Harnessing the Unyielding Momentum of a Global Economy

Free trade has historically been regarded as an ideal pillar of economics—a proverbial tide that lifts all boats. The North American Free Trade Agreement (NAFTA) is a living example of the benefits of free trade. Since NAFTA’s inception, Mexico’s exports have grown more than ten-fold, topping $350 billion in 2014. NAFTA has allowed the United States to import quality products at lower costs while subsequently increasing consumer demand for U.S.-made products within Mexico. Growing consumer demand has resulted in Mexico importing nearly 15 percent of all U.S.-produced goods—more than Brazil, Russia, India, and China combined. And because Mexican citizens are able to obtain better employment in their improved homeland economy, illegal immigration from Mexico to the United States has decreased.

NAFTA is not the only example of the successes engendered by free trade. In 2012, countries participating in free trade agreements with the U.S. purchased nearly 13 times as many U.S. goods per capita as those without such agreements. Based on these successes, Congress recently passed “fast-track” authority for the President to negotiate additional free trade agreements, such as the Trans-Pacific Partnership (TPP). The TPP is a trade agreement that seeks to lower trade barriers among partner Pacific Rim countries. Once fully realized, TPP will envelop 40 percent of the world’s GDP and, according to the Peterson Institute of International Economics, could bolster GDP by nearly half a percent across the entire globe. As more countries participate in the partnership, the rise in global GDP could increase to an even greater extent.

While free trade is certainly compelling when viewed in aggregate, it can also create micro-disruptions. In other words, while free trade can facilitate net increases in jobs and economic prosperity on global, regional, or national bases, it can have a negative impact on specific job types and industries in concentrated geographic regions. Entire cities and regions that are disproportionally reliant on newly-outsourced industries can be depleted. In such areas, property values and public services plummet. Recently-unemployed workers struggle to gain access to the training and certification needed to retool. Why? Because public educational programs are often simultaneously cut or simply insufficient due to the collapse in the tax base. And moving to find new work is difficult when workers are unable to sell their homes amid the region’s economic suffering.

In short, free trade, structured fairly for each participating country, is almost always positive when measured on a macro-level, but the resultant pain inflicted on specific geographic regions has the potential to be devastating.

Despite this pain, the reality is that no matter the U.S. policy, it is simply a matter of time before Americans will be displaced from jobs that can be fulfilled at lower cost elsewhere. Because workers need higher wages to subsist in the U.S. economy relative to much of the rest of the world, Americans in general are not optimally employed in low-skilled jobs; for this, less-developed countries have a clear cost advantage. Fortunately, America’s rich entrepreneurial spirit, work ethic, and educational foundation create an environment in which people are willing to quickly retool and reinvent themselves when given the opportunity. The government’s role is simply to ensure everyone has that opportunity by providing support during these periods of transition.

The U.S. should facilitate economic growth by leading the global economy in encouraging and establishing free trade, but the federal government must reallocate some of the macro-economic growth generated by free trade to proactively provide support for displaced workers. For instance, in areas disproportionally impacted by free trade, the government can ensure and subsidize adequate access to relevant, applicable, and immediately-valuable education training. It should also temporarily support undervalued property, and incent small business growth and corporate relocations to negatively-impacted regions. These compassionate and economically forward-thinking solutions will help the U.S. leverage what is good about free trade and mitigate some of the pain that our workforce experiences when jobs are outsourced. Moreover, these solutions are certain to prove more cost effective and pragmatic than protectionist policies that unrealistically attempt to stem the unrelenting tides of an ever-evolving global economy. With effective mechanisms in place to lessen both the pain and the duration of micro-disruptions, the U.S. will harness the significant positive macro-economic growth generated by a more open global economy and help American workers gain current, relevant skills for the evolving workplace.

This post is part of an ongoing series of data-driven commentary on current events. It was originally published in the Zion’s Bank Economic Outlook Newsletter and the Deseret News.