THE COST OF FREE TRADE

It’s widely accepted that any economist worth his or her “salt” supports the premise that free trade is one of the driving forces behind the American economy. The societal benefits include lower prices for many imported consumer products; cheaper raw materials and intermediate goods for the manufacturing sector; and the replacement of low skill, labor intensive industries with higher-skilled job sectors.

However, recent media and political attention has been directed to the nation’s declining manufacturing sector with blame given to unrestricted trade policies that promote lower cost, foreign production. The CATO Institute, Center for Trade Policy Studies, counters that the U.S. manufacturing sector is healthier than ever. They cite record levels in 2006 for U.S. manufacturing output, revenues, operating profits, return on equity, and value of exports. Despite the loss of more than 3 million manufacturing jobs during the current decade, the study points to relatively low national unemployment rates. The study concludes “Should we lament the loss of high-paying union jobs when the subsequent output and productivity statistics make clear that those jobs were highly overpaid?”

Perhaps we should. A recent Business Week article “Economists Rethink Free Trade” raises the concern that the gains from free trade are increasingly going to a small group at the top of the wealth spectrum. With the massive job losses in manufacturing, earnings have been stagnant in not only goods producing industries, but also in the service sector. Matthew J. Slaughter, international Dartmouth economist, points out that inflation-adjusted earnings are down in every educational category except for those with doctorate or professional degrees. Are the successes of free trade actually accomplishing the theorized beneficial economic outcomes of replacing low-skilled, declining industry sectors with higher-skilled, better paying jobs? Or are low-skilled, high paying manufacturing jobs being replaced by low-skill, low-paying service sector jobs?

Considering the magnitude of the manufacturing job losses and the stagnation of real earnings, it’s difficult to overlook these variables in any assessment of the benefits of free trade. Although the rate of manufacturing job losses has slowed, employment continues to decline. At what point will the scales tip to the point that the consumption power of the average worker is no longer capable of supporting a thriving service sector? Where will relatively highly paid, low-skilled production workers find employment in the emerging highly skilled job market? With the benefits of free trade in terms of record level operating profits and return on equity accruing to the elite, can the national economy grow with a potentially shrinking middle class wage earner? This may be currently evidenced by the troubles in the housing market. Is the record number of foreclosures mainly a result of mistakes by lenders or a struggling middle class worker or jobseeker?

The reciprocity of the shrinkage of this employment and income base is now showing up in labor market statistics. Michigan which was most significantly impacted by manufacturing job losses has posted a decline in service sector employment for two consecutive years. National statistics show a recent monthly decline in service jobs. Although the decline was marginal, it was still a worrisome indicator. Compounding this problem is the increasing globalization of the service sector. Noted economists point to how high-speed telecommunications make it possible to move more service jobs offshore. Alan S. Blinder, former vice-chairman of the Federal Reserve and member of the Council of Economic Advisors in the Clinton Administration, estimates that eventually up to 40 million service jobs in the U.S. could face competition from workers in India and other low wage nations. Even if this estimate is overstated, the movement to offshore service sector jobs is definitely gaining momentum.

An alternative view is that with a declining manufacturing base, the national economy is merely in a transitional phase similar to moving from an agricultural to industrial base with the result being an overall higher standard of living. It’s certain that our established manufacturing employment base is declining and service jobs are moving offshore in increasing numbers. However, the transition to a super service sector remains a major uncertainty as does the occupational composition and skill sets required for the emerging industries. Furthermore, is it reasonable to assume that we are intellectually situated to have a competitive advantage in a highly skilled service sector and that this sector will be able to provide sufficient employment for all to benefit?