Misperceptions and Misplaced Perceptions: Time to Turn the Page on International Trade

International trade has gotten a bum rap in recent years, despite accounting for 25 percent of U.S. economic activity and its significant contribution to raising productivity and real incomes. Middle-class Americans gain about a quarter of their purchasing power from trade, while nearly half of imports are inputs for U.S. businesses. Exporting firms also pay higher wages, and the United States is the global champion in services exports.

Nonetheless, former President Donald Trump tapped into a growing popular resentment of trade and has continued with his hallmark assertion “that foreign countries . . . have been ripping us off for years” and they “come in and take advantage of our country.” The Joe Biden administration has continued in the same vein, claiming that trade has “contributed to the hollowing out of the American industrial base and vital U.S. jobs, and harmed many of our communities and working families, undermining support for democracy itself.” With such portrayals, it is hard to see how anyone would favor trade.

In a speech at the Brookings Institution in April 2023, National Security Advisor Jake Sullivan cited trade liberalization—together with markets allocating capital efficiently and productively and the notion that all growth is good growth—as assumptions whose limits were laid bare by the “the shocks of a global financial crisis and a global pandemic.” He proclaimed that a new consensus is needed to “build a fairer, more durable global economic order, for the benefit of ourselves and for people everywhere.”

Smart industrial policy to advance national security, address climate change, and promote innovation can have its place. But it is a mistake to give short shrift to markets, trade, and growth, as they are the very mechanisms that raise incomes, a necessary part of addressing the unfairness issues cited by the last two administrations. Two phenomena are at play: a misperception and a misplaced perception.

Misperception

The misperception is the apparent view of Biden administration officials that the usual levers of fiscal and monetary policy were not working properly. During the Great Recession, the prime age employment-population ratio—which tracks the proportion of all Americans between the ages of twenty-five and fifty-four who are employed—tumbled from 80 percent in January 2008 to 75 percent by October 2009 and took nearly a decade to recover. Journalist Matthew Yglesias has suggested than rather than admit the Barack Obama administration stimulus measures were inadequate, the notion took hold that the sluggish labor-market recovery was due to something more “profound and conceptual.” Perhaps this is why officials rolled out a “worker-oriented trade policy” that has maintained the Trump administration’s tariffs, eschewed new market-opening arrangements, promoted onshore production, and expanded Buy American provisions.

But, in fact, the economic machinery of the United States works fine. As the COVID-19 pandemic dropped the prime age employment-population ratio down to 70 percent, the Biden administration’s massive stimulus package and a forward-looking Federal Reserve headed off another slow labor-market recovery. The prime age employment-population ratio popped back up to 80 percent within two years, faster than forecast. Whatever merits the worker-oriented trade measures could have had to create jobs, they are not appropriate in a relatively tight labor market with unemployment at 4.2 percent.

Misplaced Perception

The misplaced perception is that trade has few benefits when they are overwhelmed by other unfavorable economic conditions. Intuitively this makes sense. When Walmart shoppers’ savings on purchases of a tradable items—produced abroad or in the United States—are more than eaten up by rising rent and medical costs, awareness of any benefits from trade quickly evaporates like water on a hot rock.

This dynamic was evident during the Great Recession. Those who believed trade was good for the country collapsed from 78 percent to 58 percent and never fully recovered. When the pandemic undercut the economy, the 79 percent who thought foreign trade presented an opportunity for growth in 2020 slipped to 61 percent, according to a Gallup poll. 

Even though more recent headline data suggest that the economy is doing well, a May 2024 Pew survey reported that only 23 percent of respondents believed that economic conditions in the country were excellent or good. It is no wonder that 59 percent of respondents believe that the United States has lost more than it has gained from increased trade with other nations, a 3 percent increase from 2021.

Pre-distribution

Rather than build policy on the misperception and misplaced perception described above, Washington policymakers should do more to help ordinary Americans by taking measures to increase the supply of goods and services that are currently constrained by regulation or market concentration and contribute to raising costs. Unlike distributional policies, where the government makes direct payments such as unemployment insurance to address unequal growth outcomes, in these so-called pre-distribution measures the government helps raise real incomes in the first instance by strengthening market forces that reduce costs, such as lowering the price of drugs.

The Biden administration deserves credit for seeking to lower costs in some pre-distribution areas such as housing and medical care and for creating the Competition Council to tackle exploitive practices such as junk fees and noncompete clauses. But more could be done. Journalist Derek Thompson has proposed an “abundance agenda” to reduce price pressures in areas of constrained supply by easing regulatory burdens. Vanderbilt University’s Accelerator Program has chipped in, listing forty new ideas to promote competition.

International trade policy also has a role to play to lower prices in pre-distribution areas. For example, under a process known as foreign peer approval, the Food and Drug Administration could address shortages of a drug it has already approved by allowing the importation of the same drug produced abroad and approved by a foreign drug agency. Other examples where trade policy could support pre-distributional policies are by lowering tariffs on housing construction goods; expanding visa extensions for qualified doctors, construction workers, and others; lifting the recent pause in processing new visa applications for international nurses; and signing on to the new Agreement on Climate Change, Trade, and Sustainability providing for duty-free treatment of environmental goods (excluding unfairly subsidized goods).

Dispelling the misperception that the machinery of the U.S. economy is defective would be the first step toward a discussion of more effective policies that embrace trade. Using trade measures to reduce pre-distribution costs would help lift real incomes and improve the economy’s overall performance. When paychecks go further to meet family needs, perhaps the population would have a rosier view of the economy and discard the misplaced perception that trade presents a threat. Politicians would have less of a foothold to exploit trade for populist purposes.

Time to turn the page on international trade.

James Wallar is a former U.S. Treasury official and advisor to the CFR RealEcon initiative.