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How not to build support for free trade

The Midwest, like the rest of the United States, lives largely on trade. But if we leave trade policy to officialdom in Washington, that lifeline is in danger.

This is the impression I took away from a recent Washington conference on trade. It was definitely a pro-trade affair, dedicated to celebrating and strengthening America’s global trade position. As such, it attracted a crowd almost evenly split between business and industry people, government officials and journalists — all folks who should know what’s going on in this field.

The text for the day was an excellent paper by Matt Slaughter, a highly-regarded Dartmouth professor and a government advisor under both Republican and Democratic administrations. Slaughter’s paper, “How America Is Made for Trade,”  gave a national view to a series of regional papers sponsored by HSBC bank, including one I wrote on the Midwest’s trade in manufactured goods.

For me, the high — or low — point of the day was what the audience thought of Slaughter’s suggestions for strengthening US trade policy.

Slaughter noted that the forces of trade have produced “globally engaged companies, each determining and building its strengths connected to the world to ensure continued success in keenly competitive world markets.” But at the same time, he said, “America today continues to confront a competitiveness challenge of too few quality jobs and too little income growth.”

There’s a solution, he said, that “could create 10 million new trade-connected jobs in the next decade if [the US] pursues an expansive and connected set of pro-trade policies in the areas of international trade, investment, immigration, tax, and the social safety net.” Specifically, he urged five policy goals:

    • Enact international trade agreements, especially TTIP, the transatlantic deal with the European Union, and TPP, the Trans-Pacific Partnership with 11 trade partners in Asia.
    • Liberalise high-skilled immigration, to bring in more educated and entrepreneurial immigrants.
    • Tax reform, to simplify and lower the tax burden on American corporations operating globally.
    • Reauthorise the Export–Import Bank and update its rules.
    • Strengthen the safety net for American workers, to help workers hurt by trade, spread the benefits of trade, and maintain broad political support for free-trade policies.

The audience at the conference was asked to vote on these proposals. The trade agreements and the tax reforms dominated: each got 43 per cent. The proposals on immigration and the Ex–Im Bank came in far behind. And the recommendation on help for workers got exactly one vote.

What’s wrong with this picture?

I guess if one is in Washington, where taxes rank with Ebola as a threat to civilisation as we know it, a knee-jerk vote for lower taxes is only to be expected. But the sorry support for the workers – that is, for much of the rest of the nation – is dismaying.

The connection between trade and the social safety net is probably not broadly understood. But all trade experts get it. Slaughter laid out the case clearly.

Trade causes both gain and pain. Trading with the world brings in new, better and cheaper products, strengthening and enriching the economy as a whole. That’s the gain. But it “is not evenly shared and does not directly benefit every worker, firm, and community,” Slaughter said. Too many workers today fear the impact of trade on their lives.

“Their concerns are real, widespread, and legitimate,” he wrote. “Left unaddressed by policymakers, their concerns will likely translate into weak and waning support for the kind of pro-trade policies recommended" in his paper.

The overall economy benefits whenever the United States imports a better or cheaper widget. But this benefit is felt broadly across society. Local widget-makers, though, feel a lot of intense and specific pain — possibly the loss of their jobs. If their widget factory closes, this intense pain is felt in their towns. This is the story of Delphi in Dayton, GM in Flint, Maytag in Newton.

When new free trade deals are proposed, how enthusiastic do you think those GM or Maytag workers will be? On election day, politicians who backed these deals have to face these angry ex-workers.

Major trading countries have always known this. This is one big reason why industrialised European nations, such as Germany or France, have stronger social safety nets. Trade has long accounted for a major share of their economies. They also know that what’s good for their nations may be painful for individual workers. If they want to keep support for free-trade policies, they know they must provide generous unemployment pay, vigorous retraining and monetary aid for stricken towns and cities.

In overall dollar terms, the United States has been a major trading nation for decades. But because of its huge domestic market, it has exported relatively little of its total output. The World Bank says that trade — both exports and imports — amounts to 23 per cent of American gross domestic project. In Germany, it’s 75 per cent.

Traditionally, the impact of trade here has been so localised that policymakers and politicians seldom had to worry about it. In recent years, this impact has expanded to embrace whole industries and cities. Latest public opinion polls, including one by the Chicago Council, show little support so far for protectionist measures. But as Slaughter recognised, it’s a potential problem to be met.

A wave of protectionism, in fact, could do much more damage than a breakdown in international trade talks or taxes on businesses. In a globalising world, it could take America out of the game.

If anybody in Washington is even thinking about this, I saw no sign of it. Perhaps these folks should get out more. The former factory towns of the Midwest would be a good place to start.


This post was originally published at The Midwesterner