 10 percent in the past year alone, so the required currency rebalancing would be larger still.

While these measures may sound extremely ambitious, a similar realignment was achieved in the 1985 Plaza Accord. The United States was also able to negotiate a significant currency realignment following the end of the Bretton Woods system in 1971. What both of these cases have in common was that the United States threatened to impose (or actually did impose, in the case of Nixon’s temporary import surcharge in 1971) relatively large, broadly based tariffs on a significant group of exporters to this country, which persuaded them to negotiate broad-based realignments between their currencies and the U.S. dollar.

Conclusions

It is time for the United States to undertake a fundamental re-evaluation and realignment of its trade policies and objectives. Although NAFTA could be reformed and improved, the last thing this country needs is more trade and investment deals. President Trump should implement a halt to the negotiation of all new trade deals. The federal government should develop substantial capacities to self-initiate fair trade enforcement cases, and we should take steps to end pernicious, wide-spread currency misalignment of the U.S dollar.

Even these policies alone will not be sufficient to rebuild U.S. manufacturing. We can start by supporting strong and enhanced buy-American policies for all public investments. The United States also needs trillions of dollars of public investments to bring our infrastructure up to standards identified by the American Society of Civil Engineers. We need to invest in American research, development and innovation, in manufacturing extension services and in worker training. And while reform of the tax code could help, we also must avoid gutting the public sector by slashing tax rates, a step that will cripple our ability to provide these essential public investments.

Donald Trump was elected on the promise that he will rebuild U.S. manufacturing and rebalance U.S. trade. Voters should be satisfied with nothing less. And they certainly should not be satisfied with xenophobia dressed up as trade policy.

• Putting pen-to-paper on trade agreements contributed nothing to aggregate job loss in American manufacturing. This is almost certainly true.

• The aggregate job loss we have seen in manufacturing is due to automation plus declining domestic demand for manufactured goods, period. This is mostly false. Trade deficits, especially with China in the last 15-20 years, have contributed significantly to overall manufacturing job-loss..

• The source of these rising trade deficits is mostly an overvalued U.S. dollar, which has nothing to do with trade policy. It’s true that an overvalued dollar is what’s behind rising trade deficits, but saying that has nothing to do with trade policy is semantics. Call it macroeconomic policy if you want, but the way an overvalued dollar hurts Americans is through its impact on trade flows.

• The trade agreements we have signed are mostly good policy and have had only very modest regressive downsides for American workers. This is false.

• Globalization writ large has been tough on some American workers and policymakers have failed to compensate losers. This is true, but I think DeLong underestimates the number of losers and the size of their losses.

So, let me dive deeper into each one of these arguments:

Putting pen-to-paper on trade agreements contributed nothing to aggregate job loss in American manufacturing.

This is almost certainly true. The only thing that keeps me from being more unambiguous is that recent research actually does provide some empirical evidence that trade flows and trade deficits respond surprisingly strongly to trade agreements—much more than standard trade models would predict. But by and large the problem with trade agreements has not been that they’ve led to large trade deficits, but that they have amplified the already-regressive impact of globalization writ large on U.S. income distribution and have contributed to the too-slow wage growth experienced by the majority of American workers. This is key—it’s not just manufacturing workers who can be harmed by trade deals, but all workers economy-wide who resemble these workers in terms of skills and credentials.

Of course, the signing of trade deals has cost some manufacturing workers their jobs. Workers in sectors shielded from competition that see that protection eroded by deals have surely lost jobs—and any potential export gains from these deals have certainly not absorbed the same workers whose jobs were lost to import competition. But, in the aggregate, I think the judgement that these deals in-and-of themselves is trivial in driving overall manufacturing job loss is sound.

The aggregate job loss we have seen in manufacturing is due to automation plus declining demand, period.

This is wrong, and easily seen by looking at the trajectory of manufacturing employment over the past 50 years. From 1965-2000, the level of manufacturing employment was extraordinarily stable, hovering between 17.5 and 19.5 million jobs (depending mostly on the phase of the business cycle). Automation was certainly happening in that period. In fact, it was happening at a faster pace than it has since 2000. And yet it’s only beginning in the late 1990s that manufacturing employment first stalls and then falls off a cliff starting in 2001. From nearly 17.5 million in 1997, manufacturing employment hit a trough of just over 11 million in 2011 and is now still below 12.5 million.

