America’s Home-Made Raw Deal for Workers

A few weeks into his transition, U.S. President-elect Donald Trump has moved to fill various White House and Cabinet posts. But he has also found time for many calls to the chief executives of U.S. multinational companies, warning them not to move any production or jobs to Mexico.

Trump tweeted first (Nov. 18) that he “got a call from my friend Bill Ford, Chairman of Ford, who advised me that he will be keeping the Lincoln plant in Kentucky – no Mexico.”

Ford had not actually been planning to move its Lincoln plant to Mexico, but the point was made nonetheless.

The same day, news stories appeared saying that Apple, the largest U.S. company by market capitalization, had asked Foxconn, the Taiwanese company that assembles iPhones in China, to look at moving some of those assembly jobs to the United States.

Then came the announcement that Trump’s incoming Vice President, the outgoing Governor of Indiana, had offered extensive tax breaks to furnace manufacturer Carrier to keep some of its jobs in Indiana instead of moving all of them to Mexico – something the President-elect had vowed during the campaign to stop.

It is a new day in U.S. trade relations with the world. A nation that has long seen trade as a “win-win” – good for American companies, good for Americans, good for the world – is now asking a different question: what’s in it for us?

Happiness reloaded

What happened? It is not as if the U.S. economy has lagged. Since the low point of the Great Recession that in the United States was reached in 2010, the country has created more than 14 million jobs.

That far surpasses the performance of any other advanced economy. Unemployment has now fallen to below 5% and the U.S. economy grew by a healthy 2.9% in the last quarter.

Yet, Americans chose Donald Trump to lead them, a presidential candidate who had called the U.S. economy “a complete disaster.”

Trump has promised to restore American “greatness” through long discredited policies such as trade protectionism and tough restrictions on immigration, which could quickly pull the rug out from under the longest period of sustained job growth in U.S. history.

What went wrong? As I lay out in my new book, the Great Political Tsunami of 2016 was the most predictable storm in decades.

The United States has been through a long period in which technology and global competition decimated the manufacturing jobs that sustained many communities across the country.

During the campaign, Trump denounced “this wave of globalization [that] has wiped out our middle class.” The anger generated in those communities has now found voice in a man who promises, without any plausible way to deliver, that “we can turn it around fast.”

Sources of frustration

In decades past, many U.S. manufacturing jobs paid modestly-educated workers far higher salaries than they could have earned otherwise.

That great post-war “deal” — which owed much to the damage that had been done to most other major economies around the globe (whether through war, central planning or sheer incompetence) — has long been gone.

But the transition to a more competitive global economy was poorly managed, most particularly during the decade of the 2000s when roughly a third of U.S. manufacturing jobs disappeared due to a combination of new technologies, two recessions and growing import competition, especially from China.

And unlike their counterparts in Europe (whose economies have mostly under-performed the United States), U.S. workers have had little or no help from the government.

Owing to a considerably different social contract that prevails in the United States, they were largely left alone with adjusting to the loss of work and the decline in wages.

A clear warning not acted upon

The anger generated by these economic upheavals should not have been surprising to anyone; the writing has been on the cards for a long time.

In the research from my book, I uncovered a long memo written back in 1971 to President Richard Nixon by his then newly appointed director of the White House Council on International Economic Policy, a body set up by Nixon to grapple with the growing challenges of managing U.S. economic relations with the world.

The author was Peter G. Peterson, who would later go on to a lucrative Wall Street career (and, full disclosure, become a generous contributor to many think tanks, including the Council on Foreign Relations where I work).

Peterson warned that the United States had come to the end of an era in which its economic competitiveness was unchallenged.

With the rise of the German and Japanese export machines, and more competitors clearly on the horizon, Peterson told the president that new import competition “poses adjustment policy problems which simply cannot be ignored.”

The failure to help Americans adapt to this new reality — through worker retraining, aid to hard-hit communities, and even restraining import competition temporarily to allow for adjustment — would “leave long periods when the transition is painful beyond endurance.”

All talk, almost no action

Yet, successive U.S. government ignored that warning. They also overlooked the conclusions of the world’s leading economists who argued that, while trade would create far more winners than losers, the losses were real and would need to be addressed.

Consider the issue of retraining workers for new jobs or new careers. The U.S. Trade Adjustment Assistance (TAA) program, which was supposed to help displaced workers, was created at the initiative of President John F. Kennedy in 1962. That is now over a half century ago. As Kennedy said in launching the program:

When considerations of national policy make it desirable to avoid higher tariffs, those injured by the competition should not be required to bear the full brunt of the impact.

But that promise was never delivered. In the first six years of the program, while 25 petitions were filed covering thousands of workers, not a single one was approved by the U.S. government.

Today, while TAA is a somewhat more robust program, the chart below from a recent paper I wrote with Bob Litan shows that U.S. spending on “active labor market” programs designed to help workers move from one career to another is a tiny fraction of what European governments spend.

Indeed, in the 34-member OECD, only Mexico and Chile spend less money as a share of their GDP on retraining than does the United States.

