A Progressive Free Trade

sanders

Senator Bernie Sanders has a free-trade problem or, more accurately, a problem with free trade. Throughout his campaign for the Democratic Party’s nomination, Sen. Sanders’ platform often criticizes United States trade policy over the last 20 years, which he argues has exacerbated income inequality at home by allowing multi-national corporations to ship millions of good-paying jobs abroad. For example, over the last year, Sanders has repeatedly slammed the Trans-Pacific Partnership (TPP), a proposed free trade agreement between the United States and 11 other countries (TPP is admittedly much more than just an agreement about tariffs). Sanders promises that, if president, he would work to reverse other free trade agreements that the United States has signed such as NAFTA.

 

In addition to voicing his own opposition to free trade agreements, Sanders uses opposition to free trade agreements as a litmus test for progressivism. In their widely followed back and forth over Twitter, Sanders used Hillary Clinton’s support for NAFTA and the decision to grant China “Most Favored Nation Status,” which permanently lowered tariffs on American imports from China, to claim that she was not a progressive.  This exchange raises broader questions about the role free trade should play in progressive economic policy.  Can a politician claim to fight for higher wages and against rising income inequality while supporting free trade?

 

At the end of the day, the arguments that Sanders makes against free trade are claims that can be assessed with data. While economists as a group tend to instinctively support free trade in the abstract, several recent papers by prominent economists support Sanders’ arguments. For example, a 2013 paper by David Autor, David Dorn and Gordon Hansen found that all else equal, American industries that were more exposed to competition from Chinese imports experienced large declines in employment and wages, exactly the point that Sanders has made. In follow-up work that David Dorn presented at the 4th Annual Conference of the Julis-Rabinowitz Center for Public Policy and Finance at Princeton University last February, Dorn and his co-authors found that from 1999 to 2011, import competition from China caused a net loss of over 2 million jobs in the United States.

 

Beyond just this group of scholars, economists in general have more begun making more of an effort to carefully study how globalization has hurt working class Americans.  A survey paper in the Journal of Economic Perspectives argues that the widely documented stagnation in real income experienced by many Americans can be partly traced to globalization and trade. Given this wealth of new research from economists, it is tempting to conclude that Sanders is correct. Free trade and globalization have, it seems, hurt millions of Americans. It would appear that progressives ought to turn their backs on the principles of free trade.

 

This interpretation is flawed. While economists have long extolled the virtues of free trade by claiming that it drastically improves economic well-being, simple economic theory does not argue that free trade is without losers. The traditional argument in favor of trade rests on the ideas of comparative advantage and specialization: by allowing nations to specialize in producing what they are relatively good at, trade is a positive sum game. Nations engaged in trade are able to produce more and consume more at lower costs, generating widespread gains.

 

If you have taken a class in introductory economics, you have probably heard examples like the following from Dani Rodrik’s book Economics Rules. Suppose it takes 80 workers to produce some amount of wine and 90 workers to produce some amount of cloth in the United States. In England, suppose it takes 120 and 100 workers respectively. Because the United States can produce wine at a lower opportunity cost than England, the United States should produce wine and import cloth from England. In doing so, the United States can receive more cloth by trading with England than it would have if it tried to produce cloth domestically.

 

However, the obvious next question is: What happens to the cloth workers in the United States if Americans start buying all their cloth from England? Unfortunately, many will lose their jobs and be forced to find work in another industry. If these workers can find other jobs, then cheap cloth imports will result in the US economy allocating labor to other, more productive industries.  If the former cloth workers are unable to retool their skills and stay unemployed, then unemployment may increase. The key lesson to take away is that free trade creates widespread gains, but it can also create concentrated losses. This is exactly what we have observed over the last decade. Trade with China and other developing nations allows the United States to import a wide array of goods and consume them at a much lower cost, thereby boosting real incomes. At the same time, workers that produce these goods domestically lose out as factories are shipped abroad and wages stagnate.

 

Even though many Americans have lost their jobs to overseas competition, we must not turn our backs on free trade and globalization. As basic economic theory highlights, free trade creates winners and losers. It is our responsibility to ensure that policies are in place that will redistribute the widespread gains from free trade to those that lost their jobs. In this sense, the new evidence from economists on the costs of free trade is an argument in favor of progressive policies that strengthen the social safety net. For example, more generous unemployment insurance and wage insurance would dampen the real harms that globalization and free trade inflict on working class Americans while still reaping the many benefits they bring.  Sen. Sanders is correct to draw our attention to those that have been left behind by international competition. But traditional progressive economic policy that aims to strengthen the social safety net, not protectionist rhetoric, is the correct response.

 

 

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