Choosing 1997 as our start year is no coincidence; it’s when the Asian Financial crisis began leading to rapidly-growing U.S. trade deficits. As the overall U.S. economy was booming in the late 1990s, these deficits at first just kept manufacturing from seeing any job gains from the boom. But as the economy entered recession in 2001, persistent (and even rising) trade deficits keep manufacturing from seeing any part of the post-2001 recovery.

Some numbers: In 1997, domestic demand for manufacturing goods (calculated as domestic output plus imports minus exports) was 10 percent greater than domestic production. The wedge between domestic demand (or apparent consumption) and domestic production in manufacturing is, by definition, the manufacturing trade deficit. Between 1997 and 2015, domestic demand for manufactured goods rose by 62 percent, while productivity rose 79 percent. All else equal, this interplay of domestic factors (demand and productivity) should have cut manufacturing employment by 17 percent (79 minus 62). But hours worked in manufacturing fell by over 35 percent in those years.

Where did the other 18 percent come from (35 percent fall in hours minus the 17 percent accounted for by domestic factors)? An 18 percent rise in the wedge between domestic demand and output—or a rising manufacturing trade deficit. This translates into roughly half of the 5 million jobs lost in manufacturing over the 1993-2015 period accounted for by trade deficits. Yes, this is a too-rough calculation, but the order of magnitude is right: trade deficits have significantly contributed to the loss in manufacturing jobs in the last 15 years.

DeLong highlights that manufacturing employment has been falling as a share of total employment steadily for decades. That’s true, but it’s a separate question from whether or not aggregate jobs have been lost in manufacturing. Further, the decline in manufacturing’s share of total employment has obviously been significantly hastened by the rise in manufacturing trade deficits.

The source of these rising trade deficits is mostly an overvalued U.S. dollar, which has nothing to do with trade policy.

It’s clearly true that trade deficits in manufacturing are driven by an overvalued dollar. It’s also true that the exchange rate is a macroeconomic price, and is not directly related to trade policy (including barriers to trade) per se. But this is largely semantics. The way that the macroeconomic policy decision to allow the dollar to become overvalued ends up harming some American workers is through its impact on trade flows. It’s no surprise, then, that many of these same American workers blame trade rather than macroeconomic policy for their distress. Policymakers and economists who want these workers to not blame trade for manufacturing job-losses should support policies that stop the job-losses, not just give lectures on textbook economics.

Further, trade policy may not be totally unrelated to exchange rate policy. The paper referenced earlier about the surprisingly large empirical association between trade policy changes (the permanent normalization of trade relations with the U.S. and China and China’s entry into the World Trade Organization) and subsequent growth in trade flows could surely reflect an interplay between trade and exchange rate policy. When China’s market access to the U.S. was up for review each year, any large surge in the U.S. trade deficit with China could potentially have drawn a countervailing response. This would have greatly reduced the potential payoff to mercantilist exchange rate management for China. Once this trade policy was permanently normalized, the chance of a countervailing response to a surge in the trade deficit was greatly reduced. This essentially gave a green light to China to engage in mercantilist exchange-rate management.

The trade agreements we have signed are mostly good policy and have had only very modest regressive downsides for American workers.

DeLong argues:

“I could write an entire piece on what has been wrong with America’s international economic policy. But NAFTA and China-WTO ain’t it. They are good trade deals…The economic case against the two agreements that passed, and the one that did not, doesn’t hold water.”

This is false. Trade agreements proposed and enacted since NAFTA have had a number of provisions that eroded protections for American workers’ claim on returns from American institutional and organizational capital—an erosion that has helped stifle wage growth. At the same time, these agreements have beefed up protections for the monopoly profits of many American companies, particularly those whose profits rest on enforcing intellectual property claims (such as pharmaceutical, software and entertainment companies).

My judgement is that most of the downward pressure stemming from globalization writ large would have likely happened even if NAFTA and subsequent agreements had not been signed. Yet the trade agreements, from NAFTA onward, have at the least constituted a regressive insult on top of the injury inflicted by globalization.

In short, these treaties have rather predictably become a key political focus for workers who feel like they have had their economic prospects damaged by trade, and this has opened up deep and unproductive fissures in broader coalitions hoping to move the ball forward on progressive policy. And there is no serious analysis that says that the net benefits of these agreements for the country at large are so large that they make the toxic politics resulting from them worth it.

Globalization writ large has been tough on some American workers and policymakers have failed to compensate losers.

