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Goods move freely in global trade agreements | But People Do Not
Is the picture of international trade so rosy? That is:
Countries export what they’re best at producing
Countries import from other countries when it’s more affordable
An example
Egypt export handwoven carpets - the production is labour intensive and the labour is cheap
China uses its technological resources and efficient factories - they export mass-produced computer parts
These computer parts can be bought by companies all over the world - this supports their local tech industries
International trade can harm industries and jobs
Factories can discontinue unprofitable products and innovate to start making new ones
Workers then switch to new industries
But this is assuming there is flexibility in the industry and the workforce
Workers do not easily change industries
They find it difficult to “change their ways” and react to economic incentives
Companies are inflexible too
PhD economist Petia Topalova found Indian companies rarely discontinued product lines (even unprofitable ones)
New companies often innovate, but they lack the cash to do so. They find it very hard to get credit from banks
Old companies (sometimes even failing ones) can more easily get credit from banks
New companies can also go out of business - it’s not easy to compete when you’re new
Companies in developing countries get treated with suspicion - this prevents investment into what could be profitable companies
Trade Agreements Can Harm Locals | Protectionist Policies Won’t Help Though
President Trump announced in 2018 that he will impose a heavy tax on aluminium and steel imported from China
This was to protect American jobs
Steelworkers’ jobs will probably be protected
More people will buy local steel, meaning more demand and fewer layoffs
The “China Shock” is an effect where local factories went out of business, due to greater outsourcing of work to China
Look at the effect it has had on Bruceton and Tennessee (more info below)
However, China announced it would impose its own tariffs against the USA’s agricultural products
China buys 16% of all crops from the US
This will harm the agricultural industry
Steelworkers get to keep their jobs - farmers will lose out on business
Factories have now gone out of business
The China Shock
As mentioned above the “China Shock” is an effect where local factories went out of business, due to greater outsourcing of work to China. This has greatly affected a number of places, two places being Bruceton and Tennessee.
Bruceton had to close its factory employing 1,700 people
In 2000, they let their last 55 workers go
This meant demand went down in the town
This led to more local businesses being shut down
As a result, it became a ghost town
What can unemployed workers do, if they can’t easily move locations?
The US has an initiative to help people lose their jobs
This is called the Trade Adjustment Assistance program (TAA)
This program extends unemployment insurance
It also provides training and support to enter new industries
Financial assistance is provided to help workers relocate
However, it is massively underfunded
To conclude, protectionism is a requirement in the global economy. However, imposing tariffs won’t work.
Investment is key - investment into helping, retraining and diverting unemployed workers towards more profitable industries.
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