Trump’s Dismantling of Trade Deals Won’t Bring Most Jobs Back

Mexican policy works a little differently. Instead of directly manipulating exchange rates by buying and selling reserves, Mexico’s central bank, like the U.S. Federal Reserve, focuses its monetary policy on interest rates. Interest rates, in turn, can be used to affect exchange rates indirectly, since raising rates encourages capital to flow toward Mexico and boosts the value of the peso. Twice this year, once before and once after the election, Mexico has raised its rates. But as in the case of China, its efforts have not been fully successful. The peso has fallen to record lows anyway.

There is a deep irony here. Contrary to Trump’s claim that our trading partners manipulate their currencies to undercut American workers, China and Mexico have been fighting to keep their currencies strong. Yet Trump’s protectionist bluster has spooked the markets so badly that renminbi and the peso have depreciated anyway. On the currency front, the more Trump rants, the harder he makes it for his American working-class supporters to hang onto their jobs.

 

Falling labor mobility means U.S. workers are less adaptable.

Economists have long acknowledged that free trade produces losers as well as winners. To be sure, the Pollyannas among them have assured us that the losses are transitory. Trade-displaced workers, they have said, get back on their feet as they move to new jobs in export industries. Meanwhile, as cheap goods flood the stores, those workers, like everyone else, enjoy a lower cost of living.

Recent research suggests, however, that the picture is not quite so bright. Globalization has brought many benefits, to be sure, but the losses have been more persistent and more concentrated than the optimists expected. A widely cited study by David Autor, David Dorn and Gordon Hanson examines the effect of sudden changes in patterns of trade, or what the authors call “trade shocks.” Focusing on the largest of these, “the China shock,” they reach a number of pessimistic conclusions.

Most importantly, they find that the impact of trade shocks is far from temporary. Job losses and lower wages in hard-hit regions persist for years. Furthermore, because the effects are geographically concentrated, labor mobility is not sufficient to ensure that losses by workers are widely shared across regions and industries. Nor is it true, as some optimists have promised, that workers displaced by trade shocks quickly find comparable jobs in export industries.

Moreover, Autor and his colleagues find that trade shocks disproportionately affect low-wage workers within affected regions and industries. Those who do find work often end up in services or other sectors where jobs do not fit their skills and wages are lower. Others turn to government assistance, as evidenced by sharp increases in the uptake of unemployment benefits, disability benefits, food stamps and other forms of government assistance.

What is more, evidence from other studies suggests that it has become harder over time for the U.S. labor market to adjust to trade shocks. One major reason is decreased labor mobility. As evidenced in the chart below, in the 2000s, fewer Americans left one state for another, as compared to the 1980s.

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