Delivered March 12, 2008
There are major differences among the presidential candidates on
issues like tax levels, the role of government, Social
Security, health care, and trade, and I would be happy to talk
about any of them. I'm going to start, however, by talking about
the candidates' views on trade. It's my main area of specialization
in my current job. It also has the advantage of being what I was
asked to talk about by the sponsors of this lecture.
I want to start with some ideas about how one should approach
any of the policy pronouncements or campaign promises by
presidential candidates. I would propose a four-step process:
First, ask yourself: Has the candidate stated a
problem that is real? It is an interesting-some would say
sad-feature of this wonderful society in which we live that those
vying for political power may be tempted to exaggerate problems in
order to justify the campaign promises or platforms on which they
would like to be elected. We need to ask ourselves during election
season if we agree that the situation being described by a
candidate is real and if it's a problem. Is the description of it
accurate and based on sound data?
Second, if the answer to those questions is yes, then
has the candidate proposed a goal that is consistent with the
problem? If job loss in certain communities in Ohio is the problem,
is renegotiating NAFTA a reasonable and appropriate
Third, is the proposed solution achievable? Is it
something that can happen politically in the real world?
Finally, and very importantly, will the proposed
solution affect other areas as well, perhaps creating unintended
negative consequences along with the promised benefit? This is
always a significant problem in connection with economic
issues. Our economy is a web of interconnections, and changes
in one area often have effects in others. More broadly, government
solutions generally imply tax increases or new regulations, both of
which can sap the vitality from an economy.
Take an issue like climate change. We know we can reduce the
emission of greenhouse gases by reducing the level of economic
activity, and most of the proposals that have been suggested both
domestically and internationally would have this effect,
either through tax increases or cap and trade schemes. These
increase the cost of energy and will reduce energy use, but they
will also lower standards of living: We will have less income, less
health care, more poverty, less scientific research and progress.
Are we willing to accept these consequences?
"…Create More American Jobs"
What have the candidates actually said? Have they stated a problem
that is real? Here's a quote from Senator Barack Obama's Web site:
"Trade with foreign nations should strengthen the American economy
and create more American jobs."
I'm not sure I hear a problem, though the Senator seems to be
implying that trade does not now strengthen the American economy.
By all accounts, such an implication would be wrong.
The first half of the sentence is a statement of economic theory
that has been demonstrated over and over throughout the world.
Trade with foreign nations does in fact strengthen the American
economy. We are not forced to trade. We do so because it makes
us better off. If I as a consumer buy product X from country Y, it
is because I am better off having made the purchase. If I as a
producer sell product Y to country Z, it is because I am better off
having done so. As long as these transactions are voluntary, it is
a very safe assumption that they make each party better off
and strengthen the economy.
The concept of comparative advantage tells us that if people or
countries specialize in those areas of economic activity in which
they are relatively more efficient and then trade their production
with each other, the total amount of goods available will increase.
So if you believe that a bigger economy- one with more goods
available-is a stronger economy, trade is definitely a
The second half of the sentence is more problematic.
Senator Obama talks about creating more American jobs. Standard
economic textbook examples of the benefits from trade-that is,
the benefits of comparative advantage-assume fixed inputs of labor
in both countries. In other words, they hold the number of jobs
The benefit from trade is not that there are more jobs, but
rather that labor is used more productively; i.e., that each
worker, on average, produces more in an environment with
specialization and trade than they would have before. Overall
economic activity is more efficient, and production is higher, but
there is no change in the number of jobs.
What, then, determines the number of jobs? Well, the size of the
population for starters. And the amount of investment. Finally, the
extent of freedom in the labor market-that is, how easy is it
to hire and especially fire workers, and how strong are labor
unions? A study in 2000 by Pietro Garibaldi and Paolo Mauro at the
International Monetary Fund reports that there is less job creation
where unions are powerful and that extensive employment protection
by government and higher levels of taxation both appear to
dampen job creation.
Even if we agree that the overall number of jobs is not
necessarily changed by trade, the composition of those jobs will
definitely change. An individual may lose his or her current job as
a result of trade and have to seek different employment.
