Trade Sequence Part 2 – They Took Our Jobs!

First off, I have to say I’m both pleased and apprehensive I managed to get over 100 comments on my first post without actually saying anything. I hope that it’s a sign of ongoing interest in the topic, and not you guys running out of steam in the first post.

I’ve gotten some interesting comments so far, and just so I don’t put anyone off, I just wanted to explain that my approach is going to be to start with the least sophisticated arguments against free trade, and get more sophisticated as I go. If this post comes off too didactic for your tastes, bear in mind that I intend to get more nuanced as I go.

Here’s my table of contents so far, this will be updated as new parts are planned or released:

1. Introductions and Definitions
2. They took our Jobs! (you are here)
3. The tribulations of the Working Class
4. The Race to the Bottom
5. Getting Strategic

If you have additional topics on the subject you’d like me to address, I’m open to requests. While I’ll happily answer questions, I may put off answering some as I may be addressing them in later posts in the sequence.

So, why shouldn’t a country restrict trade between its citizens and foreign nationals? Shouldn’t a country protect its industries and workers from foreign companies that will create unemployment and weaken the economy?

These questions are based on an old, but flawed model of how trade works. The basis for the mistake, which is near-universal among non-economists, is the idea that the purpose of trade is the acquisition of money. This isn’t surprising, at a personal scale money is synonymous with wealth, so it would be natural for a country to make itself wealthier by accumulating money. Of course, Spain actually tried this when it started colonising South America – they brought tonnes of silver into their country and worked hard to ensure as little of it as possible left Spain. Did Spain become über prosperous as a result of this? Not really, all that happened is that they suffered massive inflation. The thing to remember is that you can’t eat money – the whole point of making money is to spend it on goods.

This is why an anti-import trade policy makes no sense, if you acquire money and don’t spend it, all you’re doing is hoarding pieces of paper. At least Spain could have made statues out of their silver but in modern times a country’s currency can normally only be spent in that country. All that foreign currency is really only good for buying foreign goods. And the same works in reverse too, all the dollars China is accruing through exports are only useful for buying American products, either now or in the future. If they never buy any of your products then all they’ve done is give you free stuff. This doesn’t strike me as something to feel aggrieved about.

But what about jobs?  Well I’m never seen empirical evidence that lowering trade barriers affects long-term employment (for an economist “long-term” is anything beyond 5 years), and the one study I’ve seen that looked at short term effects didn’t find any effects either. And that’s not surprising when you look at the theory behind trade.

At its core, trade is about specialisation. Instead of each country producing everything it consumes, a country can specialise in a smaller number of goods and then swap its surplus production for other goods. This makes sense as it lets countries focus on the things they are best at making, and it allows for the benefits of specialising. The logic here is the same as why you don’t make everything you consume, but instead specialise almost entirely on one thing (your job), sell that production to one or more employers / customers, and then buy what you want from people specialised in making it. By each country specialising in the production of a narrower range of goods, everything is produced more efficiently, and everyone is better off. This is why liberalising trade doesn’t cause unemployment – some industries shrink, but others grow.

Not only that, specialisation means that new industries and jobs will have higher productivity than the ones lost. That means greater profits and wages than before. Productivity gains from trade work just like any other productivity gains. Opposing trade liberalisation is no more in the interests of a country than opposing technological innovation, they affect the economy in very similar ways. Think of trade as a machine that transmutes one kind of good into another. If such a machine existed would you destroy it? Depending on its conversion rate it may or may not be a good idea to use it, but its existence can’t make you worse off.

So why do people continue to believe that free trade harms employment? I think there are several reasons, but the primary one is that free trade does destroy jobs – it just doesn’t destroy net jobs. This goes back to Bastiat’s point about the seen and the unseen. Seeing the jobs go away, is easy, and blaming it on foreigners comes even easier. But noticing the new industries that spring up is much harder since they may be totally unrelated to the jobs that were lost. They may be in a different state and/or industry entirely. It’s actually very easy to miss the upside of freer trade unless you know what you’re looking for. And it doesn’t help that economists can’t tell you where the jobs will be created because if they knew that they’d be far too rich to care about answering your questions.

Additionally, people are naturally loss averse. Losses feel worse than gains of equivalent magnitude (I’ll talk about ways of dealing with this in part 3). People fear that any new jobs won’t be as good as their current one. They may require retaining, they may not be as fulfilling. They may not pay as well, or you may one of the unlucky few people who loses their job without a new one on the horizon.

Just because things work out on average doesn’t mean they’ll work out for you. I’ve heard many people argue that the benefits of freer trade accrue mainly to the rich, leaving workers worse off even as the country in aggregate benefits. This will be the topic of part 3 – who gains and who loses from trade and what can be done about it.