Trade and the Honest Candidate

By Sebastian Mallaby

The Washington Post

Monday, August 2, 2004; Page A17

John Kerry may have surrounded himself with Clinton veterans, the technocrats who form the Democratic Party's permanent establishment. But the tone of his convention speech -- nationalistic not just on matters of defense but also on trade and economics -- marked a departure from the Clinton orthodoxy. Kerry attacked the outsourcing of jobs, which he implicitly blamed for a decline in manufacturing and in middle-class living standards. What does it mean, the candidate asked, "when Dave McCune, a steel worker I met in Canton, Ohio, saw his job sent overseas and the equipment in his factory literally unbolted, crated up and shipped thousands of miles away, along with that job?"

Since Kerry asks this question, perhaps he will be good enough to provide voters with the answer next time he raises the subject.

As Kerry and his advisers know, trade explains only part of the decline in manufacturing. Between 1970 and 2002, the sector's share of U.S. gross domestic product fell from 24 percent to 14 percent, a drop of 10 percentage points. But the trade deficit in manufactured goods grew by only about 4 percent of GDP over this period. Even though it's true that the deficit has recently grown sharply, deeper historical forces explain manufacturing's attrition.

What forces? An honest candidate might highlight two. First, Americans are growing richer, and richer people tend to spend less of their money on manufactured goods and more on services. As a result, the composition of production tends to shift. Second, manufacturing productivity has risen fast -- considerably faster, in fact, than the average rate for the economy. That productivity gain explains why manufacturing jobs tend to pay well. But it also allows firms to meet consumers' limited demand with fewer workers, so that manufacturing employment has fallen even faster than manufacturing's share of GDP.

So here's what Kerry ought to say. "My fellow Americans, I promised in my convention speech to revitalize manufacturing. But this sector's long-term decline is the flip side of our economic progress. Our manufacturing workers are marvelously productive, which is why they are paid well and also why they aren't more numerous."

While he's at it, Kerry could correct the impression that the pain an Ohio steel worker feels is about to beset millions of others. American voters are forever being told that workers in poor countries get paid rock-bottom wages and that there's something suspiciously unfair about this; "our plan calls for a fair playing field" was Kerry's summation of his trade philosophy at the convention. But the fear of foreign workers is exaggerated.

The reasons are explained in "Why Globalization Works," a powerful book by Martin Wolf, the chief economics commentator at the Financial Times. Foreign workers may be cheap: Chinese ones, for example, cost an average of $730 a year in the second half of the 1990s, as against $29,000 for the average American. But the average Chinese worker in this period added only $2,900 of value per year, while Americans added $81,000 each. U.S. workers are better educated, better managed and equipped with better machinery: They had at their disposal fixed capital worth 25 times as much as the machines their Chinese rivals used. No doubt, in the future, China's handicaps will erode. But China's wages will rise, too, offsetting the advantage.

This is not to deny that trade has a cost. It does destroy some jobs, and it forms a small part of the reason why unskilled workers (those who compete most directly with cheap foreign ones) have seen wages stagnate or decline over the past quarter of a century. But dwelling on these costs is the equivalent of denouncing new technology, which accounts for a much bigger part of the travails of unskilled workers. "What if we have a president who believes in science?" Kerry asked the nation last Thursday. What if we had a president who acknowledges trade's huge advantages?

Over the past generation, trade has lifted millions of people in developing countries out of poverty. It has generated new wealth at home, making all kinds of products more accessible to working families. Kerry, who complains about the rising cost of college tuition and health care, should acknowledge that inflation in these sectors reflects the fact that they aren't traded. The right response to trade's real downside is to spend part of the dividend compensating society's least fortunate -- for instance, by making the tax code more progressive and spending the proceeds on Head Start, inner-city schools and other programs that help trade's potential losers.

Kerry's views on these matters suddenly count more because the world trade talks launched three years ago achieved a breakthrough over the weekend. It seems altogether possible that the next president will have the job of completing these talks and pushing the results through a skeptical Congress. At stake will be a chance to boost the incomes of the world's people by well over $100 billion a year. It would be unfortunate to have an American president who is ambivalent about this opportunity.

mallabys@washpost.com