Economic Policy Institute
Delivered September 27, 2023
Over the past year, my colleagues in the Biden administration have presented compelling explanations of our approach to international trade. It is an approach that is unsurprisingly rooted in Bidenomics, specifically by recognizing two simple realities that EPI saw decades before most others.
The first is that globalization generates both meaningful benefits and meaningful costs. From today’s perspective, this may seem obvious, especially as the political consequences of ignoring the costs of globalization have been laid bare. But back in the early 1990s, that was not the case, despite the trade-offs apparent in conventional trade theory.
The second is that people are not only consumers. They are also workers and these workers live in communities that, in too many cases, were hollowed out by the loss of factory jobs.
Policy-wise, such losses were justified by the thinking that as long as expanded trade creates enough income for the “winners” to compensate the “losers,” it’s worth pursuing. Pareto optimality is a powerful analytic tool, but in the real world, it’s insufficient to show that society can compensate workers hurt by trade competition. The dispositive question is will we do so. Is there a politics to facilitate such actions? In fact, the past political climate enabled the winners from trade to rig the game even further on their behalf, for example, through high-end tax cuts or cutting what little trade-adjustment assistance existed.
Trade policy at the time also assumed largely frictionless transitions, the idea that a displaced worker can seamlessly move into a different job, often in another locality, with similar compensation. In fact, this episode taught me to cringe whenever a policymaker invokes a “transition.” Too often, that word means somebody, and it’s usually someone who’s economically vulnerable, is in for a world of hurt, with lasting damages to their communities. Filling in places that were hollowed out is a Bidenomics goal that we are pursuing, with signs of early progress, as seen in the geographical diversity of new, domestic manufacturing facilities.
My colleagues in the Biden Administration have espoused these points. As Trade Amb. Tai, a long-time supporter of elevated labor standards in trade deals, has explained our “worker-centered approach to trade.” Secretary Yellen has upheld deepening economic integration with trusted partners where benefits from the ensuing efficiencies work better for American workers. Reflecting on how pandemic snarl-ups in supply chains failed both workers and consumers, National Security Advisor Sullivan has stressed the importance of “diversified and resilient global supply chains” concurrently setting “high standards for everything from labor and the environment to trusted technology and good governance.” My CEA colleague Heather Boushey has touted the “positive-sum economics of collaborating with our allies and trade partners.”
I recommend their talks fleshing out our framework, but as they’ve covered this ground, I’d like do something different.
First, because I’m at EPI, I want to provide a brief history of the U.S. trade debate that took off in the early 1990s, which was when I came to work here. Why go there? For one, it’s an instructive example of something that matters a lot to the President’s economics team, much as it does here at EPI. Too often, economic theories and assumptions interact with powerful ideologies lodged deep within the political economy in ways that diminish a key insight from classical trade models: trade generates winners and losers. When I came up in this field, prominent economists, including Nobel laureates like Robert Lucas, argued that distributional concerns were not under the purview of economics. It is worth revisiting that EPI ultimately prevailed in this debate.
Second, I want to draw something out of this debate that is perhaps not as well understood as it should be, despite the fact that it is well-embedded in the speeches of my colleagues.
That is: we in the Biden Administration highly value robust trade flows. We believe we can continue to aggressively pursue the benefits of U.S. worker-centered trade policy without giving up the many and deep benefits of trade. Such benefits include greater supplies of goods and services, lower inflation, more innovation, good jobs for American workers in exporting sectors, foreign direct investment on U.S. soil, and a better chance of reaching our climate goals.
I suspect this audience is familiar with the empirical literature supporting these assertions but it is perhaps less obvious how trade can support decarbonization. Through the trade channel, we can complement our own increasing supply of intermediate and final goods, along with the green technologies necessary to hit our climate targets, while bending the relevant cost curves.
