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Adjusting to Free Trade

Thursday, November 1, 2007

Congress can help American workers without sliding toward protectionism, writes DIANA FURCHTGOTT-ROTH.

Globalization_Free Trade_Worker ProtectionPresident George Bush recently concluded his weekly radio address by saying, “Expanding trade will help our economy grow.” On October 27th, Democratic presidential contender Edwards strongly disputed this. “Presidents from both parties have entered into trade agreements like NAFTA and the WTO promising that they would create new jobs,” Edwards said. “Instead, in recent years we’ve lost millions of manufacturing jobs, seen wages stagnate, and run up larger and larger trade deficits.” Yesterday Congress passed a bill to reauthorize and substantially expand assistance to trade-affected workers, without due evaluation of the costs and benefits. The Senate is drafting equivalent legislation. Meanwhile, Republicans and Democrats are at loggerheads over bilateral trade deals with Colombia, Peru, Panama, and South Korea, all of which now await Congressional approval.

These debates boil down to a simple but increasingly controversial question: Do free trade agreements help our economy grow, or do they result in job losses?

Whereas trade increases economic growth and employment, it causes job losses for a relatively small percentage of America’s 153 million workers. That’s why the Labor Department oversees a multitude of plans to help workers negatively affected by trade. Free trade creates U.S. jobs not just by boosting foreign investment, but also by increasing employment at American exporting firms. This latter effect, though less obvious, is far more significant. 

Economists Andrew Bernard, Bradford Jensen, and Peter Schott have concluded that approximately 57 million American workers—more than 40 percent of the U.S. workforce—are employed by firms that engage in international trade. Bernard analyzes American imports and exports using customs documents that accompany shipments of goods crossing the border, along with reports of firms’ employment. The resulting information provides the most precise picture available of the employment effects of American trade. Imposing barriers to international commerce in the name of “fair trade” would not increase jobs in America—quite the opposite. Other countries would retaliate against us. As a result, our export markets would shrink and more Americans would lose jobs.

Trade also benefits millions of families who cut their shopping bills by buying low-cost imports. To take just one example: the amount that Americans spend on clothing has declined by 17 percent in real terms over the past 20 years, yet our closets are fuller than ever.

Imposing barriers to international commerce in the name of 'fair trade' would not increase jobs in America—quite the opposite. Our export markets would shrink and more Americans would lose jobs.

The benefits of free trade are often taken for granted. But even though our unemployment rate is low by historical standards (around 4.7 percent), the negative effects of free trade—such as the occasional instances of shuttered plants and lost jobs where American firms are not as efficient as international competitors—are all too visible, and they provide ammunition for the likes of Edwards and other trade skeptics. We have enough jobs for Americans; our challenge is to facilitate the movement of workers from some sectors to others. One way to address the concerns of the protectionist crowd is to modernize our workforce-training programs and make them as efficient as possible. We have over a dozen such programs, but Congress could streamline them and prevent redundancy without a budget increase.

About 97 percent of wage and salary workers now have unemployment insurance, a federal-state program funded by employer payments that rise accordingly with the number of firm layoffs. The program gives unemployed workers, who numbered about 7.3 million in 2006, benefits for up to six months. Qualifications and benefit levels are set by individual states.

Workers adversely affected by free trade have access to a two-year program called Trade Adjustment Assistance (TAA), which is projected to help 71,000 workers in FY 2007, at a cost of $12,000 per participant. In 2006, 72 percent of TAA workers left the program for a new job within three months; 90 percent of those were still employed six months later.

If workers are above the age of 50, they also qualify for Alternative Trade Adjustment Assistance (ATAA). Under ATAA, workers who take a new job paying less than their previous position receive “wage insurance”—compensation of up to $5,000 annually for two years—to offset the decline in their salaries. About 3,200 workers signed up for ATAA benefits in 2006.

One reason that more people are not participating in these programs might be that they are finding jobs on their own in growing industries, such as education and health services. Another reason could be administrative difficulties. For that matter, it would be worthwhile to streamline the TAA application process before expanding it. 

Measures to improve TAA could reduce unemployment. Workers affected by trade are all different, and it would be beneficial to have counseling for TAA recipients at the local government job-service offices to develop individualized plans. TAA recipients could also be required to register at job centers and check computerized listings for suitable jobs. Staff could then monitor recipients’ job searches to ensure that they are effectively looking for work. In cases where training is likely to have a high payoff, the job centers could provide funds to cover direct training costs and stipends to provide income support. Meanwhile, the Labor Department could help defray commuting costs and perhaps pay a portion of relocation expenses (assuming a worker stays employed in an area for at least six months).

Before expanding government programs, it’s always essential to make sure they are effective. We should use high-quality measures to hold TAA accountable for guaranteeing its funds go to workers who are actively searching for new jobs or obtaining training likely to increase their subsequent earnings. We also need to redirect training funds to include more community colleges, which offer sound education and train the majority of America’s nurses and emergency personnel. This year, some 45 percent of the nation’s college freshmen are enrolled in community colleges. Studies have shown that when unemployed workers take technical courses at community colleges, their future earnings increase.

In addition to workforce training, America needs to take a fundamental look at its education system. We need to reduce our high-school dropout rates—by incorporating vocational training, if necessary—and encourage young people to get as much education as possible. This prepares them for a succession of careers, rather than just one, and enables them to change jobs more easily.

Such changes, many of which have repeatedly been proposed by President Bush and rejected by Congress, would mitigate the negative impacts of free trade on the small pool of affected workers. Addressing these workers’ problems would be far better for the economy, and for most other American workers, than sliding toward protectionism. 

Diana Furchtgott-Roth is a senior fellow at the Hudson Institute and former chief economist at the U.S. Department of Labor.

Image by Shutterstock

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