The Trade Tightrope

SYNOPSIS: The gains from free trade, like those from all economic progress, are a gain to all of society as a whole, but such progress poses risks for some individuals who can lose their jobs and/or find themselves in lower paying jobs or none at all. If only to prevent the political backlash against such progress, we must have a strong social safety net to cushion the blow for those who are hurt.

You can't blame the Democrats for making the most of the Bush administration's message malfunction on trade and jobs. When the president's top economist suggests, even hypothetically, considering hamburger-flipping a form of manufacturing, it's a golden opportunity to accuse the White House of being out of touch with the concerns of working Americans. ("Will special sauce now be counted as a durable good?" Representative John Dingell asks.) And the accusation sticks, because it's true.

But the Democratic presidential candidates have to walk a tightrope. To exploit the administration's vulnerability, they must offer relief to threatened workers. But they also have to avoid falling into destructive protectionism.

Let me spare you the usual economist's sermon on the virtues of free trade, except to say this: although old fallacies about international trade have been making a comeback lately (yes, Senator Charles Schumer, that means you), it is as true as ever that the U.S. economy would be poorer and less productive if we turned our back on world markets. Furthermore, if the United States were to turn protectionist, other countries would follow. The result would be a less hopeful, more dangerous world.

Yet it's bad economics to pretend that free trade is good for everyone, all the time. "Trade often produces losers as well as winners," declares the best-selling textbook in international economics (by Maurice Obstfeld and yours truly). The accelerated pace of globalization means more losers as well as more winners; workers' fears that they will lose their jobs to Chinese factories and Indian call centers aren't irrational.

Addressing those fears isn't protectionist. On the contrary, it's an essential part of any realistic political strategy in support of world trade. That's why the Nelson Report, a strongly free-trade newsletter on international affairs, recently had kind words for John Kerry. It suggested that he is basically a free trader who understands that "without some kind of political safety valve, Congress may yet be stampeded into protectionism, which benefits no one."

Mr. Kerry's Wednesday speech on trade seemed consistent with that interpretation. He decried the loss of jobs to imports, but was careful not to promise too much. You might say that he proposed speed bumps, rather than outright barriers to outsourcing: rules requiring notice to employees and government agencies before jobs are shifted overseas, steps to close tax loopholes that encourage offshore operations, more aggressive enforcement of existing trade agreements, and a review of those agreements with an eye toward seeking tougher labor and environmental standards.

I don't see anything there that threatens to unravel the world trading system. If anything, the question is whether it provides enough of a "political safety valve."

The answer, I think, is yes but only if those modest measures on the trade front are combined with much bigger changes in domestic policy.

First and foremost, we need more jobs. U.S. employment is at least four million short of where it should be. Imports and outsourcing didn't cause that shortfall, but if the job gap doesn't start closing soon, protectionist pressures will become irresistible.

Beyond that, we need to do much more to help workers who lose their jobs. It didn't help the cause of free trade when Republican leaders in Congress recently allowed extended unemployment benefits to expire, even though employment is lower and long-term unemployment higher than when those benefits were introduced.

And in the longer run, we need universal health insurance. Social justice aside, it would be a lot easier to make the case for free trade and free markets in general if, like every other major advanced country, we had a system in which workers kept their health coverage even when they happened to lose their jobs.

The point is that free trade is politically viable only if it's backed by effective job creation measures and a strong domestic social safety net. And that suggests that free traders should be more worried by the prospect that the policies of the current administration will continue than by the possibility of a Democratic replacement.

Put it this way: there's a reason why the two U.S. presidents who did the most to promote growth in world trade were Franklin Roosevelt and Harry Truman, while the two most protectionist presidents of the last 70 years have been Ronald Reagan and, yes, George W. Bush.

Originally published in The New York Times, 2.27.04