Free Trade: Good or Bad?
There has been a lot of trash talk about U.S. free trade policy this political season. Candidates Bernie Sanders and Donald Trump have led the rallying cries about how trade deals have killed U.S. jobs and upended the economy, which is a great way to incite disgruntled middle class voters, but as always, the facts are a bit murkier. It is important to start this analysis with a brutal truth: some U.S. industries and employees have been hammered by a trifecta of forces over the past three decades: (1) globalization/lowered trade barriers, (2) the technology revolution and (3) a reduction in the power of unions to protect workers’ wages. The effect of these long-term trends has amounted to a loss of jobs in some goods-producing sectors of the economy and wage stagnation for the middle class.
Bureau of Labor Statistics research has found that the total number of manufacturing jobs peaked in 1979, fifteen years before North American Free Trade Agreement (NAFTA) and more than twenty years before China became a member of the World Trade Organization, which opened that market more fully. So to blame a specific trade deal for the erosion of manufacturing sector employment omits the other factors at play and likely overstates the negative impact of trade deals on the labor market.
That’s why PolitiFact called into question a Bernie Sanders ad that refers to 850,000 jobs lost under NAFTA. Sanders cites that number from the Economic Policy Institute, which gets about a quarter of its funding from unions. PolitiFact found other nonpartisan analyses, which concluded that NAFTA’s influence was much less dramatic. A Congressional Research Service report said “it is difficult to tease out the effects of the trade deal by itself… A similar review published by the international Organization for Economic Cooperation and Development reached the same conclusion...Jobs in certain industries, such as cars and electronics, might have suffered, but overall, the job impact was nominal."
Of course that impact wasn’t nominal if it was your job that vanished. Technological advances, globalization and free trade have combined to create losers and winners across the globe. Blue-collar American workers have been among the losers, while highly skilled ones were able to succeed. U.S. consumers have been winners; as they have been able to enjoy lower prices on imports and so too have the hundreds of millions of workers in developing markets, who have been lifted out of poverty.
Economists and politicians may have overstated the benefits of trade deals and minimized the potential pitfalls, but one thing is clear: even the hint of ripping up existing agreements has raised warning flags globally. A report last week from the Economist Intelligence Unit listed a Donald Trump presidency as the sixth biggest risk to the global economy (tied with the rising threat of jihadi terrorism), primarily due to his “exceptionally hostile towards free trade, including notably NAFTA” and his repeated accusations about China being a “currency manipulator”.
Economists are almost universally concerned that a potential trade war would be devastating, because it would decimate U.S. exporters, raise prices for Americans and escalate geopolitical tensions. As proof, they cite the 1930 Smoot-Hawley legislation, which contributed to making the Great Depression even worse.
So what is the solution? Economists Ed Dolan says, “It would be far more reasonable to employ direct forms of aid. Retraining, adjustment assistance to workers or employers, income support, or wage subsidies are some of the possible remedies,” but those would require government spending, something that deficit hawks have fought tooth and nail.
MARKETS: It was just like old times…a dovish Fed sparked a rally in stocks. It was the sixth consecutive winning week, which pushed the Dow and S&P 500 into the black for the year. Crude oil climbed towards $40 for the first time since December.
- DJIA: 17,602 up 2.3% on week, up 1% YTD
- S&P 500: 2049 up 1.4% on week, up 0.3% YTD
- NASDAQ: 4795 up 1% on week, down 4.2% YTD
- Russell 2000: 1101, up 1.3% on week, down 3% YTD
- 10-Year Treasury yield: 1.88% (from 1.98% a week ago)
- Apr Crude: $39.44, up 2.4% on week, 5th consecutive week of gains
- Apr Gold: $1,254.30, down 0.4% on week
- AAA Nat'l avg. for gallon of reg. gas: $1.98 (from $1.92 wk ago, $2.43 a year ago)
THE WEEK AHEAD:
Mon 3/21:
8:30 Chicago Fed Nat’l Activity
10:00 Existing Home Sales
Apple Event: Expected to unveil smaller-screen iPhone and an updated iPad
Tues 3/22:
9:00 FHFA Home Price Index
Weds 3/23:
10:00 New Home Sales
Thursday 3/24:
8:30 Durable Goods Orders
Friday 3/25: Good Friday Stock Markets Closed, Banks Open
8:30 Q4 GDP final, slight upward revision likely from previous 1%
8:30 Corporate Profits