Talking points, delivered forcefully

This is not because there wasn’t sufficient congressional attention given to the issue.

In fact, over the past several decades, whenever a new trade agreement was on the horizon in the U.S. Congress, legislators dutifully promised to “finally” and “at long last” pay real attention to the issue of trade-adjustment measures.

Unfortunately, TAA has too often been window dressing to help attract the votes needed for trade deals, and the track record remained nearly the same as in the Kennedy days: a big talking point, delivered forcefully to assuage wounded souls, followed up by little or no action.

Other big U.S. policy mistakes on globalization

While candidate Trump made it sound as if all the fault for the U.S. difficulty in managing globalization was due to trading partners abroad that were out to cheat the United States, the worst mistakes were made by successive U.S. governments at home, due to their sustained inaction.

This inaction, in part, was due to conservative opposition in the U.S. Congress. Republicans were adamantly opposed to anything that smacked of “industrial policy” or government intervention in the market.

As a result of this ideological stance, the United States never developed a strategy for competing in the global economy.

Agenda items such as (re-)training the workforce, building infrastructure to get products to market and rewriting corporate tax laws to discourage outsourcing, for the most part, remain unattended.

The one important exception has been innovation, where a combination of an entrepreneurial culture, the world’s finest research universities, abundant venture capital and sensible public policy helped to build world-beating companies such as Google and Facebook.

This wasn’t all the Republicans’ fault by any means. The Democrats are plenty culpable themselves for too often putting the struggles of U.S. workers on a back burner.

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These were notably not mistakes to lay at the feet of U.S. trade policy. But the critics of trade from the left and right are not entirely wrong.

The China factor

As Peterson had argued in his 1971 memo to then President Nixon, the United States would have to negotiate harder in its own interests on trade, and insist that other countries not gain artificial advantages through currency manipulation or government subsidy of industries.

The failure to do so was fodder for the Trump campaign, especially in Rust Belt states like Michigan, Pennsylvania and Ohio that swept him to victory.

China has been, of course, the most egregious example of both, and U.S. efforts to counter Chinese trade distortions have been mostly ineffective.

Negotiating with China is hard, to be sure. What is more puzzling is the failure by the Obama administration to take steps that would have strengthened its leverage, and also helped appease some of the critics of trade.

During the congressional debate over the now lifeless Trans-Pacific Partnership (TPP) trade deal last year, for example, the administration firmly rejected an amendment sponsored by Ohio’s Republican Senator Rob Portman, a former U.S. Trade Representative, that would have committed the TPP countries not to manipulate their currencies for competitive advantage.

The administration feared that other countries would walk away from the TPP if the amendment passed; as it stands now, the United States will be the one to walk away from TPP.

The Obama administration’s reflexive nationalism

More recently, the U.S. Treasury has fought back against efforts by the European Commission to crack down on special tax breaks. Those had lured investments by companies such as Apple and Amazon.

Apple’s belated overture to move some iPhone assembly jobs to the United States is a transparently political move after years in which the company played countries off against each other to get the lowest possible tax rate on its earnings.

Tiny Ireland had, for example, enticed Apple to invest and create some 6,000 jobs in Cork, while paying taxes of less than 1% on its foreign income.

The biggest loser here is the U.S. taxpayer, because American companies are able to manipulate the U.S. tax system to park profits offshore and avoid paying Uncle Sam.

While corporate profits as a share of U.S. GDP are up sharply since the 1980s, the corporate tax burden has fallen slightly.

The result is fewer tax dollars available for education, for infrastructure, for basic research and for other initiatives that could help U.S. competitiveness.

Yet instead of addressing the problem, the Obama administration jumped to Apple’s defense. The right path of action would be working with Europe to discourage such tax avoidance, and to create investment rules in which the winners and losers are not determined by which government is offering the biggest handouts.

The path forward

For the past half century, under U.S. leadership, the world has moved in fits and starts towards freer trade. With Trump’s election, and the UK Brexit negotiations on the horizon, that progress has been stopped in its tracks.

The question now is what comes next. If the outcome is a slightly tougher negotiating stance by the United States — an insistence, for example, that China adhere to World Trade Organization rules and pull back on subsidies and other trade-distorting supports for its companies — then the result could be positive.

A stronger U.S. social safety net, as well as investments in infrastructure and worker training to help Americans and to bolster U.S. competitiveness, should be part of the package.

But the Republicans who now control Congress are highly unlikely to favor spending public money on anything that actually helps the voters who elected them.

And nothing in Trump’s record suggests a subtle approach on trade. Instead, he has long seen trade in “zero-sum” terms, in which gains for one country are losses for another.

That portends a bitter series of trade conflicts and perhaps even a genuine trade war in which countries engage in the sort of retaliatory protectionism last seen in the 1930s.

The costs to the United States and to the world — costs brought on by decades of U.S. government neglect — could be enormous.

Editor’s note: This feature draws upon insights from the author’s recent book Failure to Adjust: How Americans Got Left Behind in the Global Economy (Rowman & Littlefield Publishers, October 20, 2016)