How to Fix Trade

One of the key issues underlying the political currents driving the election this year is free trade. The candidates frequently discuss the topic itself, but trade is also an indirect cause or contributor to the broader sentiments defining each political side. On the right you have supporters of Donald Trump looking warily at the rest of the world, suspicious of those who have gained as they perceive America to have declined. On the left you have supporters of Bernie Sanders, now largely in Hillary Clinton’s fold, looking warily at the rich, again suspicious of individuals who have gained as they perceive others to have declined. The ties of free trade to these issues is clear. The makeup of the American economy has changed drastically with the opening of our markets to the rest of the world, leading countless jobs to be exported abroad and the companies—and the owners of those companies—who exported those jobs to profit greatly. American society has also reaped many benefits from this, but the gains of free trade have always been much harder to pinpoint than the drawbacks.

Unfortunately, the top-line policies from Trump, Clinton, and Sanders aren’t real solutions to the trade problem. As I’ve said before, simply not signing the TPP won’t solve anything. Throwing up huge tariffs on China isn’t a real solution either. Look around your house and find the products you have that are made at least partly in China (not to mention all the other countries). If imports from China become more expensive, you won’t start getting all of those products now with a “Made in America” tag. Instead, most will just become too expensive to afford, and U.S. manufacturing will only be able to pick up some of the slack. The ability for electronics companies to source cheap components from all over the world is the only reason you’re able to read this on a computer and smartphone that don’t cost as much as your car.

Any real solution needs to be targeted at the actual problem: the displacement of workers. When something can be bought more cheaply from another country, the people who were making it in this country are going to be out of a job. The federal government has a program that’s supposed to address this, but it is small. The Trade Adjustment Assistance (TAA) program had 47,335 participants in 2015. Between 2001 and 2015, the Department of Labor estimates that TAA covered 2.1 million workers (and that is almost definitely an overestimate, judging by more specific yearly reports). Meanwhile, over that same time period, the Economic Policy Institute estimates that 3.4 million U.S. jobs were displaced due to trade with China. That’s a big gap to start with, but moreover, the benefits those 2.1 million received are not all life-changing. The benefits are a good start, but they are limited. Displaced workers can get either:

  • Up to $1,250 for job searching and relocation
  • Cash allowances on top of unemployment insurance, which is extended if enrolled in a training program
  • Up to two years of job training in an approved program
  • Two years of wage supplements for half of the salary difference if the worker takes a new job that pays less than the job they lost

All nice things, but all time-limited and subject to restraints. More importantly, the program is unlikely to do much to heal a local economy in the wake of a closed company or factory, since it helps workers find employment but doesn’t directly help create new employment opportunities. There is a side of TAA that is targeted at businesses, but it is even smaller. The budget request for the program’s next fiscal year is $10 million, which is clearly not enough to turn around all the businesses in the U.S. affected by import competition.

So what should we do instead? No plan looks perfect, and no one policy will solve everything. But here are some ideas I want to put out there:

1. Grants, loans, and advice to displaced workers for starting small businesses. Helping small businesses get off the ground is something worth doing in any case, and doubly so for those losing their jobs. This would not only help the workers in the event of a factory closure, but also help keep the local economy going. Maintaining a small businesses is very hard, which is why the vast majority close in under two years, and the support shouldn’t be so excessive as to incentivize bad ideas. There may also have to be some micromanagement so that when a plant closes down, 200 people don’t all try to open up a diner in town. But on the whole, this would allow the market to do its thing. It would give a community a diversity of businesses to rely on, so the whole town doesn’t go under if one closes.

2. Incentives for companies, particularly those benefiting from free trade, to open new operations in areas most affected by outsourcing. As many workers struggle with job losses, plenty of companies are doing very well and are continuing to grow. Naturally this growth tends to disproportionately benefit large cities where these companies are already based, and more rural areas don’t see much of the action. With strong enough financial incentives, companies could be convinced to disperse their operations as they grow, especially now that teleworking is becoming more feasible in a wider range of industries. It could mean either hiring a few people to work remotely from a small town, or actually opening up a new office in a small city struggling with factory closures. This could also be paired with funding for training for the specific job openings.

3. Funding for two- and four-year degrees at public schools, not just up to two years of job training. This would look like the current TAA program for job training, except not as restricted. If a displaced worker can set themselves up on a new career path, particularly one that will let them escape the need of government help in the future, they should be allowed to by all means. College may not be for everyone, but graduates certainly do make more money on average.

4. For workers past a certain age, wage supplements until they retire. If you’re 58 and the factory you’ve worked at your whole life shuts down, you don’t want to have to figure out a whole new career path. Here is where I think wage supplements could be put to use. Then the worker won’t have to push back retirement by a number of years if they can’t save up enough because they got stuck with a lower-paying job.

Of course, figuring out where to find money is harder than thinking of how to spend it. These ideas would certainly come at a cost, and that money would have to come from somewhere. In principle, the funds could be drawn from the winners of free trade:

1. Investment tax on companies proportional to how much of their business is imports, particularly of products whose production they outsourced. The stock market and all that’s linked to it is where much of the gains of outsourcing have ended up. Figuring out a way to redirect some of that wealth to the people who have lost their jobs as a result of production moving overseas may be the most fair thing to do, as Sanders-esque as it may be. Of course, while the idea sounds relatively simple, taxes never are, particularly on investments. Figuring out how much of a company’s business has been moved overseas would certainly be a controversial and difficult process.

2. Tax on corporate profits that go unused for too long. By taxing profits that aren’t being reinvested, this tax could both raise revenue and encourage businesses to invest. Again, this could be proportional to how much a company imports. U.S. corporations are sitting on $1.6 trillion in cash. That’s a big pile of money that could be utilized, but 72% is held overseas, so is untouchable by our current tax system. Still, a small tax on the rest could have a strong effect. Even better would be to make this part of a larger reform of our corporate income tax to incentivize companies to bring more of that money back to the U.S., but that’s another topic.

The devil is always in the details with policy, and there are almost certainly some big devils hiding in the details here. But on the face of it, I think there’s a real chance policies along these lines would have a positive impact.

Heading further into the 21st century, we don’t have the option of propagating trade policies that are either excessively backward-looking or uncaring for average workers. Halting growth in global trade would hobble major market forces that offer real economic benefits, but letting it continue without compensation will only put more people out of work. And that will only fuel the kind of social and political anger this year has laid bare. Lawmakers need to start making laws that will channel the strength of free trade into building up the communities that it can break.


Like any of these ideas? Hate any of them? Have any proposals of your own? Let me know in the comments below or on the Maine Meets World Facebook page.

Phoenix McLaughlin

About Phoenix McLaughlin

Phoenix McLaughlin works at the National Endowment for Democracy helping to foster political development in Asia. Phoenix lives in Washington, D.C. now, but was born and raised in Norway, Maine. In between, he has studied and/or worked in Colorado, Nepal, India, France, Ethiopia, and Augusta. All opinions expressed on this blog are solely his own and do not represent his current or former employers.