In this DeLong is right, but I think he still underestimates the number of losers and the size of their losses. There is ample evidence now that American imports (particularly, but not exclusively, from lower-wage nations) are labor intensive, while American exports are capital intensive (if we include human capital). This naturally means that expanded trade will reduce demand for labor and boost demand for capital, hence widening inequality. This prediction is confirmed by direct empirical estimates of trade’s effect on wages.

On top of this effect, there is growing evidence that globalization writ large has reduced the bargaining power of low- and moderate-wage workers. Essentially, globalization has given many American employers a better fallback position should wage-bargaining with workers break down. In the event of this bargaining breakdown in earlier eras, there was simply no production and both sides lost. In the era of expanded globalization, employers have the fallback option of producing abroad. In essence, globalization has become the anvil against which American workers’ bargaining power has been broken by hammer-wielding corporate owners and managers. Of course, this aspect of globalization’s wage-suppressing effects could be ameliorated by domestic policies that take the hammer out of the hands of capital-owners and corporate managers.

But we should be clear that this reduction in bargaining power and the resulting drag on wages are not confined to manufacturing workers. Instead, all workers without a four-year college degree are likely seeing slower wage growth because of globalization (while workers with more human capital are seeing substantial gains). And the size of the redistribution is large. Not large enough to explain, say, all of the increase in the wedge between economy-wide productivity and pay of the typical worker, or even most of it. But trade has likely redistributed a full percentage point of GDP annually from the bottom two-thirds of American workers to the top third in recent years.

But the compensation policies most often paired with measures (like trade agreements) to further boost trade and capital flows (and hence globalization’s pressure on wages) have always been orders of magnitude too small to counteract this regressive redistribution. At its historic peak, long ago, trade adjustment assistance (TAA) was $1 billion, or about 0.5 percent of the full redistribution caused by globalization. This is not a shock—TAA only aids a subset of a subset of workers harmed by globalization: manufacturing workers who can prove their jobs were directly lost to import competition. Restricting definitions of the group of workers losing from expanded globalization is the perennial move in these debates that keeps genuinely fair compensation from happening.

Summing-up

American workers (and the policy wonks who criticize current trade policy on their behalf) are correct to think that the integration of the U.S. economy and the global economy has been done on terms that are bad for many—if not most—of them. Compensation for the inevitable wage drag stemming from importing lots of labor-intensive goods has never been forthcoming. Complementary policy choices (mostly exchange rate policies) have led to trade deficits that have buzzsawed manufacturing jobs. And the specific trade agreements we’ve signed in recent decades have been blatant exercises in selective protectionism that tear down institutional supports for workers’ wages while beefing up buffers for corporate profits.

In the end, DeLong seems to be on board with two crucial things that would make for much better outcomes for American workers: getting exchange rates right to narrow trade deficits, and throwing out lots of the worst of the corporate welfare in trade agreements (he mentions, for example, the pitfalls of intellectual property protections and investor-state dispute settlements). If he would stress these points, instead of all the ways trade critics are allegedly being foolish (especially since they’re not), this would be a good start to healing the poisonous politics of trade in the Democratic coalition.

Trump correctly told them that U.S. trade treaties contributed to these problems and that the Trans-Pacific Partnership would only make matters worse. However, these trade treaties are just one way that policy has indeed been rigged to suppress wages for the vast majority of Americans. Millions of working Americans of all races are struggling, while the benefits of growth have gone only to people at the very top of the income ladder.

Working class Americans want what everyone wants: good jobs and hope for a better future. Now, the Trump administration and a GOP congress will have to deliver. How will a Trump administration lift wages for low and middle income Americans? As EPI has been promoting for decades, there are specific policies that will raise wages. The only way to raise wages for the vast majority of American workers is to give workers more power. For far too long, employers have held all the cards.

Trump has called for a higher minimum wage. A truly bold increase in the minimum wage would lift pay for the bottom quarter or more of the workforce.

He has called for a massive increase in spending on infrastructure to have highways, bridges, airports, tunnels, and schools that are second to none, which would create hundreds of thousands of jobs on its own. If infrastructure is paid for by gutting other Federal spending then its job creation benefits would be neutralized. Whether infrastructure jobs will pay middle class wages depends on federal law and whether union contractors do the lion’s share of the work. Trump’s support for prevailing wage laws will be a key test of his commitment to higher wages for middle class workers.

