Needed — a new trade policy

Yesterday, there were a number of trade activities and articles. Lou Dobbs (and others) testified on Capitol Hill at the House Foreign Affairs Committee on Trade, Foreign Policy and the American Worker (something I had an indirect role in bringing about – but that is another story). The Wall Street Journal ran a front page story on how Alan Blinder (and others) are re-evaluating the free trade policy (Pain From Free Trade Spurs Second Thoughts). And Steven Pearlstein’s column in the Washington Post (An Opportunity On Trade) outlined a potential Grand Bargain of joining a more effective worker retraining and adjustment policy with continued open markets.
Pearlstein is right when he starts by saying “We’re at a crucial moment in U.S. trade policy.” But neither his Grand Bargain nor the House hearings get at the core of situation.
Economic competition and trade is shifting from industries to tasks (as the organization of work continues to evolve). That is the point Alan Blinder and other raise (see Blinder’s paper in Foreign Affairs- Offshoring: The Next Industrial Revolution?, the Grossman/Rossi-Hansberg paper at last summer’s Fed Jackson Hole symposiumThe Rise of Offshoring: It’s Not Wine for Cloth Anymore, and Baldwin – Globalisation: the great unbundling(s).
As that shift continues, a trade policy that tries to shift workers from one industry to another is bound to fail unless it deals with the fundamental competition between workers on the task level. And that competition is due to that fact that, as Pearlstein states, “even the best-paid workers in many of the best-behaved countries earn a fraction of the wages of American workers.” Yet our entire trade policy is based on moving resources and workers from rising industries and out of declining industries (as evidenced by market winners and losers).
My frustration with the system is unless we deal with the task competition, all the retraining in the world won’t help — because our re-adjustment policy thinks it is shifting workers to new industries (supposedly where there is competitive advantage here so the jobs remain here) while it is actually re-training people into tasks were there may or may not be a US competitive. We will end up repeating the experience of the late 1990’s of re-training folks for jobs in the computer industry exactly at the time when those tasks were beginning to come under intense wage competition.
As a result, taxing the winners to pay the losers (the standard solution to the downside of globalization) becomes an ever deepening hole – as there are no industries to shift the losers into, only tasks that continue to be subject to continued wage competition or are in non-traded sectors. And there in lies the second problem. As task competition increases, are the only jobs left for Americans only in non-traded sectors? If so, how do we then earn the income need to pay for our imports?
As Paul Craig Roberts has pointed out in Manufacturing & Technology News :

All advocates of offshored production for U.S. markets fail to explain how the United States can balance its trade and current account deficits when its work force is being redirected into domestic nontradable services. The United States has made it thus far, because the U.S. dollar inherited the reserve currency role after WW II. Although less inclined than previously, foreigners are still willing to accept U.S. dollars for real goods and services. This willingness is threatened by large and persistent U.S. trade and budget deficits.
(Tuesday, March 13, 2007 Volume 14, No. 5 – subscription required)

Obviously, I don’t have an answer for how we get out of this box. My real problem is that we don’t even seem to acknowledge that we are in the box. Labor and environmental standards (while I support) don’t touch the issue. Neither does “new industries” – if most of those new industries consist mostly of tasks which are subject to global wage competition.
My hope is that the Grand Bargain isn’t a splitting of hairs — but a chance to re-evaluation our situation. I know the chances of that happening are slim – but I remain an optimist.


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