Hey, Bernie Sanders, Trade Isn't All Bad
Democratic presidential candidate Bernie Sanders has promised to scuttle new free trade agreements like the Trans-Pacific Partnership and the Trade and Investment Partnership. He has vowed to undo trade deals with Latin American countries, such as the North American Free Trade Agreement and the Central American Free Trade Agreement. And he has declared his intention to remove Permanent Normal Trade Relations with China, paving the way for tariffs on imports from that country. In other words, protectionism is back in a big way, and Sanders is its standard-bearer. Republican candidate Donald Trump is saying very similar things, though his proposals are less concrete.
This is incredibly frustrating for people like me. I’ve long complained about the pro-free-trade consensus among economists. I’ve pointed out evidence that opening up trade with China has hurt American workers. I’ve argued against presenting a simplistic pro-free-trade view to the public, and against treating Econ 101 textbook theories as if they are the gospel truth.
QuickTake Free Trade Feud
But instead of thoughtful moderation of free-trade policy, what Sanders is offering is an upending of the conventional wisdom. This is like finding out that reading in low light can be bad for your eyes, and reacting by giving up books. As usual, Sanders substitutes passion for thought and conviction for evidence. But I want to be clear that I surely don’t want my own cautions and caveats about free trade to become ammo for this kind of emotion-driven crusade.
The first problem with Sanders’ protectionism, as Vox’s Zack Beauchamp points out, is that it would hurt poor people in developing countries around the world. Beauchamp points to a 2008 paper showing that trade liberalization is followed by a burst of growth in poor countries. This is a consistent finding among economic researchers, going back to a famous 1999 study by Jeffrey Frankel and David Romer. There is evidence that trade gave a big boost to South Korea, which successfully made the leap from poverty to riches. The World Bank has found that trade boosts growth in sub-Saharan Africa, one of the world’s most impoverished regions. Trade was obviously a big factor in China’s economic development, which led to the greatest reduction of poverty the human race has ever seen.
The accumulating mountain of evidence has convinced many of trade's benefits. U2 singer Bono, a tireless campaigner for the developing world, recently declared that “Commerce, entrepreneurial capitalism takes more people out of poverty than aid -- of course, we know that.” But Sanders hasn't gotten the message.
Free trade isn’t the only thing that helps poor countries prosper, of course, but it’s an important component. To revoke trade deals with these poor countries could condemn millions of indigent farmers to remain on the land, scratching out a meager existence, their bellies growling with hunger. That would be a shameful legacy for someone like Sanders, a self-defined socialist, given that socialism was originally conceived as a worldwide movement dedicated to wiping out poverty.
What about the U.S.? The country isn't a global charity, and there are limits to what it can do for the poor in other nations. And it’s pretty clear that trade has hurt a huge number of working class Americans, especially in the past 15 years. The question, though is would protectionism help the U.S. working class today?
Probably not. First, trade isn’t always good for the U.S., but it usually is. Before 2000, most workers displaced by trade managed to find new employment. But that didn't happen after the U.S. started losing jobs to China. China was probably a special case because of its undervalued exchange rate, heavy government promotion of exports, very low income and enormous size. It presented U.S. workers with a challenge unlike any they faced from Japan, Europe or even Southeast Asia.
But that challenge is over, for the most part. China’s growth has slowed, its trade has flatlined, its wages have skyrocketed and its currency is now overvalued instead of undervalued. All the manufacturing and supply chains that could relocate to China have already done so, and now some are even returning to the U.S.
So what would restricting trade with China do for the U.S. now? It might simply provoke a trade war, as Beauchamp notes. More likely it would have no effect except to antagonize China and increase the chance of a future war.
But restricting trade with other countries would be more harmful for the U.S. than in the past. As the graph below shows, the U.S. has become more dependent on exports in recent years:
In particular, the U.S. benefits enormously from trade with rich countries like Japan and Europe, which have wage levels comparable to the U.S.'s. These countries don’t put U.S. workers out of jobs; instead, trading with them simply creates work for Americans and allows the U.S. to buy a wider variety of products. Killing the TTP and TTIP would choke off this beneficial trade. It would also weaken the country's main geopolitical allies.
I’m not saying that we should let trade policy keep going on the path of business-as-usual. Export promotion policies, for example, might be helpful in remedying our trade deficit. But smart technocratic tinkering like that is far too mild for a fire-breathing crusader like Sanders. As a result, he risks harming the U.S. economy based on a nothing more than a gut feeling that isn't grounded in facts.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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