3. Understanding the Backlash Against Trade
What can explain the recent rise in anti-trade sentiment in the US? This section analyses some of the key concerns expressed. To what extent are they legitimate, and to what extent has trade become the bogeyman?
The impact of trade on jobs, wages and inequality
A focal point of Donald Trump’s election campaign was ‘bad’ trade deals, which he blamed for killing manufacturing jobs at home and depressing the wages of American workers. Bernie Sanders used similar rhetoric during his bid to secure the Democratic Party nomination. Hillary Clinton also vowed to ‘stop any trade deal that kills jobs or holds down wages’.21
Mainstream economic theory holds that while the losses arising from trade liberalization in the form of job displacement and lower wages are concentrated in particular sectors of the economy and geographic areas, the gains are spread more widely. Economists and policymakers alike have in public discourse focused largely on the benefits stemming from trade. Their failure to acknowledge the attendant costs has created a space for those tapping into the sentiments of people who feel left behind.
According to theory, those benefiting from trade will not collectively stand up to promote its liberalization because the gains are more diffused across the population, whereas those adversely affected have a greater incentive to speak out against further liberalization because the detrimental aspects are more concentrated. This helps explain why all of the leading contenders in the 2016 presidential election appealed to those hurt by trade, even though the majority of Americans still viewed trade positively.22
The rise of China in the global economy, and its admission to the WTO in 2001, contributed to job losses in the US. A recent study, published in 2016, found that the growth in imports from China between 1999 and 2011 cost the US up to 2.4 million jobs. About 985,000 of those lost jobs were in manufacturing, accounting for some 17 per cent of the 5.8 million manufacturing jobs lost during that period.23
Another study, published in 2017, concluded that 13 per cent of the job losses in manufacturing between 2000 and 2010 have resulted from trade. Over 85 per cent, meanwhile, were caused by productivity growth stemming from automation and other technologies.24 In other words, trade is not blameless, but neither is it the main culprit in the hollowing-out of the US manufacturing base.
Workers who have lost their jobs because of trade find it very hard to obtain new employment at comparable wages. In addition to reducing their lifelong earnings potential, there is often a skills mismatch that prevents displaced workers from simply transitioning to different sectors of the economy.
Regarding the impact of trade on income inequality, former treasury secretary Lawrence Summers acknowledged in 2015: ‘The consensus view now is that trade and globalization have meaningfully increased inequality in the United States by allowing more earning opportunities for those at the top and exposing ordinary workers to more competition, especially in manufacturing.’25 But, again, most research concludes that trade accounts for a relatively small share of inequality, and that other factors, such as technological changes, are much more important drivers.26
Overall, the impact of trade as opposed to technological change on the labour market is not easy to distinguish: these two factors can go hand in hand.
Overall, the impact of trade as opposed to technological change on the labour market is not easy to distinguish: these two factors can go hand in hand. For instance, following China’s entry into the WTO, increased competition spurred technological change in US firms that led to reductions in employment and wages for Americans.
Insufficient adjustment mechanisms
The US has had a federal government programme – Trade Adjustment Assistance (TAA) – in place since the early 1960s to help workers whose jobs have been displaced by trade. TAA provides funding for training and re-employment services, income support and a tax credit for health coverage for workers who have lost their jobs or experienced a reduction of hours and wages as a result of an increase in competitive imports or shifts in production to a foreign country.27
Yet while the existence of TAA acknowledges that trade is responsible for some displacement in the labour market, stringent eligibility criteria apply, with assistance restricted to workers who can demonstrate that their employment has been adversely affected by foreign trade. Of the almost 7.8 million Americans unemployed in 2016,28 of whom 126,844 were eligible for TAA support, only 45,814 participants were served by TAA in fiscal year 2016 (1 October 2015–30 September 2016).29
TAA is also widely considered to be ineffective. For instance, an evaluation published in 2012 estimated that, without considering the benefits of TAA in potentially promoting free trade, the scheme caused a net loss to society of about $53,800 per participant. Almost half of this loss fell on participants (who earned about $26,800 less than comparable workers who found re-employment not through TAA), with the remainder falling on taxpayers (in the form of footing the programme’s costs – e.g. payments to participants, cost of training and re-employment services – of $27,000 per participant).30
The US spends little on helping those who have lost their job due to trade get back into the workforce. In fiscal year 2016, TAA for workers had a budget of $802 million (or 0.004 per cent of GDP).31 Among advanced economies, the US has one of the lowest spending levels on active labour-market adjustment programmes (see Figure 1).32
Figure 1: Public expenditure (% of GDP) on active labour-market programmes (2015)
— Source: Organisation for Economic Co-operation and Development (2017), ‘Table Q – Public expenditure and participant stocks in labour market programmes in OECD countries, 2014 and 2015’, in OECD Employment Outlook 2017 – Statistical Annex, http://www.oecd.org/employment/emp/StatisticalAnnex-EmO2017.pdf (accessed 16 Jun. 2017).
