U.S. Trade Policy: Populist Anger or Out-of-Touch Elites?

Just how disconnected is the business elite and Washington policy class from the way most Americans actually experience the U.S. economy?

The presidential primary campaigns of both political parties have exposed widespread voter anger over U.S. global trade policies. In response, hardly a day has recently gone by without the New York Times, the Washington Post and other defenders of the status quo lecturing their readers on why unregulated foreign trade is good for them.

The ultimate conclusion is always the same – that voters should leave complicated issues like this to those intellectually better qualified to deal with them.
Trade experts, according to Binyamin Appelbaum of the Times have been “surprised” at the popular discontent over this issue. Their surprise only shows how disconnected the elite and the policy class that supports it is from the way most people actually experience the national economy.

The United States has always been a trading nation. But until the 1994 North American Trade Agreement, trade policy was primarily an instrument to support domestic economic welfare and development.

A lop-sided deal: Investment vs. jobs
Starting with NAFTA, pushed through not by a Republican president, but by the Bill Clinton in 1994, it became a series of deals in which profit opportunities for American investors were opened up elsewhere in the world in exchange for opening up U.S. labor markets to fierce foreign competition.

As Jorge Castañeda, who later became Mexico’s foreign minister, put it, NAFTA was “an agreement for the rich and powerful in the United States, Mexico and Canada, an agreement effectively excluding ordinary people in all three societies.”

For 20 years, leaders of both parties have assured Americans that each new NAFTA-style deal would bring more jobs and higher wages for workers, and trade surpluses for their country. It was, they were told, an iron law of economics.

Warm words, harsh reality
What actually followed were outsourced jobs, wage declines, shrunken opportunities and rising trade deficits. The result has been a dramatic weakening of the bargaining power of American workers.
So it should come as no surprise when the large parts of the U.S. workforce now conclude that these trade deals may have had something to do with the redistribution of income from their pockets to the bank accounts of the top 1% who own and manage large multinational corporations.

Whatever sticks
Despite this embarrassing record, the policy class remains loyal to the interests of its political and financial sponsors. They have, however, modified their arguments.

To promote the proposed Trans Pacific Partnership, for example, they now put more stress on geopolitics, claiming that the TPP is essential for maintaining American political influence in Asia — which of course is also something that should be left to the “experts.”

The economic case has downshifted, from promising workers that life will be better to assuring them that it won’t be worse. But even this somewhat deflated claim is a hard sell to those who listen carefully.
The main point now is to convince Americans that they should not worry that they chronically import more that they export, and have to make up the difference by borrowing.

To accept this argument, one also has to accept the following contradictory propositions:

1. Trade deficits do not cost jobs.

The central evidence for this assertion is that “most economists” believe it. True, but only because most economists are trained to think about trade in stylized models in which laid-off workers instantly find new jobs (typically at lower wages).
Thus, the lobby for TPP regularly cites “studies” which define the problem away — by assuming permanent full employment (and then concluding there will be no job loss).

Eduardo Porter of the New York Times adds some circular reasoning to the debate. Sending jobs to Mexico under NAFTA, he writes, may have avoided sending more jobs to China where labor costs are even cheaper than they are in Mexico. (Of course, that wouldn’t be a problem if Bill Clinton hadn’t made a similar trade and investment deal with China a few years later.)

Unfortunately for many self-described trade experts, this argument also stumbles over Economics 101. Growth, the generator of jobs, is measured by changes in the Gross Domestic Product. A component of GDP is the trade balance. When imports exceed exports, GDP drops by that amount. That, by the way, is an iron law of economics.

2. If trade deficits do cost jobs, it doesn’t matter.

Why? Because, as Neil Irwin of the Times tells its U.S. consumers get cheaper goods in exchange for dollars. Economic theory considers merely IOUs to be paid back, maybe, sometime in the future.

However, even credit card addicted Americans have a hard time believing that you never have to pay back borrowed money.
Moreover, polls regularly show that most voters think jobs are more important than cheap underwear and I-phones. But, of course, what matters to most people is apparently not what matters most economists.

3. If trade deficits do cost jobs and it does matter, don’t blame it on trade.

Paul Krugman, as part of his relentless critique of Bernie Sanders, notes that total trade is an even greater share of GDP in some of Sanders’ favorite democratic socialist countries like Denmark. Yet, Danish living standards remain high. Why? Because they are protected by government and promoted by unions.

We aren’t Denmark

Thus, according to Krugman, the fundamental problem is not trade; it is the lack of appropriate domestic policies in the United States.
What Krugman fails to tell his readers is that, unlike the United States, Denmark runs trade surpluses. Still, he has a point. Trade deficits would not have such a negative impact here if we had social policies like they have there.

But liberal free traders have been saying this for decades. Perversely, Krugman’s point has been used to rationalize the cynical alliance between Democratic presidents and Republican congresses to pass investor-privileged trade deals.

Before each vote, there are promises that this time it will be different. Generous assistance will be provided to help older workers adjust and make sure younger workers get new opportunities — later.
“Later,” of course, never comes. As everyone should know by now, Republicans have no intention of supporting government programs to bolster income and job security – ever.

It is therefore left to liberal Democrats to express their sorrow that things haven’t quite worked out, and to “feel the pain” of the ex-steelworker who is mopping floors at Burger King and the college graduate waiting on tables, as they remind them that, sadly, the United States is not Denmark.

Democrats don’t even try to bargain
It is long past the time when Krugman and other liberal “free-traders” should have connected the dots of their own analysis.
If the problem is not trade, per se, but the lack of domestic progressive policies to adjust to global markets, then the rational response is to force the investor class and their Republican agents to the political bargaining table.

Democrats should be demanding an immediate freeze, and where possible a rollback, of trade agreements until the other side of the aisle is ready to accept programs similar to those in Denmark that will allow workers to share the benefits of expanded trade.

Until that happens, we can expect American voters to become more protectionist, while the country’s policy elite remains disconnected from the lives of ordinary Americans — and continually surprised that so many of them feel betrayed.

Jeff Faux

Jeff Faux, Member of the Editorial Board of Insight, is the founder and former president of the Economic Policy Institute and the author of the new book "The Servant Economy: Where America's Elite is Sending the Middle Class".