The Economic Policy Institute, a venerable Washington-based think tank, is unhappy that the Obama Administration has decided to resurrect a free trade agreement with South Korea that was negotiated by the Bush Administration back in 2007. That’s no surprise: the EPI is closely linked to what’s left of the union movement, and is (probably correctly) convinced that freer trade does not serve the interests of its constituents. But the EPI’s grounds for discontent does offer a reminder of the differences between the way economists and everybody else think about trade.
The EPI measures the number of jobs that would be lost from increased competition from Korean firms and subtracts the number to be gained through greater access to Korean markets. They get some nasty numbers – a net 159,000 jobs lost, as compared to no change in an estimate by the U.S. International Trade Commission (an establishmentarian, if not exactly anti-labor, source).
This difference hardly comes as a shock. Such calculations are more art than science. And for many years, centrist Democrats and many conservatives have succumbed to the temptation of defending open trade in terms of job creation. Think of NAFTA, and the wild enthusiasm of the Clintonites versus the giant-sucking-sound scenarios of protectionists.
But as economists, we’ve always found this debate a misunderstanding at best, and flat-out sophistry at worst. Almost everybody who bothered to stay awake in Econ 101 knows that, in the medium to long term, the total number of jobs is largely determined by macroeconomic factors – a mix of fiscal and monetary policy leavened by imponderables like savings rates. Trade is worthwhile because it increases total income indirectly by increasing the efficiency of production (classic “static” gains from trade) and, more importantly, by encouraging innovation through greater competition. There can be exceptions; indeed, a zillion PhD candidates have made their bones by dreaming up new ones. But, in the end, it’s a big stretch to make a broad case for messing around with using trade policy as a means of increasing jobs.
What trade undeniably does, though, is to create jobs for some and destroy jobs for others. Take the standard example of competition from the Japanese auto industry, which has surely led to better, cheaper cars. That makes most of us winners. But not the United Auto Workers and their families (or the city of Detroit), who would have been be better off if American trade policy had been used to strangle Toyota, Honda and Nissan in their cribs. The hope – and not a very realistic one – is that the losers will quickly and painlessly find attractive niches in the new order of things.
So what’s our point? Arguments about regulatory policy are almost always cast in terms of efficiency, but nobody except policy wonks really buys them. That’s one reason the White House made a modest effort to pass off the accord as good for American workers, when apparently the real reason was to come to the aid of embattled political allies in Korea – and maybe even to earn a few points with the free market wonks.