Technology & Trade

What Is to be Done on Trade?

in Program

By William Reinsch: 

These are famous words in Russia — the title of one of Lenin’s most prominent manifestos. Having just been in Russia for the first time last week, I was a bit surprised to see them popping up so frequently in conversation — not about Lenin or Communism — but as a preface to every discussion of the problems Russia faces right now. It is also an appropriate phrase for a discussion of the problems the U.S. faces, particularly the problem of trade that I’ve been writing about for the past several weeks.

As we have seen, there is no shortage of complaints about what is wrong — lost jobs, companies moving offshore, growing income inequality, slow growth, declining manufacturing — all of which end up being blamed on trade and trade agreements. While most economists would tell you it’s more complicated than that — that these are the consequences of globalization — even assuming that trade is part of the problem doesn’t get us to an effective solution.   

The anti-trade prescription is essentially a negative policy — let’s not have any more trade agreements, or at least from Donald Trump’s perspective, no more stupid ones.  That is the equivalent of saying let’s leave everything the way it is. “No more trade agreements” doesn’t mean things will get better, only that they might not get worse, or at least won’t get worse as fast. What the trade political debate has lacked so far, aside from proposals from Hillary Clinton, is suggestions for actively making things better — for tackling job loss, offshoring, and income inequality head on.

The problem for the anti-trade folks is that pro-job, pro-growth, and pro-equality policies don’t have much to do with trade agreements. That, however, should not prevent us from talking about them, even though it’s not as much fun as bashing the foreigners. I’ve been talking and lecturing about this problem for more than 25 years, and the short version can be expressed as a competitiveness tripod: taking care of the victims, incentives to stay here, and running faster. Let’s look at these one at a time.

Taking Care of the Victims

The “victims” of the change wrought by globalization fall into two categories — those who have lost, or will likely lose, their jobs because of these changes and future generations of workers who will arrive at the job marketplace unprepared to succeed. The essence of success in the new economy is agility — the ability to learn new skills and move from job to job as demand for those skills changes. Unfortunately, we have many people who lack the necessary skills or education to adapt to change or who live where there are few other opportunities even for those who do have the necessary skills. 

The right answer here is adjustment assistance, which has gotten a bad name over the years because we don’t do it very well. In truth, nobody does, except maybe Denmark, because it’s hard. There are answers here, however. They involve redesigning our programs to provide more resources and better training that is focused on jobs that actually exist now rather than ten years ago, and they involve restoring our people’s confidence in their own ability to adjust and succeed, the latter probably being harder than the former. This will require both Congress and the Executive Branch to take the problem seriously and stop essentially throwing these people away. When the program was most recently reauthorized, Congress budgeted only $450 million, less than half what it had been at the very time it needs to be much bigger. Real progress will also require organized labor spending more time helping its members acquire the skills they need to move into new areas and less time trying to protect jobs that in the long term are doomed. 

Agility is also the guiding principle for the next generation of workers. The days of lifetime employment at a single company are long gone. I’ve just started my tenth and eleventh jobs (both part time), and I expect my children to have twice that many in their lifetimes, many of them part time jobs also held simultaneously. This is what we mean by agility, but whether our education system is preparing our kids for it is an open question.  There are people smarter than I who can answer that, but the point here is that the answer for them lies in education policy, not trade policy.

Staying Here

One of the clear consequences of globalization has been the movement of American manufacturing facilities and jobs off shore. Contrary to the assertions of some of the anti-trade groups, the reason for this is not always cheaper labor, although that is certainly sometimes the case. Frequently it is due to the realization that to penetrate a market effectively, a company needs to have a physical presence there. In some cases, notably China, the government often requires it. This is a pernicious practice, but not one the WTO has been able to stop. 

Offshoring has led to calls by politicians in both parties to punish companies that move. This is the wrong approach. My years representing large companies have persuaded me that it is very hard to bludgeon them into submission — they have too many alternatives, one of which is to leave the U.S. entirely, which would be the worst solution of all. They can, however, be bribed into good behavior.  In other words, carrots work better than sticks, and in this context that means tax incentives. Rather than trying to figure out how to tax more of their overseas income, it is more effective to give them incentives to both stay here and to return here. This is not cheap, but it is enormously important. While moving operations offshore initially means a loss of jobs, over time it leads to the movement of more assets, including research and development capabilities, out of the country, which, over the long term is crippling to our competitiveness.

Running Faster

The third leg of the tripod is reinforcing something we are already good at. Throughout our history, America has demonstrated its ability to invent, create, design, and build innovative products and technologies better and faster than anybody else. Often this has been the work of an enormously imaginative and capable private sector where failure is viewed as a valuable learning experience rather than a personal embarrassment. More often than people like to admit, however, it is also the product of government efforts to allocate resources to support national objectives. As far back as the Lincoln administration, our government mastered the art of using government resources to achieve its policy goals — in that case, over a long period of time, efficient agriculture, more recently wireless communication, aerospace, and the internet, to mention just a few.   

Either way, we are good at innovation, and staying that way is the key to our continuing global leadership. There are only two ways to stay ahead of people when they’re gaining on you – trip them up, or run faster. We have learned over time, except maybe for Donald Trump, that the first is an uncertain and largely ineffective strategy. We do, however, know how to run faster, but there are things government can do to make it easier. Once again, with one exception, those are not trade policy things. 

Encouraging R&D through the tax system, providing more federal support for basic R&D, and expanding the work of agencies like DARPA and NIST are some of the tools available. With respect to trade policy, it does have an important role to play in protecting intellectual property. IP is the crown jewel of our economy. To the extent we lose that, whether it is by theft, surrender, or simple incompetence, we compromise our ability to continue to outcompete everybody else. One of the reasons why TPP is important is the additional rules for IP protection it provides.

These three legs provide a solid foundation for keeping the U.S. strong, healthy, and competitive without having to unravel any trade agreements to get there.
William Reinsch is a Distinguished Fellow with the Stimson Center, where he works principally with the Center’s Trade21 initiative.

Photo credit: Freaktology via Flickr
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