Most leading economists agree that when countries trade, the importing country loses jobs and the exporting country gains jobs.
Support for “free” trade is largely based on two key assumptions — that in the long run the newly created jobs that are gained pay better than the old jobs lost and that the number of jobs gained and lost balances out.
One of these assumptions is wrong and as a direct consequence, U.S. trade policy is at the root of America’s twin problems of unemployment and middle-class wage stagnation.
Increased trade with relatively low wage countries such as China increases the number of high paying jobs in the U.S. The Chinese, for example, do not import from this country stuff they can make more cheaply for themselves. They import stuff they cannot yet make and that stuff tends to be produced by highly compensated people.
These types of goods and services include advanced software and medical equipment. In contrast, the U.S. imports from China stuff we can easily make for ourselves by averagely compensated people that is just a lot cheaper to make in China because of the relatively low wages there.
That is how we lose lower paying jobs and get higher paying jobs when we trade with China.
That sounds great. But it is less than half the story. The assumption that the number of jobs gained and lost balances out is lethally wrong. When the U.S. trades with China at current levels, we lose a massively greater number of jobs than we gain.
Inside the numbers
Assume we increase imports and exports by exactly the same amount — $1 million. If we increase exports by a $1 million worth of goods produced by newly hired workers earning $100,000 per year and we increase imports by a $1 million worth of goods formerly produced by now unemployed $40,000 per year workers, we will have created 10 higher paying jobs and lost 25 lower paying jobs.
Before and after the increase in trade, the total earned by U.S. workers is exactly the same. But in the increased trade situation, that same amount has been concentrated in the paychecks of fewer workers.
As a result, both U.S. unemployment and U.S. income disparity has increased.
It is sometimes said that the U.S. workers that lose their jobs because of trade will find new employment in the higher paying jobs newly created by trade. But even if the newly unemployed have the right skills for the higher paying jobs, which is very doubtful, the number of new jobs is far fewer than the number of jobs lost.
Moreover, increasing an already large pool of unemployed people tends to lower wages in the remaining jobs as competition for those jobs increases.
This is the lose-lose situation that U.S. “free” trade policy has inadvertently created for millions of American workers. None of this is to say that the U.S. should dogmatically be against free trade. But we should not reflexively be in favor of increasing it either. ●
Jerry McLaughlin is founder and CEO at Blow Birthday Cards