In my experience, it is insufficiently understood by many in this debate that worker-centered trade implies neither less trade nor more trade. We consider the fact that aggregate trade flows have remained robust as a necessary condition for ample, resilient supply chains, even as the country origins for U.S. imports are diversifying, with less reliance on China. In a moment, I’ll share with you some CEA work wherein we tout the unsnarling of global supply chains and track the contribution of better supply conditions to disinflation, delivering, as the President puts it, increased breathing room for families. I’ll also highlight increased foreign direct investment in new manufacturing plants here in the U.S., in sectors of domestic production consistent with CHIPS and IRA.
These FDI flows are consistent with our agenda to boost domestic production of strategically important sectors, most notably semiconductors and clean energy products. To be clear, we expect some degree of import substitution in these areas, including of inputs that we have long imported. Such investments can help firms meet the domestic content provisions of the IRA and CHIPS bills.
We have also clearly elevated both security and resiliency risks with regard to some of our trade with China, and are acting on those concerns. But here too, we have been clear to emphasize the narrow, though crucial, national security dimensions to which these restrictions apply—what National Security Advisor Sullivan describes as a “small yard” with a “high fence.” After all, quantum computers and military grade robots are not sold at your local Walmart, but thousands of imported goods are.
Or consider that nature in her wisdom did not put all the inputs under our soil that are required to hasten the clean energy transition, underpinning the climate targets set by President Biden. We’re actively working with our allies to avoid unreliable dependencies and accelerate the achievement of our mutual goals, including global supply-chain early-warning systems, anti-corruption initiatives, more frictionless trade and investment, all while promoting strong labor and environmental standards as seen in our pursuit of new measures like the Indo-Pacific Economic Framework and the U.S.-Japan Critical Minerals Agreement.
Given the current labor landscape in the U.S., it is worth noting that this minerals agreement includes an employer neutrality clause when it comes to union organizing. On this President’s watch, every deal we make must uphold our labor standards and support our unions.
In other words, our policy in this space is best understood as “both-and.” BOTH increased domestic sourcing, from upstream extraction to final production, AND robust trade and investment flows, alongside heightened cooperation with our friends and allies with clear standards guiding those efforts.
Let me now turn to a brief history of the trade debate, with a focus on EPI’s role in that debate and how we at the White House continue to build a trade policy that reflects those lessons.
I arrived at EPI in 1992 to work with Larry Mishel on that year’s version of State of Working America. I came here from NYC, and if it’s not too late, I’d like to apologize to my co-workers for being such a New York snob, whining about the lack of decent pizza, bagels, and jazz clubs. I remember after I’d been here for a year, someone asked me where’s a good jazz club in DC. I said, “You know Union Station?” They said, “Sure. Is there a good club there?” I said, “No, that’s where you can get the train to Manhattan.”
I’d planned to go back to New York after a year but I fell in love, had kids, moved to Alexandria, and stopped hanging out in jazz clubs.
At any rate, back then, the Institute, under Jeff Faux’s leadership, was buzzing about something called NAFTA. Like any good grad student, I was well versed in trade theory, comparative advantage, Pareto optimality. But I knew zip about trade deals, or FTAs. What I quickly learned was that free trade agreements had far less to do with free trade than I’d realized.
Instead, they partly represented the rules of the road, and as any DC policy analyst knows, she who writes the rules decides who benefits from them. To be clear, this is no blanket rant against this aspect of trade deals. Roads need rules, though if you are one of the tiny minority who both holds forth on FTAs and actually reads them, you know these are often mind-numbing but necessary discussions about what constitutes a rubber-tire, grade 4 or, to quote the NAFTA, “Filament yarns must be composed of filaments that are formed or extruded in a NAFTA country, but petrochemical or cellulosic feedstock that is used to make the filaments may be sourced outside NAFTA.”
Of course, if that’s all that was in these agreements, EPI would have had less to worry about. But as Dean Baker, who also got his start at EPI back then, has long documented, these deals often contained protectionist measures of the type most economists would consider anathema in any other setting, added at the behest of powerful lobbies like big Pharma. There’s a reason Doctors without Borders vehemently opposed the TPP FTA.
