Managing Winners and Losers in Globalizing Economy

Globalization has produced winners and losers, which has soured many Americans and US policymakers on the undisputed benefits of free trade. The problem may not be trade, but the failure of US policy to keep pace with demands in a more competitive global economy.

Globalization has produced winners and losers, which has soured many Americans and US policymakers on the undisputed benefits of free trade. The problem may not be trade, but the failure of US policy to keep pace with demands in a more competitive global economy.

Based on the 2016 election, Americans seemingly soured on international trade. But that may not be an entirely accurate perception.

The election focused on workers dislocated by globalization. Less attention went to the benefits of trade, such as low-cost apparel and year-round fruits and vegetables. Foreign-sourced clothing has enabled American families on average to reduce spending on clothing from 7 percent to 3 percent of total household budgets.

Right or wrong, trade policies produce winners and losers. The losers received the attention in 2016, not inappropriately. US policies to compensate dislocated workers have been inadequate and, at times, non-existent. But that oversight does not override the everyday benefits that freer flowing international trade has brought to a broad swath of Americans.

Innovation Hub, an NPR program airing over the weekend, carried an interview with Edward Alden, author of “Failure to Adjust: How Americans Got Left Behind in the Global Economy.” Alden argues that America at large has benefitted from trade, but at the expense of some Americans who lost their jobs. The impact was predictable, as far back as 1971, but US policymakers have by and large dodged responsibility for finding ways to compensate trade losers, unlike many foreign contemporaries.

That responsibility, Alden says, includes both showing respect for dislocated workers and preparing the next generation to compete in a global economy.

Pete Peterson, an economic adviser to President Nixon, wrote a prescient paper in 1971 citing the upside of international trade and the dangers lurking in the future. He accurately predicted that some American workers would be left behind by globalization and implored for policies to prepare Americans for intensified global competition. You can’t say we weren’t warned.

“A program to build on America’s strengths by enhancing its international competitiveness cannot be indifferent to the fate of those industries, and especially those groups of workers, which are not meeting the demands of a truly competitive world economy,” Peterson wrote. “It is unreasonable to say that a liberal trade policy is in the interest of the entire country and then allow particular industries, workers, and communities to pay the whole price.”

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Today, trade has become a four-letter word. Republicans and Democrats have made protectionist arguments for border taxes, punitive penalties for US corporations moving manufacturing overseas and dumping or renegotiating trade agreements such as the Trans-Pacific Partnership. Nobody cried when President Trump withdrew from the TPP, even as China quietly stepped in to fill the void left by the United States.

That is exactly the point Peterson made in 1971. Much closer to World War II, Peterson could foresee the rise of a new generation of industrial leviathans, starting with Germany and Japan, which the United States helped to resuscitate. It may have been harder back then to project the economic rise of China, let alone Vietnam, India and Brazil.

Alden’s view aligns with Peterson’s. You can’t stop the ineluctable move toward globalization, but you have to adapt. Clinging to the past is like playing poker without ever looking at your cards. It also ignores the fundamentals of why globalization has advanced – trading partners are less likely to engage in war and free trade rewards the economy of advantage, whether it is technological innovation or low wages.

Trade pacts are intended to create rules that sufficiently even out advantages and disadvantages in bilateral or multilateral arrangements, but not necessarily to erase all disadvantages. Those disadvantages can be groups of workers or communities dependent on businesses on the decline.

Automation can amplify the perceived effects of globalization on job losses. Factories may remain in the United States, but employ fewer people because assembly lines are manned by robots. Remaining jobs are for people with different skills, such as running sophisticated machine tools or designing computer programs.

Digital technology has led to greater international integration, generating a flood of information flows that is reaching all corners of the globe. Information has become less proprietary and in many cases the cost of entry into business sectors has been significantly or totally erased, creating new waves of competition, such as outsourced tax preparation in India. There is evidence to suggest that cross-border data flows are becoming the most dominant form of international commerce.

One of the ironic twists of a more competitive global economy is the investment in the United States by foreign-owned companies. Asian and European auto makers manufacture vehicles in the United States, both to sell here and export elsewhere. Taiwanese-based Foxconn announced plans to build what it called a multi-billion-dollar manufacturing facility to produce Apple iPhones. It also has plans for an R&D facility in Michigan for self-driving cars. Chattanooga Tennessee sports two dozen foreign-owned companies that have helped lower the state’s jobless rate to 3.6 percent, a record low.

Traded goods are just a part of international commerce. The movement of capital, supported by financial services, plays a significant role. That’s why large banks are closely watching the details of Great Britain’s exit from the European Union, which could create barriers to service free-flowing capital. Data indicates financial flows have more than doubled since the beginning of the 21st Century.

Alden concludes that opposition to trade deals and globalization is the result of ignoring advice Peterson gave Nixon almost half a century ago. A more competitive world demands American keep its competitive edge, promoting innovation, investing in modern infrastructure, ensuring top-notch education and getting serious about retraining workers who suffer dislocation caused by trade (or by automation).

Today’s disillusionment with trade is linked to growing economic inequality, itself a reflection of a nonchalant attitude toward global competitiveness. People frustrated with their economic lot often blame immigrants. A better focus for their anger might be US policymakers who have failed to do what’s necessary to keep America competitive.