With respect to immigration, a path to citizenship and reforming work visas are a better road to improving wages for the vast majority of Americans than building walls. Immigration policy should be changed so that employers do not have the easy option of undercutting wages by importing workers on non-immigrant guest visas that fail to provide basic labor protections.

Most of Trump’s economics agenda is the tax cutting and deregulation approach that Republicans have pursued over the last few decades, the approach that failed to produce rising wages for the vast majority of American workers. Revisiting those policies is not a recipe for middle class economic success.

EPI will stand with our partner organizations to insist that the policy actions that follow this election truly support workers and their families.

Trump correctly told them that U.S. trade treaties contributed to these problems and that the Trans-Pacific Partnership would only make matters worse. However, these trade treaties are just one way that policy has indeed been rigged to suppress wages for the vast majority of Americans. Millions of working Americans of all races are struggling, while the benefits of growth have gone only to people at the very top of the income ladder.

Working class Americans want what everyone wants: good jobs and hope for a better future. Now, the Trump administration and a GOP congress will have to deliver. How will a Trump administration lift wages for low and middle income Americans? As EPI has been promoting for decades, there are specific policies that will raise wages. The only way to raise wages for the vast majority of American workers is to give workers more power. For far too long, employers have held all the cards.

Trump has called for a higher minimum wage. A truly bold increase in the minimum wage would lift pay for the bottom quarter or more of the workforce.

He has called for a massive increase in spending on infrastructure to have highways, bridges, airports, tunnels, and schools that are second to none, which would create hundreds of thousands of jobs on its own. If infrastructure is paid for by gutting other Federal spending then its job creation benefits would be neutralized. Whether infrastructure jobs will pay middle class wages depends on federal law and whether union contractors do the lion’s share of the work. Trump’s support for prevailing wage laws will be a key test of his commitment to higher wages for middle class workers.

With respect to immigration, a path to citizenship and reforming work visas are a better road to improving wages for the vast majority of Americans than building walls. Immigration policy should be changed so that employers do not have the easy option of undercutting wages by importing workers on non-immigrant guest visas that fail to provide basic labor protections.

Most of Trump’s economics agenda is the tax cutting and deregulation approach that Republicans have pursued over the last few decades, the approach that failed to produce rising wages for the vast majority of American workers. Revisiting those policies is not a recipe for middle class economic success.

EPI will stand with our partner organizations to insist that the policy actions that follow this election truly support workers and their families.

The United States has a massive trade deficit with China that has taken on added significance in the light of the proposed TPP agreement between the United States and 11 other Pacific Rim countries. While China is not party to the TPP, it is a major force behind a larger East Asian co-production system that uses unfair trade (dumping, subsidies, excess capacity, export restrictions, and more), coupled with currency manipulation and misalignment, to make U.S. goods more costly and thus less competitive in China, the TPP and in other markets.

The United States also had a large trade deficit with the TPP countries in 2015 that cost 2 million U.S. jobs. Flawed trade and investment deals, such as the North American Free Trade Agreement (NAFTA), plus the currency manipulation and unfair trade by some TPP members account for many of those lost jobs (note that Mexico and Canada are TPP countries). In addition, analysis developed here demonstrates that a substantial share of these TPP job losses can be directly linked to trade between China and the other members of the TPP. Specifically, most of the TPP countries run large trade deficits with China while running large, offsetting trade surpluses with the United States. Thus, it appears that at least some TPP producers are buying parts and components from China and re-exporting them in the form of finished goods to the United States.

The links between China and TPP exporters would get a big boost from crucial accounting provisions of the TPP, specifically the rules of origin (ROO) requirements. ROO are used to determine the country of origin of a product for purposes of duties and restrictions imposed under the rules of the proposed TPP and other trade and investment deals, and they are critically important in the U.S. automotive and parts industries, which play a critical role in trade within NAFTA, and in trade with Japan and other TPP partners. Under the TPP, TPP partners can get preferential access to U.S. markets for goods with a lower share of domestic content than in prior agreements, especially the NAFTA. This opens a large back door for increased imports from China and other non-TPP exporters. In other words, China, which is already exporting a lot of artificially cheap and subsidized goods directly to the United States, could export even more by increasing what are essentially pass-through exports to the TPP countries, which would make nominal changes and then ship them on to the United States. This could lead to growing U.S. trade deficits with and job losses to the TPP countries if the agreement is approved and implemented without dramatic changes in the ROOs.

