The Positive Impact of Trade on U.S. Jobs

The protectionist assault on the longstanding U.S. liberal trade policy has had notable success in recent years. Vilification of the North American Free Trade Agreement (NAFTA), defeat of fast-track legislation, and the failure of the World Trade Organization (WTO) ministerial meeting in Seattle in 1999 testify to the power of the protectionist assault. Even the May 2000 congressional approval of permanent normal trade relations with China was accompanied by a Wall Street Journal/NBC public opinion poll indicating that 48 percent of Americans believed foreign trade is bad for the U.S. economy and only 34 percent believed it was good.

The assault comprises several lines of attack. A vague anticapitalism and antiglobalization ideology is proffered, with particular venom directed at large multinational corporations. Violations of core labor standards and environmental degradation in developing countries are more specific targets. But the most compelling political argument is that trade-liberalizing agreements like the NAFTA and a new WTO round of multilateral negotiations will have widespread adverse impact on U.S. jobs. This charge, however, is not substantiated by recent experience. To the contrary, expanding international trade and investment are providing substantial net benefits to American workers.

There is no question that as trade expands some American jobs are lost to import competition, just as some new jobs are created in export industries. The same is true throughout the market-oriented U.S. economy, as more competitive firms gain market share from less competitive firms and as new technology applications and changing consumer tastes favor some companies and products over others. In this context, the issue of impact on U.S. jobs from trade concerns the relative numbers of jobs gained and lost from trade, the quality of such job gains and losses, and trade-induced changes in levels of worker income. And in all of these areas, international trade creates substantial net benefits.

Few Existing Jobs Lost

Almost all American jobs threatened by or lost from imports are in the manufacturing sector, but today only 14 percent of the U.S. labor force is in manufactures, thanks largely to consistently high gains in labor productivity over the past two decades. Of this 14 percent, only 3 percent is in industries facing substantial import competition. Textiles and apparel account for almost 1 percent, and the other 2 percent is spread among various industries. The remaining 97 percent of U.S. workers, mostly in the service sector, are therefore, with rare exception, net beneficiaries of trade from export-oriented jobs or as consumers.

Consequently, the number of existing jobs actually lost to trade is also very small. Each year approximately 2.5 million American workers, or 2 percent of the labor force, are “displaced” because of plant shutdowns or abolition of particular jobs. Only some 120,000, or 5 percent, of these lost jobs, however, are caused by imports and foreign direct investment, based on the number of workers certified for Trade Adjustment Assistance (TAA) or NAFTA transitional assistance. This amounts to just one-tenth of 1 percent of the labor force actually losing jobs because of trade. Moreover, three-quarters of these certified workers quickly find jobs elsewhere and do not need to avail themselves of the TAA/NAFTA services and allowances. Public- and private-sector programs to assist displaced workers in upgrading their skills and finding new jobs play an important role in a dynamic, growth-oriented economy, but the very large majority of this assistance is unrelated to trade, and the trade-related 5 percent of displaced workers, if anything, receive more generous benefits than the other 95 percent.

Export-Oriented and Transportation Jobs Grow

Export-oriented jobs pay 12 to 15 percent more than the average for all U.S. jobs, largely as a result of higher skill and education requirements. It is difficult to calculate how many new export jobs are created as trade expands, but for a given increase of both exports and imports, more new export jobs tend to be created than existing import-competing jobs are lost. When the overall economy is growing, which is almost all the time, an increase in exports generally produces a direct increase in jobs, whereas a comparable increase in imports often results in a slower growth of industry-wide jobs rather than a loss of existing jobs.

The moderating effect economic growth has on import-related job losses is evident in the thirteen industries that account for over 80 percent of TAA/NAFTA job loss certification. During 1994-1999, a time of steady growth in the U.S. economy, there was actually a net annual gain of 21,000 jobs for all thirteen industries. Six individual industries also showed positive job growth, while textiles and apparel accounted for three-quarters of industry job losses. With respect to relative pay levels, the six industries with positive job growth provided average annual compensation to workers of $51,000, compared with $30,000 in the textiles and apparel sectors.

A liberal trade policy is especially beneficial to labor in segments of the transportation sector because increases of both imports and exports tend to create jobs there. For example, the number of containers passing through U.S. ports in both directions increased by 42 percent between 1993 and 1998, clearly benefiting jobs in the port cargo handling sector. Long-distance truck drivers likewise benefit greatly from NAFTA because trucks account for 83 percent of surface trade between the United States and Mexico. This trade increased by more than 70 percent between 1994 and 1999 and, partly as a result, there is now a growing shortage of experienced truck drivers, which is exerting upward pressure on wages. Despite this win-win job-creating ability of international trade in these two segments of the transportation sector, the longshoremen and teamsters’ unions are outspoken protectionists in the trade policy debate.

All Workers Gain as Consumers

Although the consumer benefits from lower-priced imports can be especially large for lower-income workers because a larger share of their income goes for apparel, footwear, consumer electronics, basic foodstuffs, and other heavily imported products, this basic justification for free trade is often ignored. Prices of many of these products could easily increase by 25 to 50 percent if imports were cut back as protectionists advocate. Similarly, remaining “protections” now double the price of sugar and increase substantially the cost of many other goods to all workers.

The most frequent job-related protectionist argument is that America’s current record trade deficit is caused by liberal trade agreements such as the Uruguay Round and NAFTA, and therefore such agreements should be terminated. This is essentially a bogus argument. The rapid expansion of the trade deficit over the past several years has been caused primarily by a low savings rate in the U.S. economy and by manipulation of exchange rates by some foreign governments to commercial advantage—not by trade-liberalizing agreements. To the contrary, agreements that have progressively reduced trade barriers have tended to expand U.S. exports more than imports because other countries’ trade barriers are higher than U.S. barriers to begin with. This was starkly evident for NAFTA, where Mexican tariffs, on average, were reduced from about 20 percent to zero for U.S. exporters, while average U.S. tariffs were reduced from only 3 percent to zero. Moreover, U.S. competitors in Europe, Japan, and elsewhere continued to pay 20 percent Mexican tariffs, giving U.S. exporters a large preferential advantage in the Mexican market. In any event, as explained earlier, the number of existing jobs lost to imports, even with a growing trade deficit but within the context of high overall growth in the U.S. economy, has been very small.

Judging by these basic points of reference that define how open trade affects U.S. jobs and labor interests, the net assessment is clearly positive and substantially so. The protectionist alliance highlights the personal hardships of individual families where jobs are lost to imports, but this anecdotal approach evades the central issue: the overall impact of trade on U.S. labor. Of course, every family confronted with a job loss, from whatever cause, can encounter hardship, in some cases severe hardship, and support facilities should be and are provided by both the government and the private sector to help them. The case for or against open trade, however, must be based on a full national assessment. Such an assessment, as presented here, demonstrates that (1) only a very small number of American workers are adversely affected by increased imports; (2) many workers benefit from export-oriented jobs or from trade directly, as in the transportation sector; (3) new jobs created from trade are higher-skilled and better-paid jobs than those lost to imports; and (4) all workers reap substantial benefits from trade, as consumers. This is the case for free trade that the protectionists need to address, point by point, but so far they have not done so.