The Right Way to Address Trade-Related Dislocations

March 25, 2018

  1. Regulation
5 minutes

By: John Dearie and Robert Litan

President Trump’s surprise announcement on March 1st that the Administration would impose substantial tariffs on foreign-produced steel and aluminum stunned global markets, angered economic allies, and led to the resignation of the President’s top economic advisor.  The decision also marks a stark break in longstanding policy for the United States, which since World War II has championed a global system of freer trade based on comparative advantages between nations and dramatic reductions in tariffs, preferences, and other barriers to trade.

That system of rules-based cross-border commerce has been an unqualified success, setting off an explosion in global trade which fueled an exponential increase in global economic output and the most substantial reduction in global poverty in the history of the world.  Trade liberalization has also been an enormous win for the United States, adding at least $1 trillion to national income each year and creating jobs for millions of Americans.  Against the backdrop of such results, the Administration’s announcement is jarring and alarming.

But in imposing tariffs on steel and aluminum imports, President Trump has responded, however imperfectly, to an important reality that has been ignored for decades by both Republican and Democratic policymakers – namely, that while liberalized global trade has been a tremendous boon to the U.S. economy in aggregate, trade-related gains have not been evenly distributed.  Quite the contrary, as resources, capital, and production are reallocated to reflect the comparative economic advantages of trading partners, painful adjustments can and do occur.  Certain industries and businesses can be disrupted or forced to downsize, employee wages might be reduced by employers in order to remain competitive, and certain jobs might be relocated or even eliminated.

This darker reality of free trade policy has become cause for anxiety and even fear for many Americans, as reflected in public polling on the subject of trade.  Two NBC/ Wall Street Journal polls, the first conducted in December of 1999 and the second in September of 2010, found that the percentage of people who think that free trade agreements “have hurt the United States” increased from 30 percent in 1999 to 53 percent in 2010, while the percentage of those polled who think that FTAs “have helped the United States” fell from 39 percent in 1999 to just 17 percent by 2010.

It should be emphasized that aggregate gains associated with freer trade have been shown to far exceed the associated costs.  Moreover, the U.S. economy is in a constant state of change, impacted by many forces other than trade pressures.  Technological advancement, innovation of various kinds, demographic changes, economic cycles, changing consumer tastes, and governmental policies continuously impact and determine the job security, economic prospects, earnings, and living standards of America workers in much more powerful ways than trade.

Nevertheless, the concerns and anxieties felt by many Americans with regard to global trade are genuine, powerful, and understandable.  Trade can and does impose real and often devastating costs on some American industries, firms, communities, and workers.  Making the case for freer trade, therefore, and strengthening the political consensus for freer trade, requires a specific and effective policy response to this reality.

As a first but significant step toward that goal, we propose combining the antiquated Unemployment Insurance (UI) and Trade Adjustment Assistance (TAA) programs into a new, integrated, and significantly expanded Economic Adjustment Assistance (EAA) program.  The new EAA program would offer American workers who have been displaced for any reason – trade-related or otherwise – a flexible 21st century menu of short-term assistance options.  This idea was proposed in 2007 by Matthew Slaughter of the Tuck School of Business at Dartmouth, Robert Lawrence of Harvard’s Kennedy School of Government, and Grant Aldonis, former Under Secretary of Commerce for International Trade.

UI was created as part of the Social Security Act of 1935 and has not changed fundamentally since then.  UI benefits are intended to reduce the hardship of involuntary unemployment, help maintain the purchasing power of the unemployed, and preserve the local workforce so that workers are available when employers are ready to rehire.  In effect, UI was designed to support an unemployed worker until he or she is rehired by the previous employer or a similar employer. But the challenges that confront unemployed workers today are much more complex, and can include finding a new employer, often in a new field or industry; upgrading or adding to existing skills; learning altogether new skills; and coping with lost earnings and benefits, especially healthcare.

TAA, created as part of the Trade Expansion Act of 1962 and further defined as part of the Trade Act of 1974, was designed to supplement UI by providing assistance to workers displaced specifically by competition from imports.  But, again, rather than facing one-time adjustments to isolated increases in import competition, firms and workers today face continuous adjustment challenges due to an ever-changing competitive landscape driven by technological advancement, competition from overseas, changing consumer tastes, business cycles, and governmental policy.  Moreover, the principal assistance provided through TAA is training within the affected worker’s current field, rather than a broad array of more tailored options responding to the specific challenges confronting a particular displaced worker.

As currently structured and administered, UI and TAA are relics of an economy that no longer exists and, therefore, are insufficient to meet the varied adjustment needs of a 21st century, globally engaged American workforce.  Given the array of forces that affect their jobs, economic prospects, earnings, and living standards, American workers need and deserve a broader and more flexible framework of adjustment assistance comprised of a la carte options designed to provide the optionality necessary to meet the varied needs of displaced workers in a highly innovative, ever-changing U.S. economy.

Some displaced workers need to upgrade or add to skills within their current field.  Others need new skills to leave a shrinking field and jump to an expanding field.  Some need help with relocation expenses in order to take a new job in a different city.  Still others might decide to start their own business and need access to start-up capital.

A modern EAA program could also include other innovative features such as wage-loss insurance to ease the transition for older workers forced to take lower-paying jobs, continued health insurance coverage while workers remain eligible for EAA, and, potentially, allowing workers in transition to access tax-advantaged savings and investment accounts, like IRAs and 401(k)s, without incurring standard penalties.

Twenty-first century economic adjustment assistance that works, meets the specific needs of displaced workers, and provides a credible pathway back to gainful employment in a growing and dynamic economy will address in a positive way the anxiety that millions of Americans experience.  And, just as importantly, modern economic adjustment assistance will help preserve the national consensus for global engagement policies like freer trade that offer the U.S. economy, and American households and workers, such significant economic gains.

Mr. Dearie is founder and president of the Center for American Entrepreneurship.  Mr. Litan is a nonresident senior fellow at the Brookings Institution.

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