Ohio and NAFTA

Via Brad DeLong, a David Leonhart column on how little NAFTA has to do with Ohio's economic woes. Still, I think hearing that the "more important cause of Ohio's jobs exodus is the rise of China, India and the old Soviet bloc" rather than trade with Mexico as such is going to do relatively little to cause Ohions to reverse their skepticism about trade policy. With trade as with every other policy area, most people's understanding of the details is very fuzzy.

"NAFTA" means "recent trade phenomena" and there's no denying that recent trends in international trade have caused economic dislocation in the rust belt. Still, responsible politicians wouldn't be promising to help Ohioans out by renegotiating NAFTA when renegotiating NAFTA won't actually deliver much help to the state. It's a bit of a cynical ploy -- by thundering loudly and pounding the table about the need to renegotiate the deal, you set yourself up for a situation where very minor modifications that barely impact anyone (for good or for ill) count as fulfilling the promise.

Comments

I'm not so sure. The EU has some - limited - common rules on labour issues, and they are probably necessary to keep political support in eg. France and Germany as some manufacturing activity is displaced into Eastern Europe, even if some jobs are really moving to China etc. A wider scope of economic exchange will - to some degree - create demands for a wider scope of economic regulation, and there's little reason to resist it, so long as the amount of international social policy doesn't bite to hard into the comparative advantage of the developing countries.

Posted by otto | February 28, 2008 7:41 AM

I don't understand. "NAFTA" means "recent trade agreements". Saying that you'll "fix NAFTA" seems to mean, then, that you'll "fix our trade policy".

And that actually would help the rust belt. Start passing laws that protect American jobs, protect the right to unionize, and take away some of the windfall profits of offshoring, and you will help the rust belt.

Posted by DivGuy | February 28, 2008 7:49 AM

I put a url in my name thee to show what is gong on up north when you talk of re-opening NAFTA. I don't think most Americans know that Canada is the single largest supplier of oil to the US market.

The whole impetus towards free trade came from the Trudeau era National Energy Program which was going to put export duties on oil and lower the price domestically. The US wanted continued acess to Alberta oil and was willing to negotiate away some tarriffs to do it. So, you got guaranteed access to oil on your continent run by the friendliest government (to you) in the world. And now that the tar sands hold the second most oil in the world, that access continues to be important. But hey, if you want to reopen NAFTA, there are a lot of Canadians who (wrongly) think that Canadian jobs have flown south since Free Trade.

Posted by Chris B | February 28, 2008 7:55 AM

It's a bit of a cynical ploy -- by thundering loudly and pounding the table about the need to renegotiate the deal, you set yourself up for a situation where very minor modifications that barely impact anyone (for good or for ill) count as fulfilling the promise.

Well, given that the prevailing wisdom is that it's simply somehow impossible in this part of the world to seriously approach trade policy in a way which serves sane and beneficial purposes for labor and other standards, that is indeed the most one would expect.

Still, given the likely choice between doing absolutely nothing or making the situation worse, and "minor modifications" which tend to somehow do some good, I guess like most mortals I would have to endorse the latter.

Posted by El Cid | February 28, 2008 8:02 AM

Canadians may not like it, but US has much more leverage over Canada than vice versa; and anyway on labour issues we're talking more about Mexico than Canada.

Posted by otto | February 28, 2008 8:08 AM

Might I suggest a wildly unsympathetic reading of this post?

What we have here is the NAFTA equivalent of the global warming two-step.

1) Deny, in ridiculous terms, that global warming exists.
2) Argue, with attempted reasonableness, that yes, global warming exists, but c'mon, doing something about it would be useless, or worse!

So, we've moved from "NAFTA was smart" to "fixing NAFTA is useless". It's an oddly anti-progressive mindset, as I think El Cid outlines.

Posted by DivGuy | February 28, 2008 8:11 AM

Well, as far as leverage goes, technically any party can abrogate with, what, 6 months notice? SO Canada has the same leverage in that sense

Does Canada need NAFTA more than the US? Yeah, sure, I will concede that. But ADDING tarriffs to avoid a recession? When did that ever work - Hoot-Smawley was the best example of trying thi tack. And when you look at the integration of the US and Canada economies, it seems really dumb to talk about abrogating a 3 way treay without any reference to your most important trading partner. There are at least two segments of our economies that function completely as one - Auto and Oil/Natural Gas. It would be hard to get around that.