A Jobs-Creation Machine
In recent years, the U.S. economy has been a great jobs-creation
machine. On average, the U.S. economy is creating about 150,000
additional jobs each month. Now, that didn't happen last month.
Non-farm employment reportedly declined by 63,000 people, so
policymakers and economists are concerned. But one month doesn't make a
trend, and I would be very surprised if next month's figures
don't show employment growth again.
Just looking at jobs lost or jobs gained doesn't tell the whole
story. These figures are marginal changes in an overall flow of job
destruction and job creation that is much larger. According to the
chairman of the Federal Reserve, Ben Bernanke, on average, about 15
million jobs disappear each year in the U.S. economy. They
go away because people's consumption preferences change or
because new products or new ways of production come into
being. A very small percentage of jobs-2 percent according to
Bernanke-goes away as the result of international trade.
The U.S. automotive industry proves a quick, useful case study.
We've all heard stories of U.S. auto manufacturers in trouble. We
can see the inroads foreign manufacturers have made in the industry
every time we take a drive.
But a July 2007 report by the U.S. Bureau of Labor Statistics
attributes automotive job loss in the Midwest not only to foreign
competition, but also to domestic competition from states like
Alabama, Kentucky, and Tennessee, as well as increased
automation and productivity. Between 2000 and 2005, output per
work hour in auto parts production increased by 28.6 percent. Demand
for foreign cars, originally created through imports, has led
increasingly to U.S. production and new U.S. jobs.
Members of the Association of International Automobile
Manufacturers (AIAM)-which includes industry heavyweights Toyota,
Honda, and Nissan-have invested more than $35.5 billion in 54
manufacturing and R&D centers in the U.S. since 1982.
Fortunately for the economy as a whole, as 15 million jobs do go
away each year, 17 million new jobs are being created. This
constant creation and destruction of jobs is called churning.
Actual levels of churning in the U.S. economy are even higher than
those caused by job loss. According to Deputy Secretary of the
Treasury Bob Kimmit, more than 55 million Americans left their jobs
in 2005, while there were 57 million new hires. This job
churning is one of the most telling features of the highly
flexible and ever evolving U.S. economy.
Costs and Benefits
The U.S. has higher rates of churning than most European
countries. We also have higher levels of productivity growth,
higher levels of GDP growth, and lower unemployment rates. Those
are the benefits.
What are the costs? Well, each of those 15 million jobs
that ceased to exist was being performed by a real live human
being, and that human being and his or her family have undergone
the stress of involuntary unemployment and a job change.
To be clear, in most of these cases, the people losing their
jobs go on quickly to better, higher paying jobs than they held
before. Again according to Bernanke, during the 1990s, average
earnings in manufacturing industries that showed net declines in
employment were $10.63 per hour. During the same period, wages in
expanding service-providing industries were $11.26 per hour, or
about 6 percent higher.
There are cases, of course, where individuals who lose their
jobs involuntarily don't find good-paying replacement jobs
immediately. There are cases where a plant that is a major employer
in a town may close, with harsh consequences for its employees,
their families, and other businesses that served the community. The
stories of these towns and the people that live in them are
In fact, one of the distorting features of our political
dialogue is that these stories of individuals who suffer as a
result of what Joseph Schumpeter called the "creative destruction"
of capitalism are perfectly suited for television journalism. First
of all, they are negative, and there is a strong bias in our media
toward reporting negative rather than positive stories. I am
not criticizing this. One of the main functions of our fourth
estate is to observe and report things that need to be changed.
Also, such stories have the power to touch us emotionally.
Again, I am not criticizing this. I'm glad we have the ability to
be moved by the misfortune of others. I would not want to live in a
world characterized by callousness.
But the story of the individual losing her job is, for the vast
majority of such people, only half of the story. The other half is
what happens next, and for most people what happens next is a new
job with better working conditions and higher pay. Not for
everyone, but for most.
