## Monday, July 7, 2008

### More on trade (sorry, no witty Kubrick reference this time)

• imports account for only 16.7% of US Gross Domestic Product (GDP) and imports from China account for 2.2%
• between 60% and 70% of the US economy faces virtually no international competition (including low-wage jobs like auto mechanics, high-wage jobs like doctors and the 18.5 million government employees)
• Chinese exports only overlap with between 5% and 10% of the US economy
For all the concern about trade in this election cycle, trade is a relatively unimportant part of the US economy (particularly compared with the rest of the industrialized world). The average US tariff on foreign goods, currently 2%, is already very low (note that many goods face 0% tariffs, while some goods, particularly agricultural products, face close to 100% rates). According to the World Bank, removing these remaining tariffs would boost the US economy by $16 billion per year; a large number, but certainly a drop in the bucket in the$10 trillion US economy.

One of the biggest trade issues discussed in the campaigns has been NAFTA. In my last post I cited a quote from Barack Obama in which he said, "Well, I don't think NAFTA has been good for America -- and I never have". But the empirical evidence doesn't implicate NAFTA in the downfall of American manufacturing. David Leonhardt, writing in the New York Times states:

When Nafta took effect on Jan. 1, 1994, Ohio had 990,000 manufacturing jobs. Two years later, it had 1.03 million. The number remained above one million for the rest of the 1990s, before plummeting in this decade to just 775,000 today. It's hard to look at this history and conclude Nafta is the villain. In fact, Nafta did little to reduce tariffs on Mexican manufacturers, notes Matthew Slaughter, a Dartmouth economist. Those tariffs were already low before the agreement was signed.

And yet candidates on both sides of the aisle have cited trade as a major concern for the American economy. Some even promised to bring manufacturing jobs back to Michigan. However, this stance misinterprets the structural changes the American economy has experienced over the past twenty years.

The focus on trade shifts our attention away from the real factors that determine wage inequality and job creation, particularly technology and skills. Austan Goolsbee, Obama's economic adviser, estimates that roughly 80% of income inequality in the US can be explained by changes in technology. Highly educated workers have benefited disproportionately from technological change. In 1980, college graduates earned on average 30 percent more than those with only high school diplomas. Today, that difference has widened to 70 percent. Over the same period, the average earnings of people with advanced degrees went from 50% more than workers without degrees to 100% more.

Unfortunately, stoking trade fears is a cheap and effective means for politicians to seem like they're "doing something" about the economy. Congress can easily derail CAFTA or some other trade agreement if voters are concerned. The impact any one such deal would be slight to the American economy. But if voters are really concerned about jobs, they shouldn't look to protectionism as a solution. The only way to change trends in job creation and income inequality is to improve the skill level of the American workforce; and this can only be achieved by reducing educational inequalities. But that's a big task. It's much easier to blame people who talk funny.