Posted by Chris B | February 28, 2008 8:14 AM

You know, we make a lot of fun of ordinary folk for getting caught up in using some catch phrase to substitute for a larger discussion -- i.e., NAFTA as a substitute for trade policies focused on some effect likely to help the population as much as investors, or issues of trust, when smooth-talking 'third way' politicians promise that oh, yes, this really will be good for you, etc.

A lot of self-satisfied people can entertain themselves by scoffing at the dumb and resentful folk who shout "NAFTA" to mean things that they're certainly not sophisticated enough to understand.

The New York Times, of course, doesn't care in the slightest whether trade or any other deals end up making a huge number of ordinary people worse off. Their authors typically take great pleasure in heaping scorn upon those who don't repeat insider assumptions about how certain economic trends which are wonderful for a tiny investor class are simply desirable whether regular people like it or not.

(They don't particularly care, either, whether their reporting on matters leading to a huge war is true or not, but any article helping to cement the air of irritation with the uninformed peasantry is always welcomed.)

But, out of curiosity, what are the other 1 or 2 word things that people could shout at some politician, or which stands as a proxy in polls to indicate their sentiments about issues which they don't research deeply?

If we are to ban the uninformed rabble from using NAFTA as a proxy for their complaints about how trade and other economic development policies always seem to act against their interests, what shall we ask them to speak of instead?

Posted by El Cid | February 28, 2008 8:23 AM

Chris B-

We went over this a bunch in the previous thread. I no of no one particularly worried about tariffs - tariffs were already very slow at the time of the passage of NAFTA, and tariffs are not the issue.

Rather, as Dean Baker argues, the issue is that NAFTA placed American manufacturing jobs in direct competition with overseas manufacturing, with few or no restrictions regarding social services, union protection, or environmental regulation.

As Leonhardt correctly notes, NAFTA did little to reduce tariff barriers to imports from Mexico. These were already low. What NAFTA was about was removing all the non-tariff barriers that prevented U.S. firms from locating manufacturing operations in Mexico and exporting their output back to the United States. By putting U.S. manufacturing workers in direct competition with low-paid workers in Mexico, NAFTA lowered their wages.

Posted by DivGuy | February 28, 2008 8:23 AM

A simple version of manufacturing sector change is that jobs in Ohio are moving to Mexico and jobs in Mexico are moving to India.

NAFTA plays a role, but is not the whole story.

Posted by Kim | February 28, 2008 8:41 AM

Of course, this being a blog, we can never criticize globalism in any form, and Americans who are losing their jobs deserve neither sympathy or support.

Posted by Freddie | February 28, 2008 8:53 AM

The current trade debate is shaped by the overreach of the free traders. I think Clinton and Obama (and most of the rest of the Democratic leadership) realize that NAFTA is not really the root of all evil, and that trade is beneficial the US and that our policies should generally be aimed at increasing trade. It's hardly a secret that trade presents a net benefit, but can have redistributive effects that impose significant harm on certain groups and individuals. But for too long the Economic Powers That Be ignored the protests and the objections completely, failed to make any effort to address the redistributive effects of trade, and just conducted themselves however they damned well pleased. This is now coming back to haunt them.

Their failure to engage with their critics and to hold up their end of the public debate has allowed trade to be demonized by its opponents. It is almost a given at this point that in order to win as a Democrat you have to support protectionism and mindlessly bash on trade as the cause of any and all economic ills. Increasingly, populist Republicans are having to sound these notes too (it fits with the general theme of xenophobia). Dani Rodrik has written on this topic often and well. Any policy based on manipulating access to the levers of power without securing public support is ultimately doomed to failure. That's the story of free trade. On at least some metaphoric level we will need to throw out our current trade policy and start over again, this time with meaningful public involvement.

Posted by J.B. | February 28, 2008 9:01 AM

Interesting. . .

Why is it that Obama's campaign feels compelled to talk a lot about NAFTA in OH and not in the state that was geographically more in a position to be affected by NAFTA?

If the fear is that talking trash about NAFTA in front a crowd of Texan Mexican Americans will run the risk of sounding xenophobic then Obama's people are wrong . . . blue collar workers from border towns (most of whom are Mexican Americans) were hit extremely hard by job losses after NAFTA was passed.

