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Free Trade Does Not Have to Devastate Workers

March 14, 2016
After centuries of emphasizing the benefits of free trade, mainstream economists have started paying more attention to the possible downsides.

The past decade and a half has been tough for a lot of American workers. Real median household income in 2014 was more than $4,000 below the 2000 level. The share of American adults with jobs is well below the 2000 level, too. 

One likely cause of this long malaise has been China's epic rise as a manufacturing exporter. Headline-grabbing new research has found depressed wages and increased job churn among U.S. workers in industries with big increases in imports from China, and lasting ill effects for the hardest-hit local labor markets. After centuries of emphasizing the benefits of free trade, mainstream economists have started paying more attention to the possible downsides.

So have politicians. This isn't the first time that trade has been a big issue in a presidential campaign, but it might be the first time since Herbert Hoover's election in 1928 that the likely Republican nominee has been this vocal an advocate of higher trade barriers. What's more, a Democrat with similar views on trade is still very much in the race.

This trade-bashing is understandable, in light of economic conditions. But it also made me curious. There are other wealthy nations in which median incomes and employment-to-population ratios have held up much better than in the U.S. since 2000, and where by certain measures living standards are now higher than in the U.S. Can any of their success be chalked up to higher trade barriers?

Well, let's see. As a proxy for economic success I'll use the United Nations' Human Development Index, which combines per-capita income (not median income) with health and education indicators to give a more complete picture of how people are doing. These are the top eight countries in the most recent HDI ranking.

Norway, 0.944

Australia, 0.935

Switzerland, 0.930

Denmark, 0.923

The Netherlands, 0.922

Germany, 0.916

Ireland, 0.916

The United States, 0.915

UN Human Development Index leaders (1.000 is the best possible score)

Now, here are those same eight countries as ranked by the International Chamber of Commerce's Open Markets Index, which measures countries on trade policy, trade infrastructure, openness to foreign direct investment and observed trade openness.

Same eight countries, ranked by trade openness

The Netherlands, 5

Ireland, 6

Switzerland, 7

Denmark, 12

Norway, 14

Germany, 19

Australia, 27

The United States, 42

Not a lot of protectionists above the U.S. on that list, are there? In fact, the U.S. is by far the least open to trade of the top 15 countries in the HDI ranking.

The UN's inequality-adjusted Human Development Index  might give an even better picture of how middle- and lower-income people are faring in different countries — but it would also make for way too big a table to publish here, because on it the U.S. is tied with Poland for 27th place. Of the 27 countries that outranked or tied with the U.S. in inequality-adjusted HDI, only three (Japan, Spain and Italy) had lower trade-openness scores. Free trade and widely shared prosperity are clearly not incompatible.

What is it, if not erecting trade barriers, that these other countries are doing differently from the U.S.? One answer comes from Georgetown University finance professor Pietra Rivoli, author of the book “The Travels of a T-Shirt in the Global Economy,” in a New York Times article last week:

“You have much more negative sentiment about trade in the U.S. than you do in pretty much any other wealthy country, and they’ve lost their T-shirt jobs, too,” Rivoli said. “What’s going on there is that in those countries, which are even more exposed to trade than we are, those countries have a bigger safety net.”

Another possibility is that governments in other wealthy countries, while open to trade, are being more strategic than the U.S. about how they pursue it. That is, well-chosen fiscal, education and investment policies have put them in a better position to compete. Small countries, which are well-represented on global well-being and competitiveness lists, seem especially adept at this.

There are a few countries with relatively high trade barriers that do prosper. As already noted, Japan has a lower trade-openness score than the U.S. So does China, which ranks 59th out of 75 countries on the list. Both countries have followed a strategy – as the U.S. long did – of protecting and promoting certain domestic industries to help them succeed in global markets. This approach has worked brilliantly for catching up with the rest of the world. It's not clear that it's the best one for an already wealthy nation looking to continue to prosper and grow.

What is the best strategy for a country in such a position? I don't think anybody really knows the answer, so debate over trade policy among politicians and economists is probably a healthy development after years of consensus. But a major retreat from trade appears unlikely to be a good strategy. The countries that rank lowest in trade openness are, from the bottom of the list, Sudan, Ethiopia, Bangladesh, Pakistan and Algeria. Those don't seem like great role models for the U.S.

By Justin Fox

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