In fact, Dean has long called for a global trading system that is both free-er and fairer, through reducing protectionist rents, especially in the areas of patents and occupational restrictions on immigrants who would otherwise compete in high-wage sectors, like medicine and law.
Back then, Thea Lee, now at the Labor Department, was a leader on EPI’s trade work, and she hammered the status quo with common-sense arguments for which they had no credible retort. Why, she asked a Nobel-laureate economist in one debate, did it make sense for NAFTA to have a chapter protecting intellectual property rights but not labor rights? Because, he honestly responded, the property rights protect my textbook royalties.
Larry Mishel warned about deindustrialization in 1988, followed by Rob Scott’s advance warnings about China’s accession to the WTO, leading to what is now recognized as the “China Shock.” EPI economists were accused of not understanding econ 101 or basic trade theory. Yet, this was while Scott and Lee were explaining that the Stolper-Samuelson theorem was fully consistent with their view, and that jobs displaced by imports were just as important as those created by exports. I remember a conference where I was the usual EPI skunk at the garden party, where an honest economic modeler pulled me aside, saying “I couldn’t say this out loud, but everybody knows we tweak the models to overwhelm Stolper-Samuelson effects.”
Economist Dani Rodrik, writing in 2018, underscored this point: this corner of trade theory “predicts that low-skilled workers are unambiguously worse off as a result of trade liberalization.” And he stressed that this result — that increased trade creates losers — is not a special case of one particular model. “It is the implication of a very large variety of models … redistribution is the flip side of the gains from trade. No pain, no gain. This is standard economic fare — familiar to all trade economists, even if not voiced too loudly in the public.”
And, because EPI never rests on its laurels, Josh Bivens and Adam Hersch continue this trade work that began over four decades ago.
Moving from the theoretical to the real world, predictably, the FTA process got captured by investors and corporate interests. The Washington Post documented that 85% of the members of the outside committees advising the government on the TPP were from private businesses and trade associations. Such corporate capture was also evident in other FTA dispute settlement procedures with the potential to challenge the very types of environmental and industrial strategy actions our Administration is pursuing.
More mainstream economists, like Larry Summers, have echoed their own version of these insights. In 2016, he wrote that the “revolt against global integration” is “that it is a project being carried out by elites for elites, with little consideration for the interests of ordinary people.” Those people, “see the globalization agenda as being set by large companies that successfully play one country against another…and conclude that globalization offers opportunities to a fortunate few to avoid taxes and regulations that are not available to everyone else. And they see the kind of disintegration that accompanies global integration as local communities suffer when major employers lose out to foreign competitors.”
That was EPI’s message when I got here in 1992, long before Larry wrote those words.
These local dynamics, as researchers of a series of “China Shock” papers found, had profound political consequences. Its contributions to inequality and political polarization catalyzed support for an extremism that still confronts and threatens us today.
I know that is a harsh message, but it also contains a strong kernel of hope. Much as we are still living with unenlightened choices made back in those days, the choices we make today, the worker-centered-trade-policy path we pursue, have the potential for positive impacts for decades to come.
While it’s easy to say “both-and,” is it possible to realize that goal? Some early evidence of IRA-induced shifts in the trade data offer glimpses in this spirit.
An important, new paper by Alfaro and Chor provides a preliminary view of a “looming great reallocation.” Consistent with my theme today, they note that reallocation is not equal to retrenchment. They find that “the aggregate value of key trade flows, such as US goods imports, rebounded strongly after the Covid-19 pandemic to all-time highs in 2022.” The reallocation they identify is largely away from China and more toward Vietnam and, in a case of the nearshoring you’ve heard us discuss, Mexico.
