The Peninsula

Why Does International Trade Take a Political Beating in the United States

By Phil Eskeland

International trade has become a top-tier political issue during this U.S. election cycle, in part, because many divergent factors, including diminished work opportunities for those without a college education, have come together to create a “perfect storm” for candidates at all levels in both political parties.  Many people in the United States still have not fully recovered from the 2008 financial crisis.  For those who are fortunate enough to have employment, many more have not seen much, if any, improvement in their wages.  Unfortunately, trade agreements have become a scapegoat for many of the domestic economic challenges that still confronts us even though a 2015 study attributes 88 percent of the jobs lost in the U.S. manufacturing sector over the past 35 years to increases in productivity, not trade.  For example, the amount of labor required to make a ton of steel has dramatically declined from 10.1 hours in the early 1980’s to 2 hours in 2006.

Some argue that the Korea-U.S. Free Trade Agreement (KORUS FTA) is flawed because the bilateral merchandise trade deficit has grown since the implementation of the agreement.  Besides ignoring the U.S. trade surplus in service exports to Korea of $9.4 billion, these anti-free trade advocates go further to claim that more than 95,000 U.S. jobs were lost to KORUS by misapplying an exports to jobs multiplier (i.e., the number of jobs created by every $1 billion in exports) to the trade deficit.  KEI’s Senior Director, Troy Stangarone, wrote an effective response to this line of argument, but still many believe trade deficits lead to job losses.

The critics of trade ignore many other pertinent facts related to trade.  In fact, the Korea-U.S. Free Trade Agreement (KORUS FTA) is a good case study.  Total U.S. exports of both goods and services to Korea are up by nearly five percent from 2011.  According to the U.S. Department of Commerce, over 350,000 U.S. jobs in 2015 were dependent upon exports to Korea, an increase of 87,000 jobs since 2009.  This approximates the initial White House projection of the estimate of the number of jobs that would be secured by the KORUS FTA.  In addition, the U.S. International Trade Commission (USITC), which is the quasi-judicial federal agency responsible for enforcing U.S. fair trade laws, has estimated that the KORUS FTA has resulted in a nearly 14 percent or $15.8 billion improvement in the bilateral merchandise trade balance in favor of the United States.  In other words, if the opponents of the KORUS FTA had their way, the U.S. trade deficit in goods with South Korea would have been 36 percent higher in 2015 without the agreement.  Plus, according to KEI’s exclusive analysis, 90 percent of Congressional districts throughout the United States either experienced an increase or saw their exports remain steady to Korea as compared to years prior to the adoption of the KORUS FTA.

The U.S. economic relationship with Korea is also more than just trade – investment plays a key role in measuring the confidence level and depth of the bond between these two great allies.  It is important to remember that the U.S. was once a major foreign aid donor to Korea.  Now, Korea is ranked 14^th in terms of largest source of foreign investment into the United States at facilities all across America.  New Korean investment into the U.S. has also grown 48 percent since 2011, employing 47,000 Americans earning an average annual compensation package of $92,000

Despite all this good news, still many in the U.S. and around the world are skeptical about the benefits of trade.  Why?  Anti-trade sentiment has become more of an ideological rather than an empirical issue.  In the U.S., outside of the major cities located on either coasts, people see communities that have been hurt by the loss of major employers, particularly in the inner core of many cities and towns.  The opponents of trade use one set of facts (rising trade deficits) and heart-wrenching anecdotal stories of displaced workers to buttress their ideological antagonism to globalization.  For example, I travelled to central New York and drove through Utica, seeing one empty factory building after another near the Erie Canal.  However, few outsiders would know after driving through downtown Utica that ground was recently broken to build a $2 billion  semiconductor chip manufacturing plant in nearby Marcy that aims to employ 1,500 workers.  Outside of central New York, there was no national newspaper, television network, or social media coverage of this good news story of a new advanced manufacturing plant.  Yet, when many hear about another major U.S. employer closing or moving production overseas, what comes to mind are all the closed establishments in downtown Utica and other communities around America; not the announcement of a semiconductor plant in Marcy or Hankook Tire constructing a 1.5 million square foot manufacturing facility in Clarksville, Tennessee.  The worst inferences are assumed:  the white-collar “elite” is heartlessly closing one factory after another in the U.S. to enrich themselves at the expense of the average working person.  Imagine this storyline being replicated in hundreds of communities all across the nation.  One only has to look at the dramatic transformation of Detroit, Michigan.  No wonder why U.S. politicians who promise to be tougher on trade have broad appeal in America.

The key, then, is to take the real concerns of those few who are negatively affected by trade and provide them a pathway to a new job or career at a comparable wage that is not in an import-sensitive industry.  For example, how many of those formerly employed at closed factories in Utica will be able to work in “clean rooms” at the AMS chip lab?  There are Trade Adjustment Assistance (TAA) programs to help these individuals, but they are criticized for offering too little help or training for jobs that don’t exist.   There needs to be a major focus on how we educate our youth who are not college-bound and current workers who need an upgrade in their skills to compete for more technology-intensive jobs that exist.  Average monthly job openings in the U.S. manufacturing sector have increased 12 percent over the past year, going from 311,000 unfulfilled positions in 2015 to 353,000 vacant factory posts in 2016.  But if workers do not have the right skill sets to match what the employer needs, these jobs openings might as well not exist.

Instead of beating up on trade as the bogeyman for all that ails the United States, let’s focus on solutions that will help the U.S. economy and workers.  The U.S. must not repeat the mistake of President Herbert Hoover when he signed legislation that increased U.S. tariffs.  He thought he was protecting American jobs, but this policy exasperated the Great Depression of the 1930’s and deepened unemployment in the U.S. by choking off global trade.   Here are some better alternatives:

1. In the absence of comprehensive corporate tax reform, increase the domestic production tax deduction (Section 199) to boost the incentive to retain and augment manufacturing in America.
2. Improve vocational education to give high school students the opportunity to earn an Associates Degree in a technical field and link up with local employers to have an apprenticeship program.
3. Improve Trade Adjustment Assistance to provide real training to displaced workers for jobs that exist with local employers and augment wage insurance in case an individual has little alternative other than to take a job that pays less than their previous employment.

Taken together, these policy changes would provide tangible solutions for those negatively affected by trade and not disrupt the overall benefits of globalization to the U.S. economy that benefit both workers and consumers.

Phil Eskeland is Executive Director for Operations and Policy at the Korea Economic Institute of America. The views expressed here are his own. 

Photo from Bernard Spagg. NZ’s photostream on flickr Creative Commons.