Posted by dudeguy | February 28, 2008 9:05 AM

If Ford moves a manufacturing line for U.S.-bound parts from the U.S. to Mexico (and elsewhere later on), is that to be viewed as "trade" in the "we are all made better off by trade" sense?

Posted by El Cid | February 28, 2008 9:07 AM

El Cid,

You're talking about actual trade. And you seem to be implying that you want to empirically evaluate the real world effects on real people's lives that that actual trade has had.

We know that TRADE IS GOOD, based on theoretical models. That is the true knowledge.

Posted by DivGuy | February 28, 2008 9:12 AM

El Cid,

And if we replace 10 people digging a ditch with one mechanical digger, is that to be viewed as "technology" in the "we are made better off by technology" sense?

Posted by Thy Econ | February 28, 2008 9:38 AM

Ha! You got me, Thy Econ! There is no response to your apt point about my Luddite convictions unlike the smart economickists who read stuff!

'Cause "technology" is just like substituting internal intra-corporate transfers to Ricardian trade discussions! Adam Smith would see no difference either! Ya gots me!

Posted by El Cid | February 28, 2008 9:42 AM

Don't you see, El Cid? Those ten laborers digging the ditch will become a part of the new information economy. Unskilled American workers will slide effortlessly into jobs with, like, the Internet. Drezner has foreseen it. That's the amazing thing about globalism: every job lost to another country is instantly, magically created right back in America. I could explain but it's complicated. Models, and all that.

Posted by Freddie | February 28, 2008 9:48 AM

Yes, because intra-corporate transfers give Ford so much of an edge that they still have a negative net income.

Posted by Thy Econ | February 28, 2008 9:50 AM

I do think this debate would be enhanced by talking about the World Trade Organization rather than NAFTA. That would eliminate what is essentially a dodge "NAFTA doesn't affect trade with China" by putting the focus on the entire world trade regime rather than bilateral agreements.

Posted by justawriter | February 28, 2008 9:54 AM

Yes, because intra-corporate transfers give Ford so much of an edge that they still have a negative net income.

Posted by Thy Econ

Is that considered even a riposte of some sort? Because then with this dumb pseudo-logic one would point out that they would be better off as they were before the intra-corporate model, and then we would be nowhere, unlike the super-happy land we are all in now.

Posted by El Cid | February 28, 2008 9:57 AM

Dan Drezner points out that Mexico and Canada hate the idea of renegotiating NAFTA. Way to start regaining American credibility internationally, Democrats - by pissing off our nearest neighbors! What hypocrites.

Posted by Al | February 28, 2008 10:05 AM

Fortunately or unfortunately, there is no thing called "Mexico" or "Canada" which loves or hates, much less "hates the idea" of renegotiating NAFTA (or other seen as set-in-stone notions).

As a matter of fact, polls regularly indicate that anywhere from significant minorities to majorities of Mexican surveyed express interest in renegotiating the treaty. As here, there are social and political divisions about what to do or not do about the matter.

Right now there is even somewhat of a debate in the Mexican Congress on this matter, impelled by fairly significant campesino reaction to the opening of the last chapter of NAFTA removing protections from corn, bean, and dried milk products. For what it's worth, the Mexico City legislature recommended that very renegotiation.

http://www.jornada.unam.mx/ultimas/2008/01/02/no-renegociar-el-tlcan-podria-originar-un-conflicto-social-diputados-federales

http://www.jornada.unam.mx/ultimas/2008/01/09/exhorta-aldf-al-ejecutivo-renegociar-renglon-agropecuario-del-tlcan

Such reifications (Mexico hates, Canada loves, America wants) should at best be used as shorthands, not for real arguments.

Posted by El Cid | February 28, 2008 10:15 AM

Freddie,

Unemployment hovers at around 5%. It has for more than 10 years. So yes, people who have lost their jobs due to outsourcing, mechanization, or because their company went belly up have all found new jobs in pretty short order.

In the case of outsourcing or mechanization, you lose your job because management (those unfeeling bastards) have found a more efficient way to do whatever it is your company does.

If your company folds, you lose your job because management (those incompetent idiots) have not found a more efficient way to do whatever your company does, but someone else has.

No matter the reason, if you get laid off, you are understandably pissed. (This happened to me recently enough that I'm more than sympathetic)It's just not clear to me that there is a solution available that isn't worse than the problem.