An important dynamic of this shift to Mexico is that it has allowed us to apply the USMCA’s Rapid Response Mechanism, enabling expedited enforcement actions when workers are denied free association and collective bargaining rights. I view this as another, important dimension of “both-and:” We can both maintain open markets and disallow a race to the bottom.
Alfaro and Chor also find that “more finishing stages of production in global value chains are now being performed within the US” consistent with the resurgence of manufacturing jobs under President Biden, which the authors suggest “likely reflect recent efforts to promote domestic manufacturing capability” in areas such as semiconductors.
The authors raise two noteworthy caveats.
First, the “great reallocation” narrative misses indirect linkages arising from other trading partners’ imports from China. They document increased trade with and FDI from China in Vietnam, Mexico, and Europe. Other trade economists, including Lovely and Freund, find similar results.
Second, import diversification may be associated with higher import prices. This comports with recent evidence of higher wages and production costs in these non-China source countries, as might be expected given stronger demand for their manufacturing output.
We’ll be carefully watching these price dynamics but because wages were already rising in China, it is possible that some reallocation independent of any U.S. policy changes would have occurred in any case. Also, as Secretary Yellen has stressed, higher costs associated with reallocation must be weighed against the resiliency and security gains from friend- and near-shoring.
Supply chain resiliency has been a focal point for our Administration since we took office. As is now well understood, when COVID hit, the savings of American households were significantly boosted through both the lockdown and the inability to interact with in-person services. This led to a sharp increase in the relative demand for goods at the very same time that supply chains were snarled due to lockdowns and worker absences.
I think it’s fair to say that, at least in my days at EPI, we tended to focus a lot more on the economy’s demand side than its supply side. But, with 20-20 hindsight, this was shortsighted. Consider but one example: between January and September 2021 motor vehicle assemblies fell nearly 30%, primarily due to the chips shortage. As a result, CEA analysis shows that the average auto-worker worked more than two fewer hours per week, most of which were overtime, tantamount to a 6% weekly pay cut.
So, in June of 2021, we formalized our Supply-Side Disruption task force which quickly partnered with the private sector to unsnarl supply chains. This included facilitation of moving higher levels of cargo in 2021 and 2022 through ports while concurrently lowering costs of shipping and rail. CEA graphics told this story in a recent blog post: measures of supply chain pressures (e.g., delivery times) are positively correlated with PCE core goods inflation in the post-pandemic period; as pressures have decreased, we’ve seen welcome disinflation.
We’ve also documented recent increases in some types of FDI, specifically in areas associated with the investment priorities of Bidenomics. Recent FDI data for new manufacturing establishments and expansions show sharp increases, while domestic investment in manufacturing facilities have grown even faster, largely in the EV space. In other words, we have some early, suggestive evidence of crowd-in investments from IRA and CHIPS, from both foreign and domestic investors.
In covering this history, recent trade flows, supply-chain improvements and their contribution to disinflation, I’ve tried to capture the nuances of our trade policy and how we got here. We will continue to wield the powerful tools of recent legislation to advance domestic production in strategic areas. We will continue to reverse decades of disinvestment in our public goods in ways we believe will encourage both private domestic and foreign direct investment in facilities and production here on our shores. As I’ve shown, even in these early days, this isn’t wishful thinking. We’re seeing some encouraging results.
But as I’ve also stressed, and as Secretaries Yellen and Raimondo did well before me, we will continue to pursue, promote and benefit from the supply and price benefits of robust trade flows. The difference, and it is a portentous difference, one that is at the core of EPI’s work, is that we will never abandon the American worker and her community, wherever those communities are located. Unlike that trade economist who whispered to me on the sidelines, we will never “tweak the model” in ways that leave workers, labor and environmental standards, or unions behind.
Our trade policy will, at the behest of President Biden, always be American-worker-centered, while elevating the importance of supply-chain resilience and national security. But, on those “both-and” terms, and on behalf of working Americans and the communities in which they reside, we will continue to participate in globalization, never ignoring the costs of trade, but at the same time reaping its benefits.