I wasn’t a big fan of George W. Bush (to put it mildly), but on immigration reform, his heart was in the right place. Back in 2004, Bush began to push for a guest- worker program that would have given legitimacy to millions of undocumented immigrants, who otherwise would have been forced to remain huddled in the shadows. The program wouldn’t have been as good as a path to citizenship, or an amnesty like the one Ronald Reagan enacted in 1986. But it would have been a good start.
Unfortunately, it never happened. Instead of being defeated by Democrats, Bush was thwarted by his own party. Grass-roots conservatives, led by former Colorado Rep. Tom Tancredo and talk-radio hosts, took up arms against the program. Bush was defeated, and immigration reform was delayed.
Now we’re witnessing a similar moment, only this time it’s the Democrats’ turn. President Barack Obama has been stymied so far in his attempt to get so-called fast-track trade authority, which would be extremely helpful in passing the Trans-Pacific Partnership (TPP), a trade deal among a dozen Pacific Rim countries. The charge is being led by Elizabeth Warren, the U.S. senator from Massachusetts who has emerged as the leader of the populist wing of the Democratic Party.
I admire Warren a lot for the work she has done on financial reform, including the creation of the Consumer Financial Protection Bureau. I have no doubt that her heart is in the right place – she wants to protect low-income American workers from the inequality that can result from trade expansion. But in the case of the TPP, I believe Warren and the populist Democrats are misguided. Like Tancredo and the conservatives who defeated Bush’s immigration plan a decade ago, Warren and the anti-TPP movement are doing more harm than good.
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The populist Democrats are worried that trade deals will ship U.S. jobs overseas. In a speech to the Roosevelt Institute think tank, Warren declared: “Over and over, America’s workers have taken the brunt of bad trade deals…We can’t keep pushing through trade deals that benefit multinational companies at the expense of workers…Working people cannot be forced to give up more and more as they get squeezed harder and harder.”
This sentiment is understandable, because American workers have been squeezed for decades, and trade – or, more generally, globalization – has been a big part of that. Labor’s share of income has drifted down to historic lows, and evidence indicates that globalization was the main culprit.
But there are two big reasons why the TPP is different.
First, past deals to liberalize trade – such as the entry of China into the World Trade Organization in 2000 – were focused on trade with developing countries. These countries, including China, have a lot of labor and not much capital in the form of roads, buildings and machines. When we open up trade with them, the global supply of labor becomes more abundant, and hence less valuable – American workers end up competing with overseas workers who can do half the job for a tenth of the price.
This is known as factor price equalization. It tends to drive wages down, killing good blue-collar jobs in areas such as manufacturing that can be easily outsourced.
The TPP is different. It’s mostly about trade with Japan and South Korea. These are rich countries, with tons of capital and very high labor costs. In fact, Japan’s labor costs are so high that Japanese auto manufacturers now build a lot of factories in the U.S. American workers are not going to lose out to the Japanese and South Koreans.
Yes, TPP does include a few poor countries, such as Indonesia. But compared with China, those countries are small potatoes. Very few manufacturing jobs will be lost to low- productivity Indonesia that haven’t already been lost to medium- productivity China.
The second reason TPP isn’t like past trade deals is the intellectual property protection. These provisions have had libertarians up in arms – Rand Paul, for example, has joined the TPP opposition. Democrats who don’t like the direction libertarians have taken our country since 1980 should think twice before getting on the bandwagon with their old adversaries on economic issues.
There is one type of activity that is very hard for U.S. companies to send offshore: innovation. But when Asian countries can just ignore U.S. patents, innovation becomes less profitable. Stronger international IP protection will help U.S. companies export more, which makes them hire more American workers, which increases the amount that those workers spend on the local economy. Yes, there are many problems with the U.S.’s intellectual property laws. But international harmonization of IP wouldn’t exacerbate these problems.
So Elizabeth Warren and the populist Democrats have good intentions, but they’re attacking the wrong enemy. Globalization was a Pandora’s box in 2000, when it was all about China. But we already opened Pandora’s box. The monsters have already escaped, and the Democratic populists are 15 years too late. Now all they’re doing is increasing the odds of scuttling a useful deal.
Noah Smith is an assistant professor of finance at Stony Brook University and a freelance writer for finance and business publications.