Posted by heedless | February 28, 2008 10:15 AM

Incidentally, this opening of the agrarian chapter of NAFTA in Mexico will devastate thousands of peasants already surviving on the barest of edges.

And it is one of those situations in which lots of well-intentioned people say that gosh, even though this will devastate them, "something else" ought to be done to alleviate their situation, or "transition", because even worse would be the retaining of market inefficiencies.

And, as usual, the devastating effects will proceed apace and the magical sparkle ponies of "other stuff" to be done to help them will not, and lots of other people will marvel at how much better we all feel that some more nagging market inefficiencies have been reduced.

Posted by El Cid | February 28, 2008 10:20 AM

It's just empirically false that trade, rather than technology, has resulted in the problems in Ohio. Look at China's former heavy manufacturing region - the Northeast provinces of Heilongjiang, Jilin and Liaoning. They've lost manufacturing jobs just as the US, and everyone else, have. It's just a fact that the number of manufacturing jobs, as a percentage of all jobs, is declining worldwide, following the pattern of farming a century ago. Any trade effects are marginal.

I really don't understand the anti-trade bias that still lingers on the left. Should Ohio restrict trade with Michigan and Kentucky as well?

Posted by cure | February 28, 2008 10:32 AM

Heedless, the rabidly pro-globo blogosphere insists on pushing the notion that it is simply impossible for globalism to result in a net loss of jobs for America, that, by some byzantine machinations, every job lost in manufacturing or agriculture will somehow be replaced. And they are righteously uninterested in confronting the negative consequences of their policies. Asking a Megan McArdle to reflect on the plight of people who have lost their livelihoods to globalization results in about 15 seconds of platitudes and an hour of "You don't understand the complicated economics."

Globalization is not magic. It is not guaranteed to be a good for America, and I am tired of dispassionate examination of it being declared off-limits, or naive. Globalization on blogs isn't argument, it's theology, and I'm sick of it.

Posted by Freddie | February 28, 2008 10:38 AM

I don't see how intra-corporate transfers make much of a difference, honestly. If you want to go around being snide for the rest of this discussion, feel free.

Posted by (Thy Econ) TE | February 28, 2008 10:47 AM

I think it is worth bearing in mind that one of the reasons that governments around the world have supported various sorts of trade agreements is that the desire to be part of the "international community" can make the adoption of difficult and otherwise unpopular domestic reforms easier. So, for instance, all the big Italian parties supported joining the Euro at least in part because it facilitated fiscal reform measures that sharply cut the government deficit in ways that would have been very unpopular with at least some of each party's constituents without the international element being in play. By the same token, while labor law reform in the US isn't generally unpopular, there is obviously fierce resistance to it from most employers. The renegotiation of NAFTA can thereby provide an effective pretext by which to overcome this resistance. I'm not saying that this is why Obama and Clinton are discussing the subject now, but it seems to me worth keeping these kinds of complementarities in mind as this discussion moves forward.

Posted by Rich C | February 28, 2008 11:05 AM

For a different view on the Leonhardt piece:

http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=02&year=2008&base_name=why_is_the_nyt_so_opposed_to_f

Posted by R. Vangala | February 28, 2008 11:10 AM

@Freddie

Aren't globalists typically also supporters of immigration, legal or otherwise?

Not that I agree that there's not enough scrutiny on trade, but I always thought that opposing globalization meant supporting populism, which means being not only against trade, but immigration as well.

Posted by Jack | February 28, 2008 11:18 AM

"The New York Times, of course, doesn't care in the slightest whether trade or any other deals end up making a huge number of ordinary people worse off."

They typically end up make a very small number of ordinary people worse off, while making almost everyone in the nation a bit better off.

The complaint was often made about NAFTA and free trade is that it led to the decline of our manufacturing jobs. Except it didn't. Mechanization did that. The decline of our manufacturing jobs has been approximately at the same rate for 40 years. It was at the same rate before NAFTA as it was after. At the same time, manufacturing OUTPUT has been up along almost the entire period.

At worst, NAFTA and most other free trade programs mildly sped up a transition away from high-cost labor in manufacturing. It was a partial substitute for mechanization. But since it didn't alter the trend of declining manufacturing jobs (and increased manufacturing output), that strongly suggests that it was a substitue for mechanization of jobs that weren't going to last much longer one way or another.

