Economist: NAFTA Benefits Economy Despite Job Losses
It’s perhaps the only thing that businessman Donald Trump and democratic socialist Bernie Sanders agree on: free trade. Both say that if elected president they’ll get out of the North American Free Trade Agreement (NAFTA), which they say floods the American market with inexpensive goods, produced with cheap foreign labor, in turn making American-made goods – and jobs – disappear.
Free trade backers, on the other hand, say NAFTA enables American consumers to buy goods at lower prices and moves American workers away from low-paying jobs to better ones. And, that by improving the economies of poorer countries, we’re all better off.
Economist Gordon Hanson teaches at University of California at San Diego. His latest research shows that voters in areas hardest hit by job losses are most likely to move politically to the far left or the far right, away from establishment candidates.
Hanson also co-authored a January study detailing how trade with China has affected American jobs. Yet, he continues to support free trade. He joins Here & Now host Robin Young to discuss what is true, and what is not, about free trade.
Interview Highlights: Gordon Hanson
You do believe jobs are lost but you support free trade?
“Funny as that may sound, that is what I believe.”
Why did free trade work better after World War II than it seems to be doing now?
“Well in the decades immediately after World War II, trade was primarily between rich countries. It was the U.S., Germany, Japan, France and England all trading with each other and that trade didn’t have the same kinds of consequences that you see when you’re trading with low-wage nations. It wasn’t displacing entire sectors like textiles and furniture that we’ve seen with expanding U.S. commerce with China.”
Are candidates right in saying that free trade is destroying our economy?
“Well, Donald Trump and Bernie Sanders did not happen by accident. We got ourselves in to this predicament where we allowed negative consequences from trade to accumulate long enough that people are now upset, and there’s good reason for them to be upset. That does not mean that trade, on net, is bad for the U.S. economy. It just means that we have done a poor job trying to improve the outcomes for workers who’ve been most negatively affected.”
What went wrong with the mentality that workers leaving low-income jobs would move into other sectors?
“You hit the nail exactly on the head. It was the moving part that didn’t work. What we haven’t seen happen in the last decade and a half in response to greater competition with China is workers freely moving from one region to another, from one sector to another, as jobs have disappeared in certain parts of the U.S. economy.”
What could it take to make it happen?
“It’s a bit of a puzzle. Economists long believed that the U.S. economy was a bit exceptional among richer nations and that our labor markets were very flexible. What we’ve come to realize is that labor markets aren’t so flexible. Workers in particularly at lower ends of the pay scale don’t move easily or quickly in response to bad economic outcomes.”
On the belief by some that NAFTA saved jobs in the auto industry
“What NAFTA did was allow the U.S. to partner with Mexico, to expand what you could think of as the North American auto complex, and that partnership allowed us to face competition from China and the rest of Asia much more robustly. China hasn’t developed a world-class automobile sector, and the fact that U.S., Canada and Mexico have worked so closely together is partly a reason for that.”
So by outsourcing the low-paying jobs to Mexico, that enabled Detroit to slim down to the more high-paying jobs, saving some sliver of the auto industry?
“I think that’s right. You think about what goes into making an automobile. There’s design, there’s marketing, there’s brand development that provide great jobs for U.S. workers. We’ve kept those jobs in the U.S. instead of seeing them relocate to Japan or to Shanghai because of the ability to share production with a lower-wage country like Mexico.”
On the current global market and the economic issues it presents
“This is the real problem with the solutions that Donald Trump and Bernie Sanders are proposing is they want to try and turn back the clock. We now live in a fully integrated global economy and just like you can’t remove computer technology from the world today, it’s hard to remove international commerce. Its part and parcel of how we make the things we make. Think about Apple’s success. Apple’s ability to develop innovative products depended in large part on the fact that Apple didn’t have to focus on the production side. It could focus on design and innovation and development and let China do a lot of that production. Had we had barriers in place that prevented Apple from following that strategy, it might have been a much less innovative company. We’re in this new world, we can’t go back, we need to find ways of making the U.S. economy work as well as it can for everybody and not think that shutting down our borders will suddenly, magically put us back in 1955.”
What impact did China have?
”I think China’s unfair trade practices get more play than they deserve. What was really distinct about China is that it was an absolutely enormous economy that went from being very isolated to being part of the global economy in the space of two decades. The magnitude of that change was bound to be incredibly disruptive.”
Will that change?
“Our future relations with China are likely going to look very different from what we have seen in the past 20 years. China is a higher-wage nation. China is facing demands on the part of its consumers for better access to goods, for cheaper housing, for a cleaner environment. This onslaught that we saw of large quantities of cheap goods just displacing so many U.S. sectors was a unique period in global economic history. That’s now over.”
What else happens now?
“What improves prospects for American workers, particularly those that have been hit hard by China and other changes in the U.S. economy, we’ve got to look internally first. Looking backwards we’ve got big segments of U.S. society that have done very poorly over the past 20 years and we need to think about how we help workers move into jobs and move off of disability insurance, move out of long run unemployment, move out of regions where there’s not much in a way of economic future.”
Part of your study showed how much the U.S. has paid to support those workers.
“It is costing, but it’s costing in a way that’s not good for those workers themselves, or good for the rest of America. We’ve got policies in place that give workers an incentive to stay out of a labor market in order to get continued access to benefits. That’s true in the shorter term with things like extended unemployment insurance or trade adjustment assistance and is true in the longer term with things like social security disability insurance. We’d be better off if we took that money and instead gave it to workers in the form of wage insurance or other policies that gave them a chunk of change when something bad happens that allows them to make the adjustments that work best for their particular situation.”
Like a move or training?
“Like a move, yes. But it’s not one size fits all. We’ve got to set up policies that treat workers pretty uniformly and it simply hasn’t worked well.”
On global relations
“We’ve worked very hard since World War II to create a set of global institutions that manage trade and finance. There are a lot of imperfections in how they work. The World Trade Organization gets a lot of bad press, the International Monetary Fund gets a lot of bad press, but look at what has happened since 1945. Living standards worldwide have improved pretty dramatically and trade between countries and the flow of capital between countries is a very big part of that. It would be an enormous mistake for us to turn our back on the accomplishments of the post-war era. The populist strings in American politics right now take that tack as kind of the best way forward.”
- Gordon Hanson, economist and professor at the School of Global Policy and Strategy at the University of California, San Diego.
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