The TPP dramatically weakens ROO in the TPP, as compared with the NAFTA agreement. Under NAFTA, at least 62.5 percent of a finished car or truck had to originate in the region, and the rule applied only to imports from Mexico, Canada, and the United States. The ROO standard is reduced to 45 percent under the TPP “net cost rules,” and 55 percent under the “build down” option (producers may choose from one of two TPP accounting standards, or the original NAFTA rules, which will remain in effect). While the NAFTA and TPP ROO accounting rules are not directly comparable, at least 8 percent more non-TPP content can be included and still be treated as TPP-originating (House Ways and Means Minority Staff Report at 12).

The day TPP takes effect, those accounting standards will weaken dramatically. Unlimited imports of parts from all 11 TPP countries would count for duty-free treatment in finished vehicles imported from Mexico or Canada, and at least eight percent more could come from non-TPP members such as China, Germany, or Thailand. Note that this benefit would not apply to cars and trucks imported from Japan until U.S. tariffs begin to fall on those products, which could take place 15 and 30 years after the agreement takes effect, but it would apply to most Japanese auto parts, as noted below (House Ways and Means Minority Staff Report at 12).

And the rules for auto parts are even weaker. NAFTA required a regional value content (RVC) of 60 to 62.5 percent on auto parts (with an RVC as low as 50 percent for some products). Under the TPP, the RVC ranges from 35 percent to 45 percent using TPP ROOs. Tariffs would be eliminated for most auto parts immediately, and for 80 percent of auto parts from Japan, and the TPP ROO would apply to those products at that time (House Staff Report, note 6 at 3, and at 7). Tariffs on particularly sensitive products from Japan in the steel and auto industries would be phased out over 15 years, at which point the TPP ROO would apply to all U.S. auto parts and most other imports.

There are three additional ways in which the TPP would weaken NAFTA ROO on motor vehicles and parts. First, NAFTA included a “tracing list” of parts, such as engine parts, that could never be counted as originating within the agreement (House Staff Report at 17). The TPP does not contain a tracing list, so parts used in assembly can be treated as TPP content when the final product is shipped, sold or traded in the TPP. Thus, under the TPP, an engine can be assembled with up to 65 percent of its value composed of parts from China and other countries and still be considered originating in the TPP region. The full value of that engine will then count toward the 45 percent RVC standard for a vehicle finished in the TPP, thus significantly diluting the effective RVC of the finished vehicle (House Staff Report at 15).

Second, the United States and Japan negotiated a special appendix to the TPP on auto parts covering a list of parts including safety glass, bodies, body stampings, bumpers, and drive axels (House Staff Report at 12). If one of a list of operations is performed on these products, their full value then counts as original content for calculating the RVC of parts and vehicles. This appendix is available to all TPP members. The covered products included commodity products such as steel products, machinery, rubber and plastics and stone, cement, and glass, for which China possesses massive excess capacity and has been found guilty of dumping in 759 cases between 1995 and 2014.

Finally, there is the issue of duty drawback provisions, which encourage the use of imported components by allowing countries to refund duties paid on components imported for re-export. NAFTA prohibited duty drawback provisions, but the TPP does not mention this issue, suggesting that such measures are allowed. Under NAFTA, if a company in Canada imports an auto part from Korea and pays a duty on that import, the Canadian government may not refund that duty when the final product is exported to the United States. But under the TPP, it appears that such duty rebates are allowed (House Staff Report at 12). This creates additional incentives to use imported components under the TPP.

China, TPP Trade, and Job Loss

Most of the members (eight of the 11) of the proposed TPP had trade deficits with China in 2015, as shown in the Table below. Of these eight, five had relatively large goods trade deficits with China, including Canada ($35.6 billion), Japan ($51.3 billion),Malaysia ($7.2 billion), Mexico ($65.1 billion), and Vietnam ($28.7 billion). Each of these countries also had significant trade surpluses with the United States that—except for Canada—were nearly as large, or larger, than their trade deficits with China.

Table 1

Overall, the 11 other members of the proposed TPP had a trade deficit of $168.4 billion with China in 2015, and a near-mirror image trade surplus of $163.6 billion with the United States in the same period as shown in the Figure below. The U.S. trade deficit with the TPP countries cost 2 million U.S. jobs in 2015, with job losses in every state.