Posted by Sebastian | February 28, 2008 11:49 AM

There are times in which I wonder why the Business Roundtable and corporate interests and the Republicans pushed so, so hard for agreements like (and starting with) NAFTA, since apparently it did nothing and in no way whatsoever changed anything significantly.

The fools -- they wasted all that money for nothing!

Posted by El Cid | February 28, 2008 12:02 PM

Overall, free trade is good for most everyone.

I think Obama and Clinton are wrong to bash NAFTA.

After all, most jobs seem to be going to China and we don't have any kind of free trade agreement with China.

Posted by neil wilson | February 28, 2008 12:09 PM

They typically end up make a very small number of ordinary people worse off, while making almost everyone in the nation a bit better off.

I keep hearing the theistic declaration that every trade deal must of necessity make us all a bit better off. How did NAFTA do that again?

Some people who are economists fail to repeat this, sometimes even looking at evidence and stuff, and these kinds of crazy people can be found at such fringe, immature, wacko lefty sites as the Economic Policy Institute:

http://www.epi.org/content.cfm/bp196

Posted by El Cid | February 28, 2008 12:19 PM

As an american that actually makes things (furniture and doors) I have tried to sell into mexico and can tell you it's next to impossible for the little guy unless you load up the pickup and cross the border at Sasabee and head on the road of death to Altar paying bribes as you go.Being that matt is a pet of the DLC (a bad pet sometimes) and he hasn't made anything in his life except Bullshit I understand him flacking this crap.

Posted by Jerry | February 28, 2008 1:39 PM

Lord help you all if any of this campaign BS becomes reality. You cannot think that either Clinton or Obama actually believe this, can you? Or that they will actually carry through? Are you that credulous?

Let's see:

You're against NAFTA, but for illegal immigration.

You support the unilateral breach of NAFTA, a trade treaty with our neighboring countries and treaty ratified by the US Senate and which has increased overall prosperity in each country, but bitch about the failure to conform to Kyoto, an anti-growth, anti-US pact that failed to attract even ONE vote in the Senate.

That's just brilliant.

Here's some reason you can use: http://reason.com/news/show/125218.html

Posted by Beer Here | February 28, 2008 2:18 PM

I believe fully that Barack Obama and Hillary Clinton will fully follow all their promises to unilaterally abolish NAFTA so that we can make all of Mexico into U.S. citizens and exclusively give the new Mexican American citizen state the right to take all jobs from good patriot conservative Americans under the new UN overlords administering the Kyoto Treaty of Makin' White American Males Feel Under-appreciated.

Here is some strong logic for the rest of you for once:

http://www.xenu.net/archive/footbullet/

Posted by El Cid | February 28, 2008 2:29 PM

Asking a Megan McArdle to reflect on the plight of people who have lost their livelihoods to globalization results in about 15 seconds of platitudes and an hour of "You don't understand the complicated economics."

There are two possible explanations for this:

1) Megan Mcardle is a heartless plutocratic schill, delighting in the suffering of the working classes, and concealing the pernicious effects of trade liberalization in the service of her corporate overlords.

2) You don't undertand the complicated economics.

Snark aside (though I do love me some snark), no one really understands how the "creative destruction" of the market works. What we do know is that over the past 20 years, the US has greatly liberalized its trade policy, and during the same period, we have seen a sharp reduction in unemployment. Clearly those jobs are coming from somewhere.

Posted by heedless | February 28, 2008 2:57 PM

1. Megan McArdle is not an economist.
2. Neither are you.

Posted by Freddie | February 28, 2008 3:01 PM

I mean, seriously. Are you really arguing that no one has lost a job because of NAFTA? What you're doing proves my point exactly. People like McArdle and Drezner don't want to have to be confronted with the fact that some people have been hurt by globalization. They don't like the consequences for their ideology of having to deal with negative consequences, so they condescend and act like no one else has the right to an opinion. So, heedless, why don't you write some snarky bullshit letter to someone who has been laid off and rendered destitute by globalization? Since you're so fond of it, and insist on perpetuating the notion that it has no negative consequences, maybe you can ladle out some sarcasm for people who have had their lives irreversibly damaged by the policy you support.

Posted by Freddie | February 28, 2008 3:05 PM

SOME people get hurt by every technical innovation.

