The politics of trade

Bruce Bartlett
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Posted: Feb 21, 2004 12:00 AM

The Bush Administration has now backed away from its forecast that payroll jobs will rise by 2.6 million this year.  Democrats had a field day attacking the administration for the retreat.  Yet on Feb. 19 the Washington Post reported that Democrats are gaining little politically from the weak jobs situation.  One reason may be their hostile attitude toward international trade, which has been one of the principal sources of high-paying jobs in the U.S.

 As Gerard Baker of London's Financial Times observes, Democrats universally condemn President Bush for acting unilaterally in Iraq, alienating our allies, and showing disregard for multilateral institutions like the United Nations.  Yet, often in the same speeches, they will demand that the administration act unilaterally to restrict imports, with no concern for its impact on our trading partners or our obligations to the World Trade Organization.

 This approach to trade policy marks a sharp departure from the Clinton Administration.  Bill Clinton may have had his faults, but on trade he was superlative.  He refused to pander to the squeaky wheels demanding protection from foreign imports, and pushed vigorously to open U.S. and foreign markets to increased trade.

 Clinton, being the consummate politician that he is, understood that trade is a two-way street politically as well as economically.  Employment in U.S. businesses engaged in trade is large and growing, as is employment among foreign-based companies.  In 2001, U.S.-based multinational corporations employed 33.4 million Americans and foreign companies employed another 6.4 million.  To put these numbers in perspective, the entire manufacturing sector only employed 16.4 million Americans in 2001 and 2.2 million of those worked for foreign companies.

 Restricting imports to temporarily save a few jobs would have threatened foreign retaliation and reduced foreign investment in the U.S., which would have cost far more jobs than the few that were saved.  And the job losses would have been in businesses that pay above average wages, which is generally the case for workers in foreign-owned companies.  Thus Clinton made the simple calculation that increased trade and investment was good for him politically and protectionism was not.

 Unfortunately, President Bush made the opposite political calculation, as have Democratic Senators John Kerry (MA) and John Edwards (NC), the leading contenders to replace him in November.  All seem to be engaged in a race to the bottom to see who can pander more to the unemployed by blaming all their woes on foreigners.  They should remember that Clinton was highly successful electorally by making the opposite political calculation.

 Although President Bush talks a good line on the importance of free trade, he never seems to miss an opportunity to subvert it.  Just recently, for example, he nearly torpedoed a free trade agreement with Australia by insisting that protection for the U.S. sugar industry be exempted.  According to the Financial Times, Bush made this decision personally in order to curry favor with Florida sugar producers.

 The result is that U.S. producers of products containing sugar will continue to pay higher prices for it than their competitors in other countries.  This cost disadvantage recently led a number of candy makers to close their U.S. operations and move abroad.  The city of Chicago alone has lost 7,000 jobs in candy manufacturing just since 1995 because of the artificially high cost of sugar.

 Rather than look at the ways U.S. trade restrictions are destroying jobs, however, many people continue to point the finger at outsourcing, which mainly refers to U.S. businesses that contract with foreign companies for information technology services.  A new study by Jacob Kirkegaard of the Institute for International Economics [pdf] should be required reading for them.

 From the amount of press generated by the outsourcing controversy, one would think that millions of jobs are involved.  In fact, according to Kirkegaard, only 70,000 computer-programming jobs have been lost since 1999, compared with the loss of millions in manufacturing.  Moreover, almost all the lost programming jobs were in low-skill positions paying below average wages.  But over this same period, 115,000 new software engineering positions have been created, most paying much more than the jobs that were lost.

 In short, what is going on among IT professionals is not job loss so much as it is job churning.  Some jobs are indeed lost, but new ones immediately replace them.  These new positions, however, often require higher and newer skills than those that were lost.  Workers without such skills must retrain, upgrade and move from where their labor is no longer needed to where it is.

 This is a painful process.  But as Federal Reserve Chairman Alan Greenspan explained in a recent speech, it is essential for growth that labor is redeployed in response to changes in technology, consumer demand and other economic forces.  Anything that interferes with this process, such as trade restrictions, ultimately impoverishes everyone.