Figure A

The last column of Table 1 and Figure A shows that the TPP countries’ trade with the world was roughly balanced (an overall goods trade deficit of $28.8 billion). The TPP countries had a much larger trade surplus with the United States in 2015 than they did with the five biggest countries in the EU (not shown)—France, Germany, Italy, Spain, and the United Kingdom—which totaled only $66.2 billion (EPI analysis of UN Comtrade 2016, not shown). Together, these five EU countries had a combined GDP of $11.6 trillion, about two-thirds the size of the United States, yet the TPP countries’ trade surplus with the EU-5 was only one-third as large as that with the United States.

Taken together, it is clear that the TPP countries form part of a greater East Asian production system. That system is based on export-led growth. Furthermore, the United States absorbs the lion’s share of the trade surpluses, and job losses, exported by those countries. Two conclusions are immediately apparent from this analysis.

First, a substantial share (some, but not all) of the 2 million U.S. jobs lost due to TPP trade deficits can also be directly traced to China trade with the TPP countries. Some are due to failed trade deals like NAFTA, which did not do enough to stimulate growth in Mexico and demand for U.S. exports, and which encouraged outsourcing, trade deficits and job losses. But others appear to be associated with increased use of cheap components from China.

Second, approval of the proposed TPP agreement is a step in the wrong direction and would only increase U.S. exposure to unfairly traded imports. The TPP agreement would substantially weaken ROO expressed in preexisting trade and investment deals such as the North American Free Trade Agreement. This would provide a back door for increased imports of parts and components from China through increased imports of goods containing unfairly traded Chinese components under the TPP.

The Asian members of the TPP (Australia, Japan, Malaysia, New Zealand, Singapore, and Vietnam) imported more than twice as much from China as they did from the United States in 2014 (data for 2015 for Vietnam was unavailable), based on total goods trade. Their imports from China rose 11.9 percent between 2011 and 2014, while those from the United States declined 3.9 (EPI analysis of data from UN Comtrade). Thus, China is poised to use the TPP as a back door to increase duty-free exports to the United States through its trade partners in these countries, due to the weak rule of origin provisions in the agreement.

In addition, approval of the TPP will provide significant, immediate tax cuts to TPP exporters that use imported Chinese components in the covered sectors (especially motor vehicle parts), in the form of duty drawback credits. This will reduce the cost and increase the competitiveness of TPP exports to the United States overnight if the TPP is implemented. Such hidden benefits may help explain the sudden surge in U.S. imports from and trade deficits with Korea that followed implementation of the U.S. Korea Free Trade Agreement in 2012 (This agreement has cost 95,000 U.S. jobs).

The TPP is not an effective answer to China’s growing influence in the TPP region. Approval of the TPP would only make it easier for China to expand exports to the U.S., resulting in growing TPP trade deficits and job losses. The best alternatives for dealing with China are enhanced enforcement of U.S. unfair trade laws to put a stop to China’s illegal dumping and subsidies, and direct intervention in currency markets to end misalignment and manipulation of China’s heavily undervalued currency.

During the 1993 U.S. congressional debate over the North American Free Trade Agreement, a Democratic Congressman with a solid pro-labor voting record asked me why I thought NAFTA would be bad for working people.

After I had given my answer, he responded: “Well, you may be right about the economics.” “But we have a 2000-mile border with Mexico. The President told me we need NAFTA to make it secure.”

Who can argue against national security?

NAFTA was the economic model for the ever more corporatist trade deals that followed, including the currently proposed 12-nation Trans-Pacific Partnership.

The arguments for NAFTA also set the pattern for the debates over those deals. Whenever the economic case crumbles, “national security” becomes the fallback rationale.

After a quarter century of off-shored jobs and depressed wages in the wake of corporate-driven trade de-regulation, the claim that the Trans-Pacific Partnership will make life better for American workers is so discredited that both Hillary Clinton and Donald Trump are opposed.

Obama, the Republican

But the Republican leadership and Barack Obama still want it, and they will try to get Congressional approval in the post-election “lame duck” session before the new president takes office.

True to form, their sales pitch has shifted from the claim that the TPP will make Americans prosperous to the claim that it will make America safer.

Defense Secretary Ashton Carter says “passing TPP is as important to me as another aircraft carrier.” Likewise, eight former Defense secretaries assure Congressional leaders that approving the TPP will “contribute to a safer world for us, our children and our grandchildren.”

Obama’s former chief economist Alan Krueger now tells us that “trade agreements are primarily about foreign relations.”