There is not much demand for horse shoes today.

Does that mean that we should have stopped Henry Ford until we figured out a way to make everyone whole?

People get hurt. Neither you nor I nor society can change that.

What we can do is to try and help the people who get hurt and try and understand how to keep the hurt to as low a level as practical.

Only God can stop people from getting hurt. Man can just do the best they can.

Posted by neil wilson | February 28, 2008 4:03 PM

Freddie,

I wouldn't direct sarcasm toward someone who had just lost his or her job for the same reason that I wouldn't mock someone who had just suffered a divorce.

Nevertheless, I don't want the government to pass a law keeping this hypothetical marriage intact. Nor do I believe that the government should do the same for any particular job.

Have people have lost their jobs because of NAFTA? Of course. They have since gotten new jobs doing something else. Losing one job does not make you permanently unemployed.

Unemployment (my apologies for the repetition) has remained steady at 5% or so for the past 10 years. That means that for every job that is lost, another one has been created. In fact, because our population has grown, there are now more people employed than there were 10 years ago. If jobs were really being destroyed in the sense that you imply, unemployment should be rising.

Please explain why it is not doing so.

Posted by heedless | February 28, 2008 4:26 PM

From the Economic Policy Institute's "Globalization and American Wages: Today and Tomorrow," by L. Josh Bivens

What economic theory actually teaches about globalization and wages

When people argue that economics teaches that liberalizing trade is a “win-win” proposition, what they mean (whether they know it or not) is that trade is “win-win” between countries. The great insight of comparative advantage, the cornerstone of international economics, is that even when one country can produce everything more cheaply than its trading partners, trade still provides benefits to both nations.

An important caveat, however, notes that even as globalization raises national income, it can still reduce the incomes of most workers. Global integration has at least two potential impacts on American wages. First, workers employed in industries directly in competition with low-cost imports from abroad can expect to see immediate job dislocation and/or downward wage pressures. Second, as relative prices change across industries, the return to factors of production, including different kinds of labor inputs, can be expected to change as well. A simple example can capture the essential insights of this second impact (which is almost surely the less intuitive one).

Start with a couple of assumptions about the U.S. economy. Say that the labor force of the U.S. can be divided into workers (those who supply labor) and professionals (those who also supply additional skills, capital, and credentials). Assume further that there are just two sectors in the U.S. economy, call them apparel and aircraft. Workers and professionals can work in either sector. If this sounds unrealistic, remember that this is a story about what matters over a reasonably long period of time. While people obviously do not lose an apparel job on Monday and begin working at Boeing on Tuesday, in the relatively fluid American economy, people do switch across many economic sectors throughout their working lives.

Lastly, assume that producing each $1 of apparel takes a ratio of workers to professionals twice as high as producing each $1 of aircraft—that is, apparel is the more labor-intensive business.

Now, say that falling trade costs (a tariff cut for example) reduces the price of apparel imports. Since domestic producers must compete with imports, this means that the price of domestically produced apparel falls as well. Fewer domestic producers are then willing to make apparel, as falling prices make this a less attractive business. Imports rise to replace this lost domestic production. Lastly, and importantly, aircraft exports rise as domestic investment once ploughed into apparel looks for new opportunities and as U.S. trading partners’ greater specialization in apparel leads them to demand more aircraft from the U.S.

As domestic apparel production contracts, too many workers are displaced to be absorbed in the expanding aircraft sector at the going wage for workers. Remember that the ratio of workers to professionals was higher in the apparel sector, so each $1 of apparel production abandoned releases “too many” workers relative to professionals to be absorbed by a $1 increase in aircraft production. Even after absorbing all of the professionals released from the declining apparel sector, there will still be many former apparel workers not finding work in the aircraft sector at the going wage.

If these unemployed workers want a job, they must agree to a wage cut. Further, it is not just the unemployed labor that takes a wage cut—it is all workers economy-wide. Any incumbent worker in either aircraft or apparel not agreeing to this wage cut would be replaced with those unemployed workers. The process works in reverse for professionals, with the apparel sector not shedding enough of them at the going professional wage in order to meet the demands of the expanding aircraft sector. This imbalance bids up professional wages.

