Posted on John Menadue’s blog, Pearls & Irritations, 24 November 2016.
For open markets to work well, they need well-developed market institutions and social safety nets.
Whether you love or loathe the president-elect of the United States, Donald Trump can achieve media attention for an economic policy issue, as well as for himself. Take the issue of trade and jobs, for example. After being a niche research topic in which a few trade and labour economists (like me) were involved, but to which few others in the media paid attention, the ‘Trumpster’ has thrust trade and jobs into the headlines. It dominated the presidential election campaign, especially in the swing states of Pennsylvania, Michigan, and Wisconsin (which remarkably Hilary Clinton didn’t visit), and even at the APEC Summit at Lima.
Trade, creating or destroying whose jobs?
I was gobsmacked to hear Australian Prime Minister Malcolm Turnbull and Trade Minister Steve Ciobo talking repeatedly at press conferences in Peru about trade deals which are “good for workers”. Back in 1992, the first President George Bush said he had signed the free trade agreement with Canada (the predecessor to NAFTA), because he wanted to create “good jobs at good wages”. Whether he fulfilled this wish in reality can, it seems, be tested by the 2016 election outcome, in which blue collar voters rebelled against free trade agreements.
This issue has an important history in Australia too. In 2000, when I was newly appointed as chief economist of the Australian Trade Commission (Austrade), I wrote a paper for the Centre for Applied Economic Research (CAER) at UNSW which showed that Australian exporters, as employers, paid on average 60 percent higher wages than non-exporters.
Exporters also achieved higher levels than non-exporters in standards of occupational health and safety, equal employment opportunity, employment security. They invested more in education and training on average than non-exporters. In addition, they were on average more unionised than non-exporters, and utilised certified agreements (enterprise bargaining) than minimum wage awards. As a former ACTU economist, I thought therefore that exporters, on average, were good employers, and an open economy worth supporting.
I concluded that, on average, exporters had been good for workers, since they had progressively ratcheted up wages and conditions (at home and abroad), and created at least as many new jobs as we lost in import-competing areas like textiles, clothing, and footwear. However this wasn’t a mercantilist (exports good, imports bad) argument, as two thirds of those companies which exported simultaneously imported or used imported components in production.
The evidence showed that the exporting sector, or more precisely the traded goods sector, was generating ‘good jobs at good wages’. The results were published in the Australian Financial Review on the day Doug Cameron was about to debate the late Senator Peter Cook on ‘free trade versus fair trade’.
This debate also raged in OECD countries, with British economist Adrian Wood seeing the loss of blue collar jobs in western countries but employment growth in the developing world. The issue also became entangled with the questions of the role of technology now causing disruption to white collar jobs (even journalism!), as well as to blue collar jobs. You can see this influence, too, in the immigration debate in the post-Trump world with Bill Shorten toughening his stance on guest workers with 457 Visas.
Conclusions from this debate
In all the noise over the trade-and-jobs debate politically, there are three conclusions which can be drawn from the evidence so far.
Firstly, not all trade agreements are good. Some can be distortionary in terms of trade, some can go too far into non-trade issues (like plain packaging cigarette advertising, or the pharmaceutical benefits scheme), and some can cause harm by cutting other trading partners out.
Secondly, you can be for an open economy, even if you are against a certain free trade agreement. Many traditional neo-classical economists hate ‘preferential’ free trade agreements, and prefer multilateral trade liberalisation (even though the WTO is as dead as a Doha), or even unilateral liberalisation (Australia in the 1980s and 1990s).
Thirdly, who it is who advocates a free trade agreement will make a difference to how it plays electorally. If the free trade advocate wants trade liberalisation because its ‘good for workers’, but in other fora is opposing minimum wage increases, workers’ rights, or wanting to strip away penalty rates, then it’s unlikely to receive a good hearing.
Australia, not America
Finally, it’s important to remember, in light of Donald Trump’s triumph, that Australia is not America. The deterioration of working conditions in the USA, particularly in the previous ‘blue wall’ of Democrat-held swing states, made such anti-free trade, anti-immigration rhetoric of the ‘Trump-licans’ (Trump Republicans) appealing.
The minimum wage has lost pace with living standards: 90 per cent of Americans have received no real wage gains in 20 years, there’s growing wage inequality, and the American labour market is losing the labour mobility for which it was once famous.
In fact, Vermont Senator Bernie Sanders tapped into that same anger in the Democratic primaries driven home by Trump in the general election, while Hillary Clinton was found to be flat-footed, instead making an unusual speech about a “basket of deplorables”.
By contrast, Australia does have a federal minimum wage which is regularly adjusted, and a labour market which has delivered employment growth for nearly 26 years after we embraced an open economy. In fact, we cut tariffs in 1991 during the last recession, but achieved a quarter of a century of economic growth since. By contrast to the USA, the economic rise of Asia has been seen as an opportunity, rather than as a threat.
But Australia also needs to remember that, to be successful, open markets can only be embraced with well-developed labour market institutions and social safety nets. And this has been the historical Australian judgement of balancing the right of the exporter-entrepreneur to ‘have a go’ with the right of the Australian worker to a ‘fair go’.
That is why we are better placed in tackling the trade and jobs issue than President Trump, especially if it’s all about tariffs on Chinese goods (most likely counterproductive by inviting retaliation), and if nothing is done about the decline of US labour market institutions.