Figure 1: Public expenditure (% of GDP) on active labour-market programmes (2015)
‘Unfair trade practices’ by other countries
So-called unfair trade practices by other countries – such as dumping, subsidies, the use of state-owned enterprises and currency manipulation – distort competitiveness, thus contributing to job losses and lower wages in adversely affected domestic industries. A study published in 2012 estimated that at least 1 million US jobs were lost in 2011 due to currency manipulation by more than 20 countries (including China, South Korea and Taiwan).33
The use (and often even the perceived use) of unfair trade practices by other countries undermines US public trust that the playing field is level. China has built up excess capacity in industries such as steel through government measures including subsidies and state ownership. Under WTO rules and US law, countermeasures can be taken to address subsidies and dumping. The TPP would have incorporated rules on state-owned enterprises, but no enforceable provisions on currency manipulation. The current systems for defining and countering unfair trade practices are in need of reform.
Trade negotiations, transparency and investment protection
Trade agreements are no longer predominantly about reducing tariffs. With average tariffs standing at relatively low levels since the early 2000s, negotiations increasingly focus on regulations, standards and norms. This has given rise to a debate about whether trade agreements could impede governments in maintaining, adopting or changing domestic regulation. Latterly, in this context, public alertness to trade negotiations and agreements has been much higher than was historically the case. Regarding the TPP, critics in the US raised concerns about its potential impact on the environment, labour standards and consumer issues (such as food safety standards, data privacy and intellectual property rights). Similar aspects were raised by opponents in other TPP countries, with a particular focus on the agreement’s potential impact on copyright protection, patent rules for new medicines, and food labelling and safety. While many of these concerns were exaggerated, supporters of the TPP were not successful in addressing them.
The TPP process received far greater public attention in the US than have the negotiations for TTIP. In the latter case, the US and the EU have repeatedly emphasized that both sides would retain their high standards and the right of governments to regulate. There have, however, been massive protests across Europe – including in countries such as Germany where support for free trade has traditionally been strong – that have fuelled a heated political discourse.
Recent trade negotiations – in particular for the TPP and TTIP – have come under fire for not being transparent enough. As part of the TPP and TTIP processes, US negotiators have provided information about negotiating rounds, have briefed and engaged with stakeholders in special meetings, and have appointed a chief transparency officer in the Office of the United States Trade Representative (USTR). Nonetheless, concerns have been raised about limited access to negotiation texts. In the case of the TPP, the 12 prospective parties did not release the full draft text until November 2015, after more than five years of negotiations. According to its critics, by the time the parties came to sign the final agreement, in February 2016, it was almost impossible to change any of the text. Parts of the draft agreement had, however, been leaked over the previous years by groups such as WikiLeaks.
While increased transparency does not automatically lead to better outcomes, engagement with stakeholders may help to ease public concerns, and more varied input associated with wider engagement can help to shape better policies.
In the case of the TTIP negotiations, not only critics of the agreement but also supporters have called for greater transparency. The EU negotiators have addressed these concerns by increasing access to negotiation texts and engaging with the public to a much greater extent than their US counterparts.34 While increased transparency does not automatically lead to better outcomes, engagement with stakeholders may help to ease public concerns, and more varied input associated with wider engagement can help to shape better policies.
Another contentious point in the polarized debates over TPP and TTIP has been the provisions regarding investor–state dispute settlement (ISDS), whereby foreign investors are able to bring claims against a government before an international tribunal. Critics, including Pascal Lamy, a former EU trade commissioner and head of the WTO, have stated that provisions for ISDS are not necessary in a trade agreement between the US and the EU as these are advanced economies with well-established legal systems.35
While the EU launched a public consultation on ISDS in TTIP, and has since put forward proposals for a permanent investment court, US negotiators have so far resisted the EU’s initiatives in this area. Although the opposition to ISDS is more pronounced in Europe, civil society organizations in the US have also called on the government to exclude it from trade agreements.36 ISDS has benefits and drawbacks, but the controversy has become very emotionally charged rather than being based on facts. While the US and the EU have a shared interest in striking a balance between the various interests and concerns, reforming the arbitration system for global investment protection will progress only slowly. A critical hurdle is getting the majority of countries around the world on board, which will be a complex process because the current system of ISDS is a fragmented regime of thousands of bilateral and international investment and trade treaties.37 Moreover, balancing the interests of various stakeholders – ranging from industry to consumers and workers – will be a challenging task.
21 Pramuk, J. (2016), ‘Clinton and Trump can agree on at least one thing’, CNBC, 11 August 2016, https://www.cnbc.com/2016/08/11/trump-and-clinton-now-sound-similar-on-one-key-issue.html (accessed 16 Jun. 2017).