Essentially, by changing the structure of what an economy produces, globalization changes the relative demand for different kinds of labor, skill, and capital. In the example above, globalization pushed the domestic economy into demanding fewer workers and more professionals by tilting the structure of domestic production away from labor-intensive apparel and towards professional-intensive aircraft.

The most well-known outcome of this process is that the gross gains for professionals outweigh the gross losses of workers, hence the national economy sees net gains from trade.2 It is these net gains (which are much smaller than either the gross gains or gross losses) that constitute the argument in favor of global integration. However, it is (obviously) the gross losses that worry many workers about globalization, and this fear is utterly rational in light of economic theory.3

It should be noted that the (slim) majority of U.S. imports come from countries that are not that much poorer than the United States. This sort of trade (call it rich/rich trade) is not necessarily inequality-inducing in the way described above. However, a significant (and the fastest growing) portion of U.S. trade is with nations that are significantly poorer than the United States, and as such, the scenario sketched out above is (and should be) a real and growing concern to U.S. workers...

...Globalization’s real costs: not just unemployment or adjustment

Some readers may think these results are obvious. Nobody, for example, denies that, say, U.S. steel workers displaced by import competition face hardship from trade. These costs, however, are often thought to be small and manageable with temporary government assistance.

This is, however, a radical understating of globalization’s costs. Note that the above example did not take into account the adjustment cost of workers’ unemployment spell between jobs. These adjustment costs are, of course, real and should be of concern to policy makers, but they are not the first-order costs of globalization to American workers.5

Rather, the losses identified above are permanent wage-loss suffered by labor in this simple economy. Empirical studies in the trade and wages debate have generally used production and non-supervisory labor as a proxy for labor in the United States, and non-production and supervisory labor as a proxy for professionals. Occasionally, workers with a 4-year college degree stand in for professionals, with the rest of the workforce standing in for labor.

Production workers constitute roughly 75% of the entire U.S. workforce, and workers without a four-year college degree constitute roughly 70% of this workforce. Hence, while gross gains may exceed gross losses in the U.S. as global integration proceeds, it is not necessarily the case that winners outnumber losers. Global integration, in short, has the potential to inflict permanent harm to most American workers, and, as later sections of this paper demonstrate, the scale of this harm is much larger than commonly realized.

This basic axiom of economic theory is all too often ignored, or, even actively hidden. For example, Bradford, Greico, and Hufbauer (2005), in what they bill as a comprehensive accounting of the gains and losses attributable to trade liberalization, count only the costs of direct displacement by imports as a debit in the balance sheet of globalization, and do not even acknowledge the possibility of permanent wage losses through a broader labor market. Failing to count the largest cost of globalization is, of course, an excellent way to make the cost/benefit analysis of integration come out well to those favoring the status quo.

The impact of globalization on today’s wages

During the trade and wages debate of the early 1990s...Krugman (1995) used a simple computable general equilibrium (or, CGE) model to examine the issue of international trade and wage inequality. CGE models are a series of equations that capture the economic relationships between and within nations. They can be incredibly complex, consisting of hundreds of equations and needing substantial computing power to solve, or they can be quite simple, representing what Krugman (1995) calls “glorified back of the envelope estimates.”

This section uses the Krugman (1995) model to get exactly such a “back of the envelope” estimate of how much offshoring has impacted American wages and inequality to date, and how it could possibly impact it in the future. The mechanics and assumptions behind the model are described more fully in Bivens (2007).

The essential features, however, can be described as follows and follow directly from the example above. The United States is assumed to be abundant in professionals offering specialized skills, capital, and credentials relative to the rest of the world, but relatively deficient in labor. The U.S. consequently exports goods that are professional-intensive and imports goods that are labor-intensive. As labor-intensive industries are shed and replaced with professional-intensive industries in the U.S. economy, the relative demand for labor falls, while the relative demand for professionals rises, leading to greater inequality.

The relevant parameter for assessing the U.S. labor market impacts of globalization is the volume of trade conducted with lower-wage trading partners (know in the jargon as less-developed countries, or LDCs for short). This paper uses the average of imports and exports from non-OECD countries (as OECD countries are generally rich, and trade with them will not necessarily follow the predicted patterns regarding the labor-intensity of imports and exports that drives the inequality-inducing effects of trade), non-OPEC countries (as oil is not generally thought to compete with U.S. production), and Turkey and Mexico (the two poorest OECD nations) for this parameter...

