Yes to free trade, no to “industrial policy”

The Spring 2020 issue of National Affairs contains a powerful defense of free trade written by Richard Reinsch, II. Reinsch is editor of Law & Liberty.

His target is industrial policy aimed at reviving jobs and increasing wages in the manufacturing sector, including policies targeting free trade. Reinsch wonders why there is so much focus on manufacturing jobs, which currently constitute only 8 percent of employment.

One reason has to do with claims of a manufacturing wage premium. Reinsch disputes the existence of such a premium:

According to the Bureau of Labor Statistics, in December 2019 the average hourly wage for production and non-supervisory workers in manufacturing was $22.46; for production and non-supervisory workers in the private-sector service industry, the hourly wage was $23.53. Construction workers have a higher wage than manufacturing workers, as do those in mining and extraction industries.

But even if there is a manufacturing wage premium, it doesn’t follow that tariffs or other interventions would create manufacturing jobs that pay as much as the current average. Reinsch explains:

[W]ages for manufacturing jobs in the U.S. are as high as they are because these jobs depend on relatively high-skilled American workers. Not all manufacturing jobs are equal, and simply adding more manufacturing jobs in America would not necessarily mean we would need more high-skilled, high-wage workers.

Reinsch also argues that this is “a disastrous time to impose tariffs.” Why? Because many goods we associate with American companies are made using foreign components, while about 56 percent of what we pay for something “made in China” goes to U.S. workers and companies, according to a recent analysis by the Federal Reserve Bank of San Francisco. These products are generally assembled in Chinese factories, but their component parts often come from the U.S.

Thus, for example:

[W]hile the steel tariffs Trump enacted may benefit the 140,000 Americans in that industry, the 2 million Americans who work directly with steel as an input are less well off. The price of production has been raised, and those higher prices must be passed on to consumers. Nationwide, we’re poorer as a result. The New York Federal Reserve recently found that Trump’s tariffs cost consumers nearly $1.4 billion every month.

Reinsch also argues that the loss of manufacturing jobs in the U.S. is due mainly to technology change, rather than trade. This seems like an obvious point, but Reinsch tries to quantify it, citing a study by economists Michael Hicks and Srikant Devaraj finding that between 2000 and 2010, 13 percent of manufacturing job loss was due to trade. The remainder was due to technology.

Job loss notwithstanding, the U.S. manufacturing sector is “robust and highly productive,” according to Reinsch. Policymakers should not be insisting that we come to its aid at the expense of consumers (i.e., all of us) who benefit significantly from the low prices free trade produces.

Reinsch does not minimize the problem of lower male participation in the American workforce. But he declines to blame the problem on free trade in general or on China in particular. He says “the decrease in male workforce participation began long before China entered the World Trade Organization in 2001; it seems to have coincided with the breakdown of family life in the early 1960s and the rise of President Lyndon Johnson’s Great Society programs in the mid-1960s.” Moreover, “while the rate of what we call deaths of despair did increase after 1998, that increase occurred in spite of five years of rising wage growth for the bottom 20th percentile of male wage earners.”

Reinsch agrees, as I think he must, that there should be exceptions to free trade to account for military and security concerns, such as those raised by China’s lead in 5G broadband technology:

Our national defense strategy must meet the Chinese directly with a smart and carefully tailored response. This will require, among other things, the end of wholesale technology transfers. The U.S. must confront China over any theft or espionage of American firms’ intellectual property. Further, addressing the potential threat China poses may require increased amounts of defense research, and development of technology intended for military use.

Any nation serious about its continued existence must have these policy conversations and make appropriate decisions regarding its military posture. If certain restrictions on trade are needed, they should be imposed.

But this is a far cry from an industrial policy that would hamper the innovation and creativity that make an efficient and speedy defense possible. In the case of 5G technology, the first consideration should be getting the incentives and policies right for its commercial development domestically.

Reinsch concludes:

For American capitalism to continue, we must understand its capacities for disruptive growth while ensuring that both the federal government and the market are not tied down in a self-defeating industrial-policy matrix.

Given the massive benefits American capitalism has conferred, some of which Reinsch describes, we should all want it to continue.