Free Trade, Jobs, and Choosing

Reading the comments to Kash’s last post, and reading articles like this one in the Houston Chronicle, it’s clear that concern over lost jobs is the major reason for most anti-trade sentiment. However, free trade opponents need to understand that protecting jobs by restricting trade also costs jobs. The recent steel tariffs, under which we saved jobs in Pennsylvania and lost jobs in the auto industry in Michigan, highlight this point:

“The duties have cost steel users, such as Troy-based Delphi Corp., the world’s biggest auto parts maker, and Caterpillar, the largest earth-moving equipment maker, about $680 million, the Washington-based International Trade Commission said in September.”

“… If you keep those tariffs in place until 2005,” said Lopes, “perhaps (the steel industry) is in a better economic situation than before, but now your customers, if they’re small and medium size business, have shut down, and your bigger customers … have been forced to shift production overseas.”

“The tariffs have been especially destructive to small auto suppliers that use specialty steels only available from foreign steel makers, said Neil de Koker, who heads the Original Equipment Suppliers Association in Troy.”

“They can’t pass that price increase onto their customers because they refuse to accept it,” said de Koker. ‘If they can’t pass it on, they’re dead.”

In the face of either losing jobs in Michigan or losing jobs in Pennsylvania, how do we choose?(*) With steel tariffs, we save jobs in Pennsylvania at the expense of jobs in Michigan; along the way, all Americans get to pay more for anything made out of steel or made using machinery that’s made out of steel (in other words, just about everything). If we instead choose free trade, then we preserve jobs in Michigan at the expense of jobs in Pennsylvania. However, in the process, all American get to pay less for things made out of steel and things made using equipment made out of steel.

Viewed in this light, the choice is obvious: free trade, which creates wealth, is better than restricting free trade, which destroys wealth. (Note that by “wealth”, I mean national wealth, as in GDP, not wealth as in more money for rich people.) Jobs are going to be lost either way, but with free trade, a portion of the benefits can be allocated to job retraining, adult education, and unemployment insurance to help soften the losses in the affected industry. With restricted trade, there is less wealth to go around so there is less money, not more, available to spend on easing the burden of unemployed workers.

Finally, how are the benefits of free trade distributed? With the sole exception of workers in industries that lose jobs (and remember that jobs will be lost either way), the benefits go to people who sell, make, or buy stuff–meaning just about everyone. And, unlike most things in life, the benefits of free trade accrue in a progressive fashion. Free trade lowers the price of food, clothing, consumer electronics, and cars. Poor and middle class families spend the large majority of their income on just these goods; as family income rises, a smaller portion is spent on these goods. For example, one study estimates the savings due to expanded free trade under the proposed Free Trade Area of the Americas (FTAA) at $814 for a family of four. That estimate is from FTAA advocates and may be high but whatever the true number is, the savings are about the same regardless of where a family lies in the income distribution. In percentage terms, this makes the benefits very progressive. For a family near the poverty line (about $16,000), saving $814 is a 5% reduction in the cost of living. For a family making $100,000, the same benefit amounts to a $.08% savings. (**)

It has always struck me as odd that people who oppose free trade are generally in favor of progressive policies. On the other hand, this gives me a new theory of why the Bush administration has been surprisingly anti-trade.


(*) With the current administration, the choice is easy: which state is closer to voting for Bush in 2004? Pennsylvania! Oh, then go with steel tariffs and screw the auto industry workers. That’s opportunism, not policy.

(**) The benefits are spread fairly evenly across the population even though the wealthy spend more on food, clothes, and cars than the poor, because as you move up the luxury scale a smaller amount of the total price of the good is attributable to the costs of inputs. A Corvette and an entry model Saturn use about the same amount of steel, so each car would be a few hundred dollars cheaper without steel tariffs. In percentage terms, this is a noticeable benefit to Saturn buyers and a trivial benefit to Corvette purchasers. The same is true for high-end clothing and expensive meals.