Trade openness still matters

Employment & Income,Inclusive Economy29 Sep 2014Noel Gaston

While the long-term benefits of freer trade for the domestic labour market seem indisputable, it is politically contestable over the short- and medium-run.

Trade, whether domestic or international, is economically beneficial. Widespread acceptance of this fact may explain why in the wake of the global financial crisis – the deepest recession since the Second World War – most countries did not resort to protectionism. (Harsher policies towards immigrants are altogether another matter.) This is surprising for at least two reasons. First, raising trade barriers had generally been the average response for countries facing severe economic difficulties in the past and, secondly, the global financial crisis quickly propagated through international interconnectivity. The most globalized countries tend to be the most developed and the global financial crisis hit the majority of those economies hardest.

Even during buoyant economic times, as with any fundamental driver of structural change, trade is disruptive for some workers. While the long-term benefits of freer trade seem indisputable, it is politically contestable over the short- and medium-run, more trade and product market competition produces winners and losers. For the majority of workers in developed countries’ import-sensitive industries and for less-skilled workers more generally, the trepidation about various facets of globalization has to do with the increased fear of job loss or lower real wages. The suspicion is that freer trade with developing economies such as China and the slicing up of the value-added chain, can adversely affect domestic employment prospects and working conditions. Intra-industry trade, a prevalent form of trade among developed economies, which has traditionally been considered to have minimal labour market effects is now suspect as well. Donald R. Davis and James Harrigan have shown that ‘good jobs’ – those which pay a premium to some workers above what their skill level would normally command – are jeopardised by trade liberalization. This could occur with no change in the overall unemployment rate. Opposition to trade liberalization by those with the most to lose is easy to explain.

In terms of public policy response, there is a growing emphasis on having good workers, rather than a focus on good jobs per se. The burgeoning ‘human happiness’ literature in economics suggests that happiness is more affected by whether or not one has a job than by what kind of job it is. Such findings indicate that the areas which policymakers need to focus on are macroeconomic fundamentals, labour market flexibility, pro-competition and ‘horizontal’ policies – i.e. policies not targeted at specific sectors. Policy planks that seek to enhance productivity growth include support for R&D activities; education, training and human capital; carefully targeted active labour market programmes and the promotion of internationalization. Such policies develop good workers, with good jobs to hopefully follow.

Globalization is blamed for many challenges that afflict modern economies. There is a sizable literature linking globalization to a ‘race to the bottom’ in social policies, pandemics, climate change and terrorism. There are probably more articles written about what is wrong with globalization than what is right about it. As for the welfare of workers, increasing income inequality, deunionization, job insecurity, increased casualization and temporary work are just a few contemporary labour market developments commonly attributed to globalization.

However, it is also clear that there have been diverse labour market experiences across countries in the wake of the global financial crisis. International trade is an obvious channel through which the effects of global economic shocks are transmitted. Recent research has shown that trade ties with the United States (the epicentre of the global financial crisis) and China (perceived as the greatest threat to unskilled workers in the West), far from hurting labour market outcomes have been beneficial. In the latter case, most of the economies with the greatest trade exposure to China had the most resilient labour markets. Such facts suggest that trade openness still matters and mostly does so for the right reasons.