22 Swift (2017), ‘In US, Record-High 72% See Foreign Trade as Opportunity’.
23 Autor, D. H., Dorn, D. and Hanson, G. H. (2016), ‘The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade’, Annual Review of Economics, 8(1): pp. 205–40, https://doi.org/10.1146/annurev-economics-080315-015041 (accessed 16 Jun. 2017).
24 Hicks, M. J. and Devaraj, S. (2017), The Myth and the Reality of Manufacturing in America, Muncie, IN: Ball State University Center for Business and Economic Research, http://projects.cberdata.org/reports/MfgReality-20170428.pdf (accessed 16 Jun. 2017).
25 Summers, L. (2015), ‘A deal worth getting right’, Washington Post, 8 March 2015, https://www.washingtonpost.com/opinions/its-worth-getting-the-tpp-trade-deal-right/2015/03/08/a1017428-c42f-11e4-ad5c-3b8ce89f1b89_story.html?utm_term=.7bf6694fbaec (accessed 16 Jun. 2017).
26 Organisation for Economic Co-operation and Development (OECD) (2011), Divided We Stand: Why Inequality Keeps Rising, Paris: OECD, http://dx.doi.org/10.1787/9789264119536-en (accessed 16 Jun. 2017).
27 Collins, B. (2016), Trade Adjustment Assistance for Workers and the TAA Reauthorization Act of 2015, Washington, DC: Congressional Research Service, https://fas.org/sgp/crs/misc/R44153.pdf (accessed 16 Jun. 2017).
28 US Department of Labor, Bureau of Labor Statistics (2017), ‘Labor Force Statistics from the Current Population Survey’, https://www.bls.gov/cps/cpsaat01.htm (accessed 16 Jun. 2017).
29 US Department of Labor, Employment and Training Administration (2016), Trade Adjustment Assistance for Workers Program – Fiscal Year 2016, https://www.doleta.gov/tradeact/docs/AnnualReport16.pdf (accessed 16 Jun. 2017). Note that the discrepancy between eligibility for and being served by TAA arises because of a two-step process. First, a group of adversely affected workers must petition the Department of Labor, which then investigates the role trade played in the workers’ job loss. Second, once a group’s petition is certified, workers may apply for individual TAA benefits. However, many certified workers choose to seek reemployment without TAA assistance or retire.
30 D’Amico, R. and Schochet, P. Z. (2012), The Evaluation of the Trade Adjustment Assistance Program: A Synthesis of Major Findings, Oakland, CA: Social Policy Research Associates and Princeton, NJ: Mathematica Policy Research, https://www.mathematica-mpr.com/download-media?MediaItemId={DE128B8A-0456-41C0-96B0-ACB6D7752D1D} (accessed 16 Jun. 2017).
31 US Department of Labor, Employment and Training Administration (2017), FY 2017 Congressional Budget Justification, https://www.dol.gov/sites/default/files/documents/general/budget/CBJ-2017-V1-07.pdf (accessed 16 Jun. 2017).
32 Those countries that have the highest public expenditure relative to GDP on active labour-market programmes (Denmark and France) have a higher unemployment rate than the US. However, other countries that also spend a larger share than the US (such as Germany and South Korea) have a lower unemployment rate.
33 Bergsten, C. F. and Gagnon, J. E. (2012), Currency Manipulation, the US Economy, and the Global Economic Order, Washington, DC: Peterson Institute for International Economics, https://piie.com/sites/default/files/publications/pb/pb12-25.pdf (accessed 16 Jun. 2017).
34 The European Commission has made efforts to increase transparency by making the EU’s negotiating positions and textual proposals publicly available, by providing members of the European Parliament access to the TTIP texts and by setting up an advisory group on TTIP, whose 16 members (including representatives from business and civil society) have access to the negotiating texts.
35 Bermingham, F. (2014), ‘TTIP: Italy and EU Commissioner Lobby for Negotiation Mandate to be Made Public’, International Business Times, 26 August 2014, http://www.ibtimes.co.uk/ttip-italy-eu-commissioner-demand-negotiation-mandate-be-made-public-1462593 (accessed 16 Jun. 2017).
36 See for example calls by the Transatlantic Consumer Dialogue (TACD), which includes US groups such as Public Citizen, Consumer Federation of America or the Federation of State Public Interest Research Groups. Transatlantic Consumer Dialogue (2013), ‘Resolution on Investor-State Dispute Resolution in the Transatlantic Trade and Investment Partnership’, http://test.tacd.org/wp-content/uploads/2014/01/TACD-TTIP-Resolution-on-Investor-State-Dispute-Resolution-in-the-Transatlantic-Trade-and-Investment-Partnership.pdf (accessed 16 Jun. 2017).
37 Zhan, J. X. (2016), ‘Overview of the current international debate on reform of investment dispute settlement’, Geneva: United Nations Conference on Trade and Development, http://investmentpolicyhub.unctad.org/Upload/Documents/UNCTAD%20James%20Zhan%20expert%20meeting%2013%20Dec%202016.pdf (accessed 16 Jun. 2017).