A new study suggests that increased trade with China had more dramatic impact in the U.S. than previously thought. While economists across the board continue to consider unilateral tariffs the wrong approach, U.S. public discourse about the trade conflict between the U.S. and China has turned to more subtle aspects of the pros and cons of globalization. The central question remains: How can people be compensated who lost job and perspective because of free trade? Economists who normally write only for an expert audience turn into permanent guests in the media. Most of them reject an isolationist strategy. Their argument goes like this: if we look at development over time, it was not free trade but automation that has caused the sharp drop of number of U.S. industrial workers. Besides, and despite dramatic warnings from select industries, the problem is far less serious than the political debate suggests: U.S. unemployment at 4.1 percent is much lower than widely accepted – in fact, it is extremely low.
And even if there are job retention problems, tariffs will not relieve them. But there are shades of gray in the debate: Kerwin Charles, Erik Hurst and Mariel Schwartz, all from the University of Chicago, have been part of a recently published research paper making an interesting objection to the debate. Although the authors do not favor isolationists policies, their arguments suggest that a serious consideration of the pros and cons of a liberal trade policy is more complex than it appears at first sight. Competitive pressure from China is indeed a factor – potentially the key factor – in the loss of U.S. manufacturing jobs. But this happens through a mechanism not as simple as mere wage differentials. In their paper Transformation of Manufacturing and the Decline in US Employment, Charles, Hurst and Schwartz show just how dramatic the decline of U.S. industry had been. Since 2010, 5.5 million net jobs were lost. One third of all manufacturing jobs disappeared. Like other research, Charles and his colleagues show that job losses were heavier in industries where Chinese competition had particularly increased. However, the China factor explains only about a third of job losses. A bigger part was played by the increased level of automation. Machines play a far more important role in processes today than they did 20 years ago, and owing to technology, U.S. industry produces far more with less than it did 20 years ago.
At first glance, this argument seems to prove right those who say that the development was not caused by trade but by automation. But Charles, Hurst and Schwartz take their analysis one step further: they show that the degree of automation rose more sharply in those industries that had come under competitive pressure from China.
Therefore, free trade appears to accelerate automation, because it increases competitive pressure. Automation and free trade are perceived by many economists as two different developments that only happen at the same time. But these results of Charles, Hurst and Schwartz suggest a strong connection: wherever lower-cost producers show up, U.S. employers are forced (or, rather, strongly incentivized) to replace humans with machines. Thus, negative consequences of trade would be stronger than expected. Peter Navarro, Director of Trade and Industrial Policy, argues similarly: if technology alone would explain elimination of jobs, there could not be many more manufacturing workers on a per-capita basis in Germany and Japan than there are in the U.S. – but there are.
Other economists have held that protectionism accelerates automation. This is not an either-or conundrum: let’s just agree that technology accelerates automation – because it’s there, because it improves quality and reduces cost and thus creates competitive advantage, and because machines don’t strike and don’t talk back. Contrary to human workers, they also become cheaper to buy with time. A world without work, for many or most?
Economic theory held for a long time that countries always benefit from free trade because the exchange of goods and services allows them to specialize. If everyone produces what he does well, everyone wins. So long as prosperity increases overall, people who lose their job as a result of globalized free trade can get employment elsewhere. Industrial workers simply become IT specialists. This has been the standard model for some decades, but recent research shows that this is precisely what did not happen: many former steel workers in the Midwest, for example, do not get other jobs in emerging industries for which they could be retrained in theory, but they instead remain unemployed.
The Chicago study now shows the dramatic effects this has had. For example, substance abuse rose most sharply in recent years where industrial job losses were heaviest. They prove this by numbers showing prescriptions of painkillers by doctors and by the development of drug deaths. Substance abuse is today the leading cause of death among Americans less than 50 years old. The U.S. experiences the worst drug crisis in history. Addicts typically do not look for employment – and so they drop out of statistics.
When economists talk about pros and cons of trade, they typically do not include the cost of a drug pandemic in their tally. But regardless of accounting estimates, tariffs will not bring lost jobs back. They may improve U.S. steel output manufactured by robots, yes, but this only benefits the shareholders of steel mills – it does not restore jobs for human workers.
Negative cost of trade is difficult to measure. But that also applies to its benefits. Nobody can say exactly what kind of economic utility results from universal access to ownership of cheap iPhones and Galaxies from China - in many ways, gadgets are just gimmicks. Besides, the real and thus far underestimated danger lay in the fallout from progressive escalation of trade conflicts: China and others respond to U.S. steel tariffs with countermeasures, which the White House considers excessive, and in response to that, economic advisors recommend additional punitive measures.
Now, if one shifts focus from China to Schumpeter’s creative destruction by entrepreneurial technology, one can take the Chicago study to its logical consequence for policy purposes: universal basic income (UBI), an idea supported by some household names in technology like Elon Musk, Ray Kurzweil, Sam Altman, but also Mark Zuckerberg and Richard Branson, although the idea dates back to Milton Friedman (negative income tax), Bertrand Russell, Thomas Paine, Sir Thomas Moore and Pericles. I plan to write about its pros and cons one of these days, as the idea gains attention again after two or three millennia of being kicked around by some prominent thinkers.