...The 1990s Trade and Wages Debate

A common argument in the globalization debate grants the point that trade theory argues that American workers have something to fear from global integration but minimizes the empirical relevance of globalization’s costs. By now, all serious people concede that the United States has seen a sharp increase in inequality over the past 25 years; the de minimus argument scales the impact of trade against this wider march toward a less-equal economy.

In the early 1990s a flurry of studies addressed this issue. The resulting estimates are spread widely, but most indicated that trade could account for roughly 10-40% of the total rise in inequality that occurred in the 1980s and early 1990s. The observation that “most” of the rise in inequality was generated by factors other than trade was often emphasized to allay anxieties about globalization. This is true but uncomforting; a significant minority of a very large number is a large number. (To put it another way, if I threw myself into a chasm that was “only” a fifth as deep as the Grand Canyon, I’d still be dead.)

Further, findings from this first round of the trade and wages debate are now a decade old, yet are still often invoked in contemporary debates. Academic interest in the topic essentially waned after 1995 as wages for all workers began rising; a tight labor market trumped all other influences. However, this does not mean that trade stopped dragging on some workers’ wages. There are lots of determinants of wage growth, and just because the net outcome of them all is positive does not mean that all are benign. In fact, as soon as the momentum from the red-hot labor market of the late 1990s dissipated, wage growth decelerated and then turned negative. This begs another question that can be answered with a model from the earlier round of the trade and wages debate: how much has trade dragged on wages in the very recent past?

By 2006, the costs of globalization rival those from taxation for this group. One imagines that none of these households consider federal income taxes a trivial cost (although they are much smaller for this group than commonly realized, as payroll and other taxes constitute the major taxes paid by families in the middle of the income distribution). Politicians make a lot of hay about income taxes, but these taxes purchase something useful for middle-income households: “civilization,” as Oliver Wendell Holmes memorably said. The globalization tax largely buys higher incomes for the already better-off.

It should be noted that the original Krugman (1995) results were often presented as an argument for the relatively benign impact of trade flows on American wages, as they were on the low-end of results in the first round of the trade and wages debate. A disaggregated (and much more computationally complex) version of this model was used by Cline (1997), who found that trade’s wage impacts were almost four times as great as the Krugman (1995) results...

...The potential level of redistribution caused by offshoring is vast, and so should be the policy response. The best way to fashion redistribution of the scale implied by this paper’s findings is through large-scale social insurance programs and public investments that insure a baseline level of economic security for American families: universal health care, stable pension income, disability and life insurance, and a lifetime of access to high-quality public education. Offshoring and trade are, of course, not the only rationale for such social insurance programs, but they do starkly illustrate the fundamental fact underlying the need for them: your economic lot in life is not wholly your own making, and in the new economy, it is less under your own control than ever before.

The failure of the economics profession to educate the larger public (including the policy-making and pundit-class elites) about this too-little known aspect of trade theory explains much of the chasm between elite and popular attitudes toward globalization.

A serious understanding of what globalization means for the U.S. economy and its workers—and what must be done to hold the broad American working- and middle-classes whole in the face of global integration—requires this failure be corrected.

http://www.epi.org/content.cfm/bp196

Needless to say, it would certainly be nice if their recommendations that huge and serious measures be undertaken to counter for the harms of globalization, but I don't see any politicians seriously proposing this, and most economists still speak of such things in a dismissive manner as if the far more important thing to do is to keep on praising globalization as bringing us all closer to some market efficiency paradise.

Posted by El Cid | February 28, 2008 5:31 PM

The Leonhart piece is exactly right. Furthermore, the idea that NAFTA is a current scourge to the U.S. and is affecting domestic workers to the extent that it needs to be changed or altered is also incorrect. Disagree with NAFTA or not, the time in which NAFTA played a significant role in U.S. trade and subsequently the time in which some "reform" or NAFTA would have been optimal, have long since passed. Even as notable a anti-trade reactionary as Jeff Faux has stated as such.

Posted by DRR | February 28, 2008 6:58 PM

@El Cid

I recall even The Economist admits that globalization kills growth of wages as more workers enter into the global workforce. I also recall reading an article in Foreign Affairs how ALL wages and salaries have been flat for most educational levels except for those with Master's Degrees, PhD's, and of course lawyer's and doctors.

Posted by Jack | February 29, 2008 3:33 AM