Plunging Mexico into turmoil

Unfortunately, the foreign policy case for these neoliberal trade deals has fared no better than the economic policy case.

The national security argument for NAFTA was that:

• it would reduce illegal immigration and
• it would transform Mexico into a prosperous, First World democracy under the rule of law.

But within a few years, the economic dislocation triggered by NAFTA led to millions of jobless Mexicans heading north across the border.

In response, the U.S. government has built 670 miles of hi-tech fence—with another 700 miles planned. It has also deployed almost 20,000 guards to patrol it with dogs, guns and drones. In effect, we are already well on our way to building Donald Trump’s wall.

Far from making Mexico more stable, NAFTA helped plunge the country into lawlessness and social turmoil. The huge increase in trade overwhelmed U.S. Customs, making it easier to ship marijuana and cocaine into our eager market.

Drug cartels fought over the profits, spreading criminal violence throughout the country. The State Department now warns Americans against traveling to Mexican border states where “U.S. citizens have been the victims of violent crimes, such as homicide, kidnapping, carjacking and robbery by organized criminal groups.” Quite a way in which trade aggressively makes us more secure!

The China problem

Six years after signing NAFTA, Bill Clinton, pushed by corporate lobbyists, agreed to the Permanent Normal Trade Relations (PNTR) deal with mainland China. It that allowed U.S. investors to produce goods for the U.S. market made by exploited Chinese workers.

PNTR, Clinton told us, was a clever geopolitical strategy to “pull China in the right direction” i.e., toward greater democracy and into the role of America’s junior partner in Asia.

After sixteen years, Americans are now told that China moved in the “wrong” direction. Internally, it remains a harsh authoritarian state.

Externally, flush with dollars from its massive trade surpluses with the United States, China has expanded its armed forces and employed its economic power. It is busily prying U.S. out of its hegemonic position in South East Asia.

In response, the United States is building up its network of military bases and supplying more weapons and training to China’s neighbors—all of which are, ironically following, what the U.S. has labeled as, China’s “wrong” model of authoritarian capitalism.

Today, U.S. and Chinese war planes and ships are buzzing each other in the South China Sea over territorial disputes that have nothing to do with the security of the people of the United States.

Short of war, the U.S. can no more stop China from dominating the South China Sea than China can stop the U.S. from dominating the Caribbean. China’s trade with its neighbors already dwarfs their trade with us. The gap, and China’s influence, will inevitably grow.

Preserving credibility?

If anything, the looming TPP deal will make it worse. By weakening the standards for “local content,” it will increase the proportion of TPP countries’ exports to the U.S. that are made in China.

Moreover, despite their current national security rhetoric, the TPP negotiators actually dropped the provisions in previous trade deals that allowed the U.S. government to stop foreign acquisitions of U.S. firms if deemed a threat to national defense.

As the arguments in favor of TPP dissolve one by one, its promoters’ last-ditch claim is that we need it to preserve credibility—otherwise known as “saving face.” Failure to approve the deal, says the President, “would call into question America’s leadership in this vital region.”

Really? Certainly, the leaders of the other nations involved understood that Congressional approval was not a sure thing. They will be disappointed, of course, and any U.S. diplomat who assured them that it was a slam-dunk will be embarrassed. So what?

The TPP would not be the first agreement negotiated by the U.S. administration that Congress has turned down. The Law of the Sea, for example, was negotiated in 1982 and we still have not ratified it.

United States will remain a major player

Just ask yourself, has the U.S. Navy lost credibility as a result? Do other nations not ship their goods to us? Do we still not assume the role of guarantor of freedom of the seas?

As for credibility, the United States suffered a humiliating military defeat in Vietnam, and we are still by far the most respected military force in the region.

The U.S. will remain a major player in the Asia whether or not the TPP is approved. And our Asian “partners” are not likely to stop using us as a piece in their political chess games with China because they can’t get to sell us even more underwear and electronic gadgetry than they do now.

Like the other trade deals since NAFTA, the TPP is a device for multinational corporations to drive down the wages of American workers. No one should be fooled by the effort to paste over that ugly economic reality with a happy-face sticker labeled “national security.”