So the story of job loss is only half of the story of
capitalism's creative destruction of jobs and an even smaller part
of the story of trade. The positive side of this process rarely
shows up on the nightly news. We need our national leadership,
including the candidates for President, to remind us of the
Senator Obama's Web site includes a section entitled "Fight for
Fair Trade." His basic policy prescription seems to be to
pressure other governments to open their markets more to American
goods. The pressure would come presumably in the form of threats to
restrict access to the U.S. market for goods from other
There are a lot of calls for "fair trade" these days, and it
would be worthwhile to think about what this concept might entail.
Does it mean exports and imports are balanced and that there is no
trade deficit? We would be a much poorer economy in that case,
with fewer and more expensive goods available for purchase and
fewer financial resources coming into the U.S. to promote the
investment that helps our economy and our incomes grow.
Does fair trade mean that we would insist that our tariff rates
equal those of the foreign country with which we wish to trade? A
tariff is just a tax, and we would in effect be letting other
countries set our domestic tax rates for us.
Does fair trade mean that we should insist that other countries
adopt labor and environmental standards equal to our own? This is
an economic issue couched in moral tones, and it does have
profound moral consequences. For me, the moral question is: Do
we have the right to impose our standards on others? If we make
another country artificially increase the cost of labor in
industries producing tradable goods above its real wage rates,
employment will go down in those industries and in the foreign
country overall. The unemployed will suffer as a result. Poverty
will increase. That's not a moral result by my calculus.
Should we make foreigners increase the level of environmental
protection in their countries? Environmental protection is a
good like any other. It has a price. A rich country will be able to
afford more of it than a poor country. It may be better for the
people of a poor country to opt for less environmental
protection and more growth now in order to meet the immediate needs
of their people and reduce poverty. Such a strategy may also
be better for the environment in the long run because, as the
society becomes richer, it will be able to afford better
environmental protection than it can at present.
Philosophers and ethicists devote lifetimes to the study of
societal equity and fairness. From my perspective, an agreement
between two parties that is entirely voluntary and from which both
parties benefit, even if the benefits are not equal, should enjoy a
strong presumption of fairness. Win/win solutions are not as common
as we would like in this world, and an economic arrangement that
consistently delivers them, such as free trade, is a rare and
precious thing. The alternatives-managed versions of
mercantilism-will not deliver the same levels of benefits to
Government intervention is, by its very nature, coercive rather
than voluntary. When government intervenes, it is to make someone
do something they otherwise would not do. A tariff makes
consumers pay more for a product than they otherwise would. A
quota makes them buy more from a domestic producer even though they
would have benefited from using a foreign manufacturer.
When we say trade protection, we are not talking about
protecting consumers. We are talking about imposing costs on
consumers-American consumers-to protect the status quo of
current manufacturers and manufacturing practices. We are
protecting our businessmen or farmers or labor unions from foreign
competition, but it is the American consumer that is paying
At its most basic level, trade protectionism is nothing more
than a transfer of income from consumers in America to
selected producers in America. If that's something you want to
do, you can vote accordingly. For me, fair trade is trade that is
free of government interference.
Much to my surprise, the North American Free Trade Agreement
(NAFTA) has become a prominent trade-related issue in this
campaign. Senator Obama wants to renegotiate NAFTA "so that it
works for American workers."
I had thought the issue of NAFTA was long settled. Its effects
have been extensively studied in both the Clinton and Bush
Administrations. Recently, the Office of the U.S. Trade
Representative has looked at the U.S. economy during NAFTA and
compared key indicators with the similar period before NAFTA.
Here are some comparisons of the first 13 years of NAFTA with
the 13 years before.
- During NAFTA, U.S. employment went up from 112.2 million jobs
to 137.2 million jobs, an increase of 25 million jobs. We haven't
really heard Ross Perot's giant sucking sound.
- The average unemployment rate during NAFTA has been 5.1
percent, compared to 7.1 percent during the 13 years before its
- Manufacturing output rose 63 percent between 1993 and 2006,
compared to 37 percent between 1980 and 1993.
- Real compensation of manufacturing workers rose 1.6 percent
annually during NAFTA as compared to 0.9 percent annually in
the prior period.
- Investment rose 107 percent, compared to 45 percent in the
comparable prior period.
