TCS Daily

How to Help Those Harmed by Trade

By Robert Krol - May 23, 2007 12:00 AM

The dramatic expansion of trade over the last quarter of a century has raised America's standard of living. This doesn't mean everyone is better off, however. In the short run, some American workers have lost jobs. Media pundits like Lou Dobbs often play up the job losses and ignore the many benefits of trade. This kind of populist coverage can turn public opinion against freer trade.

Congress must soon decide whether it will renew the President's Trade Promotion Authority which gives the President the ability to negotiate reductions in trade barriers. However, the Democratic-controlled Congress is likely to be pressured by unions and other groups that oppose freer trade to withhold the authority. Succumbing to these pressures would be costly to this country. With the right program in place, it would also be unnecessary.

Expanding the existing wage insurance program can offset some of the costs to displaced workers. An expanded and less bureaucratic wage insurance program would offer displaced workers help, yet avoid the negative employment effects of traditional programs aimed at the unemployed. This approach would allow the majority of Americans to benefit from expanded trade and effectively help those who are harmed.

The Scope of the Benefits of Trade

Under the U.S. Constitution, Congress has the power to regulate trade. In 1934, faced with the disastrous economic consequences of protectionist policies during the Great Depression, Congress transferred the power to negotiate trade policy to the President. The President would negotiate trade deals and Congress would give the proposed agreement a simple up or down vote. By prohibiting Congressional power to modify an agreement, this transfer of power gave executive branch negotiators flexibility and credibility with representatives of other countries. Foreign negotiators could make concessions without fearing further demands would be placed on them when the agreement reached Congress.

The resulting liberalization of trade has made a tremendous contribution to America's economic well being. Researchers at the Institute for International Economics in Washington D.C. estimate that since World War II, free trade gets credit for raising the average household income in the U.S. by $10,000. The U.S. Office of the Trade Representative estimates that about $2,000 of the income gain can be attributed to the North American Free Trade Agreement and multilateral tariff reductions during the early 1990s. The Institute estimates that the elimination of all remaining trade barriers would raise household income in the United States by another $5,000.

International trade raises a country's standard of living in a number of ways. Consumers and businesses can buy products and services at lower prices. This is a boost in real income, especially important to middle and lower income families. Not only are the items we buy cheaper, there is far greater variety. U.S. businesses can choose between the best domestic and foreign produced machinery for their factories. Competition from imports forces domestic firms to clean up their act and improve efficiency in order to turn a profit. Finally, new ideas are imbedded in the items we buy from the rest of the world. This can help accelerate productivity growth at home.

How to Help Those Harmed

Although the overall economic gains from trading with the world are large, not everyone is made better off. Skills-based technological change has generally improved job opportunities and wages in the U.S. (the U.S. economy has generated 1.5 million jobs a year since the early 1990s, net of job loss), but trade has depressed wages and reduced job opportunities for some less-skilled workers. Given the substantial benefits of trade over time, it makes sense to continue to expand trade and to offset the negative consequences with policies aimed at helping displaced workers. Not all strategies are equally good. A challenge for Congress, as it renews the Trade Promotion Authority, is to pick effective policies that help those adversely affected by trade.

Experience tells us that the government may be able to help in job placement, but government job training efforts have not been particularly successful. Extended unemployment compensation eases the short-term economic damage of a lost job, but has the negative effect of discouraging people from looking for jobs, keeping them out of the labor force way too long. The more effective strategy would be to expand the federal wage insurance program that was part of the 2002 Trade Act.

Wage insurance provides older displaced workers who accept a lower paying job a government payment equal to one-half the difference between the old wage and the new wage. The program lasts for up to two years and has a $10,000 cap on total payments.

Wage insurance has an advantage over other policies designed to aid displaced workers. First, unlike unemployment insurance, it creates an incentive to get back into the workforce promptly. The longer a worker remains unemployed, the harder it is to find a job. A worker may start at a lower wage but, with experience, wages increase over time. Second, the on-the-job training workers receive by getting back into the labor market is far more effective in creating marketable skills than government-run job training programs.

The United States is a major exporter and importer of manufactured goods. The President's Trade Promotion Authority has played a key role in expanding trade. Congress should renew the Trade Promotion Authority and expand the wage insurance program to offset the costs to those displaced workers faced with less attractive job prospects.

Robert Krol is a professor of economics at California State University, Northridge


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