Overall, there are nearly 100 million American workers without a 4-year degree. The wage losses suffered by this group amount to roughly a full percentage point of GDP—about $180 billion per year. Workers without a 4-year degree constitute a bit less than 70 percent of the overall workforce, but three-quarters of black workers (75.5 percent) and more than four-fifths (85.0 percent) of Hispanic workers do not have a 4-year degree. While educational attainment levels for blacks and Hispanics are rising, differences remain.

Economic Snapshot

Six of the twelve members of the TPP (Malaysia, Mexico, Peru, Vietnam, Chile, and Brunei) are low-wage, developing countries, and if the TPP leads to expanding trade with these countries it will contribute to a continuing growth of imports and growing downward pressure on the wages of non-college educated workers. This deal would be especially harmful to black and Hispanic workers, who already suffer higher unemployment and lower wages than whites.

Let’s review the basic facts. Growing imports of goods from low-wage, less-developed countries, which nearly tripled from 2.9 percent of GDP in 1989 to 8.4 percent in 2011 (as shown in Figure A, below), reduced the wages of the typical non-college educated worker in 2011 by “5.5 percent, or by roughly $1,800—for a full-time, full year worker earning the average wage for workers without a four-year college degree,” as shown by my colleague Josh Bivens.

Overall, there are nearly 100 million American workers without a 4-year degree. The wage losses suffered by this group likely amount to a full percentage point of GDP—roughly $180 billion per year. Crucially, trade theory and evidence indicate strongly that growing trade redistributes far more income than it creates. The modesty of net benefits from trade is highlighted by the U.S International Trade Commission report that recently estimated that the TPP would generate cumulative net gains of $57.3 billion over the next 16 years, or less than $4 billion per year.

Figure A

Workers without a 4-year degree constitute a bit less than 70 percent of the overall workforce, but three-quarters of black workers (75.5 percent) and more than four-fifths (85.0 percent) of Hispanic workers do not have a 4-year degree. Because black and Hispanic workers are less likely than white workers to have 4-year degrees, they are more likely to be on the losing end of growing trade.

Importantly, this year’s election has highlighted the importance of non-white working class voters for Democratic success at the presidential level. Given the modesty of net benefits and the large, regressive redistribution of income created by growing trade flows, it is puzzling why TPP is such a priority for the Obama administration—especially when it, like trade agreements before, is quite likely to do disproportionate harm to the people who make up his and his party’s political base. Even more puzzling is why there are no measures accompanying the TPP that would provide compensation for workers on the losing end (who are, again, disproportionately black and, Hispanic) at anything like the scale of the losses they will incur as a result of this terribly designed trade and investment deal.

Figure B

Six of the twelve members of the TPP (Malaysia, Mexico, Peru, Vietnam, Chile, and Brunei) are low-wage, developing countries, and if the TPP leads to expanding trade with these countries it will contribute to a continuing growth of imports and growing downward pressure on the wages of non-college educated workers. In some respects, the TPP is worse than NAFTA and other previous trade and investment deals, which included Mexico and several other TPP partners. It significantly weakens local content regulations, which will create a huge back door through which these countries can import parts and components (and semi-finished final products) from large, non-member low-wage countries such as China, Myanmar, and North Korea, and re-export those products to the United States, duty free.

So why is President Obama so determined to force this agreement, when it will do disproportionate harm to workers in the very coalition that elected him and when it is opposed by most of his own party? One claim is that the deal is mostly about foreign policy, not economics. The case for this strikes me, and others, such as former Reagan Administration trade counsel Clyde Prestowitz as thin. China is and will remain the largest and most important trading partner of all countries in the region, and its tremendous financial resources will carry much more clout than the United States, or any standards included in the TPP. On the economic merits, the likely effects of the deal are clear: continued upward redistribution of income and continued failure to address trade imbalances which hinder global economic growth.

Most Democrats in Congress also find the (often-shifting) rationales for the TPP similarly unconvincing. The deal is possible “only because of Mr. Obama’s delicate alliance with the Republicans who control Congress,” in the carefully parsed language of the New York Times. Approval of the TPP will likely depend to a large degree on the support of lame duck members of Congress, who are retiring or will be voted out of office in November, and thus have nothing to lose. If Clinton wins, and the Democrats regain control of the Senate, then the fate of this fundamentally flawed piece of Mr. Obama’s legacy could well be determined by his alliance with politicians who opposed every progressive step he took in his eight years in office, especially in the Senate. It would be a terrible irony if Mr. Obama’s last official legislative act is to sign the TPP, a huge give-away to multinational corporations. Surely, he can and should do better.