- So by all these indicators, we have been better off during
NAFTA than we were before its passage.
Do They Mean What They Say?
Now, you may think I have been picking on Senator Obama. I
have used his statements because his positions on trade tend to be
at one end of the spectrum. Senator Clinton's rhetoric on
trade is similar in many respects to Senator Obama's but tends to
be more nuanced. If you wanted to be ungenerous, you could even say
she leaves herself a little bit of wiggle room. Most notably,
she has called for a trade "timeout," which could mean changing
a lot of things or changing nothing. We don't really know.
Senator McCain supports existing and proposed trade agreements
and wants to further lower barriers to trade. His campaign
would seem to promise a continuation of the Bill Clinton/George
Bush policies on trade liberalization.
Interestingly, all three candidates talk about pressuring
other countries to lower their barriers, getting better
enforcement of agreements, leveling the global playing field, and
helping workers who lose their jobs.
Even though there is a range of views, the candidates often
use similar rhetoric. It can be difficult to parse the differences.
We also face a real dilemma in knowing whether the candidates
really mean what they say. Witness the recent spectacle of an Obama
adviser reportedly telling the Canadian government that his
candidate didn't really mean what he was saying against NAFTA.
To be informed voters, we have to try to read between the lines,
be aware of nuance, judge emotional intensity, and look at the
candidates' records. It's not easy, but absolutely necessary if our
votes are to count in the way we want them to.
The big mistake that all the candidates make in trade
discussions is in limiting the talk only to jobs. Remember that,
according to Fed Chairman Bernanke, only 2 percent of jobs
lost in the U.S. are lost because of trade. The other 98 percent
are lost because of other factors, mainly changes in taste or
increases in productivity. And more jobs are created than are lost.
Nobody wants to criticize changes in taste or increases in
productivity, so trade seems to become the target of opportunity
when trying to address economic insecurity or job loss.
Let's go back to the beginning when I asked whether the problem
the candidates are talking about is a real problem. There is no
question that some people lose their jobs in ways that cause
problems for them and that some very small percentage of those
lost jobs is the result of trade. But more people are gaining more
jobs and more prosperity as a result of the exact same processes.
Given the large benefits for society as a whole, versus the small
costs, we would be hard-pressed to change the system in a way
that improved overall well-being for society as a whole.
Renegotiating NAFTA or turning back globalization would really be a
case of throwing the baby out with the bathwater.
Can we help those few who do have problems as a result of the
system adjust and get their lives going again? Absolutely, and we
already have programs designed to do just that. These programs,
which include things like trade adjustment assistance and
unemployment assistance, may help people in need at critical
moments in their lives. The problem is ensuring that they provide
help without reducing the incentive to work. We need to evaluate
them by the same criteria for effectiveness and efficiency that we
use, or should use, for any government program: Does it work? Is it
In closing, let me just express the wish that candidates would
talk less about jobs and more about the benefits of trade for
consumers. We are all consumers, and the average benefit of our
liberalized trade system for consumers has been estimated
at up to $10,000 per year for a family of four. We get access to
more goods and services, higher-quality goods and services, at
lower prices as a result of trade. It doesn't make the news, but
the benefit is real.
I don't know of a single economist-not one- who doesn't agree
that trade benefits society as a whole. When our political
candidates are saying something different, we need to listen
carefully and cautiously. The changes they are promising could wind
up costing us all dearly.
Miller is Director of the Center for International Trade and
Economics at The Heritage Foundation. He delivered these remarks at
the Catholic University of America in Washington, D.C.
Pietro Garibaldi and Paolo Mauro, "Job Creation: Why Some Countries
Do Better," International Monetary Fund, Economic Issues
No. 20, April 2000, p. 8.
Benjamin Collins, Thomas McDonald, and Jay A. Mousa, "The Rise and
Decline of Auto Parts Manufacturing in the Midwest," Monthly
Labor Review, October 2007, pp. 14-21 (March 19, 2008).
Robert M. Kimmit, "Why Job Churn Is Good," The Washington
Post, January 23, 2007.
Bernanke, Remarks at Distinguished Speaker Series.