Six Lies on Trade

After 500 days of Donald Trump’s presidency, it is clear that any relationship between his statements and the truth are purely coincidental. He even boasts about his lack of interest in the truth, touting the fact that he had no idea what our trade deficit was with Canada when he confronted Canadian Prime Minister Justin Trudeau over our “$100 billion trade deficit.” (The actual figure is around $20 billion.)

But Donald Trump’s contempt for the truth should not cause the rest of us to become liars also. In fact, it is more important than ever that progressives ground arguments in reality.

This is especially the case with trade, where lying was standard fare long before Donald Trump entered politics. Here are six common lies which deserve major pushback any time they appear.

1. Everyone gains from trade.

This is not even the textbook story. The textbook tells us there are winners and losers. In the standard story, the winners gain more than the losers lose. This means that the winners could compensate the losers so that everyone is better off. In the real world, this compensation never takes place, so the losers just lose.

If this is hard to understand, suppose we arranged for 300,000 highly qualified doctors from other countries to start practicing in the United States. This influx would probably lower our doctors’ pay by around $100,000 a year each to roughly European levels. This would save us close to $100 billion annually ($700 per family) on health care costs. That’s a big gain to the rest of us, but a big loss to US doctors. That’s basically the story of trade, but the competition has been for manufacturing workers.

2. The loss of manufacturing jobs was due to productivity growth, not trade.

This is a classic economist’s sleight of hand. Manufacturing productivity typically increases at the rate of 2-3 percent annually. (It has been much slower in the last dozen years.) This is also roughly the rate of growth of demand, which means that increased demand for goods typically offset the jobs lost to productivity growth.

The data are clear. In the three decades from December 1970 to December 2000, manufacturing employment only fell by 100,000, less than 1 percent. By contrast, we lost more than 3.4 million manufacturing jobs from 2000 to 2007 (before the crash), which was more than 20 percent of total employment.

This was due to the explosion of the trade deficit in these years, which peaked at almost 6 percent of GDP in 2005 and 2006. That would be equal to $1.2 trillion annually in today’s economy. There were benefits from getting cheap imports, but it is incredibly dishonest not to acknowledge the enormous job loss associated with the expansion of the trade deficit in those years.

And of course, over the last 50 years, many more manufacturing jobs were lost to productivity than trade. This is true, but completely irrelevant.

3. It is inevitable that less-educated workers lose jobs to the developing world.

This is a great example where the classism of our elites obstructs clear thinking. It is absolutely true that there are hundreds of millions of people in the developing world who are willing to work in factories at a fraction of the wages that US manufacturing workers receive. This means that opening to trade puts downward pressure on the wages of US manufacturing workers, and less-educated workers more generally, as they either accept large pay cuts or lose their jobs.

The complication is that there are also tens of millions of very smart hard-working people in the developing world who would be happy to work in the United States as doctors, dentists, lawyers or as other highly paid professionals at a fraction of the pay of our professionals. They could train to our standards and learn English where necessary. This would drive down the salary in highly paid professions, and thereby lead to savings to consumers, but we don’t allow it. Trade deals have been about lowering the pay of less-educated workers, while highly paid professionals continue to enjoy protection from international competition.

4. Trade deficits don’t cost jobs.

It is very popular among pundits to claim that trade deficits don’t cost jobs by pointing to our current 3.8 percent unemployment rate, even as the deficit is on a course to exceed $600 billion (3 percent of GDP) this year. While it is true that a trade deficit does not necessarily cost jobs, in a period where we are below full employment, a $100 billion increase in the trade deficit reduces demand and employment in the same way that a $100 billion reduction in investment would reduce demand and employment.

The large trade deficit in the last decade was certainly a big factor in the weak labor market recovery from the 2001 recession. We eventually filled the demand gap from the trade deficit with the demand generated by the housing bubble. This is hardly a good model for the future.

5. It is important that other countries respect “our” intellectual property.

This is a line that has come up repeatedly in Trump’s trade war with China. We have been told that we have an interest in making China pay for the intellectual property of US corporations that it allegedly steals.

Okay, it is clear that Pfizer has an interest in having its drug patents respected by China, as does Microsoft with its software copyrights and patents. But what about the vast majority of us who don’t own lots of stock in these or other companies that have intellectual property claims at risk?

The standard trade theory tells us that if China and other countries have to pay less money to Pfizer and Microsoft due to patent and copyright monopolies, they have more money to spend on other items we produce. In other words, the money they pay to these companies increases the trade deficit in other areas.

We do have to support innovation, but that is a separate issue. There are far more efficient mechanisms than patent and copyright monopolies for financing innovation in the 21st century.

6. The developing world needed to kill US manufacturing to allow people to escape poverty.

Hundreds of millions of people in the developing world have seen huge improvements in living standards over the last three decades, especially in China. These people went from living near or below poverty levels to enjoying middle-class living standards.

This is indeed a great story, but it is not true that this rise in living standards had to come at the expense of manufacturing workers in the United States and other wealthy countries. In the 1990s, the countries of East Asia (the big success stories) had even more rapid growth than they did in the last decade. This was a period in which they were running large trade deficits, with the important exception of China, which had nearly balanced trade.

In principle, there is no reason these countries could not have continued on a path where domestic demand fueled growth and was funded by foreign investment flows. However, the East Asian financial crisis hit in 1997. The United States led the bailout organized by the International Monetary Fund (IMF) and essentially required that these countries run large trade surpluses as a condition of getting aid.

The shift from running trade deficits to running trade surpluses was a requirement of the IMF, not a law of economic development. If these countries were allowed to continue to be importers of foreign investment (the standard textbook model), and sustained the 1990s growth path, they would be far richer today. In fact, countries like South Korea and Malaysia would now be richer than the United States on a per person basis.

In short, it is simply not true that the pain to factory workers, who lost their jobs in the United States, was somehow a necessary condition for hundreds of millions of people in the developing world to escape poverty. Other paths would have allowed for even more rapid growth in these countries.

Getting to a Reality-Based Trade Policy

It seems likely that Trump’s trade war will go down in flames when Trump eventually loses interest and goes back to the hunt for President Obama’s Kenyan birth certificate. His reckless actions deserve all the ridicule and contempt they have received.

However, we should not go back to a trade policy that was based on lies. We need a trade policy that is about raising the living standards of working people in the United States and the developing world, not just giving all the money to the rich.