Pacific Money

The TPP’s Hidden Risk — and How to Counter It

It’s time for the U.S. and the Asia-Pacific to rethink trade adjustment.

The TPP’s Hidden Risk — and How to Counter It
Credit: Flickr/ David Hilowitz

On March 8, the 11 remaining members of the Trans-Pacific Partnership (TPP) signed the sweeping trade deal, just over a year after the United States’ withdrawal. That same day, in Washington, U.S. President Donald Trump authorized tariffs on imports of steel and aluminum.

Why are the TPP countries moving toward greater integration while the United States heads in the opposite direction?

Trump alone doesn’t explain it. The most recent U.S. presidential election revealed widespread skepticism from both parties about the benefits of trade agreements, as well as a broader backlash against trade and globalization — the perceived causes of job losses, stagnant wages, and income inequalities.

The answer may be that while dissatisfaction with trade has grown in the United States, particularly in former manufacturing hubs like the Rust Belt, the government has fallen short in helping those left behind by globalization.

The United States’ lack of adequate proactive assistance programs for workers has contributed to the public backlash against trade and globalization. Unless countries of the Asia-Pacific take action, they may face a similar backlash in the future.

As economists often note, the benefits of trade — economic growth and access to high-quality, lower-priced goods — are diffused across the entire economy. Meanwhile, the drawbacks — job losses due to import competition — are concentrated among a small but heavily impacted segment of the population.

The United States recognized early on trade’s potential for disruption and implemented the world’s first trade adjustment program in 1962. Since then, Trade Adjustment Assistance (TAA) has helped support U.S. workers adversely affected by trade through job training, career counseling, wage supplements for older workers, job search and reallocation allowances, and income support for workers in training programs. Over 2.2 million Americans have benefited from TAA, allowing workers to obtain the skills and credentials required to compete in the 21st century economy.

But over the years, TAA has floundered. Critics point to weaknesses that hinder the program’s successes: inadequate funding, limited coverage, and difficulties associated with accessing benefits. A comprehensive study by Mathematica Policy Research concluded that accessing TAA services is “complicated” for workers, “involving multiple steps, many actors, and specific deadlines.” Kara Reynolds, an economist at American University, found that TAA benefit recipients may in fact have lower earnings than those who receive regular unemployment benefits. More broadly, U.S. spending on active labor market adjustment programs is low, constituting just 0.11 percent of GDP, compared with 0.99 percent of GDP in peer country France, and 0.45 percent in South Korea, according to Brookings.

Based on the U.S. experience, it may not be enough for economies to continue on a path of greater trade liberalization without comprehensive and effective policies to help displaced workers. Countries in the Asia-Pacific region should consider implementing effective programs to support and retrain workers affected by trade and, more broadly, technological advancements and productivity increases.

A survey of various Asia-Pacific countries’ approaches to trade adjustment by the Asia Society Policy Institute suggests there is room for improvement. South Korea established its own trade adjustment program in 2007 ahead of the implementation of its trade deals with the United States and the European Union, focused primarily on helping firms facing import competition implement structural reforms to regain competitiveness. Though Seoul expanded coverage to individual workers in 2016, observers note that inadequate funding and distorted incentives for firms have prevented program success.

Some countries, such as China and Vietnam, rely on universal unemployment insurance (UI) schemes to address trade-related job dislocation, but success is limited. In both countries, UI coverage is negatively impacted by high rates of employment in the informal economy, and funding is largely inadequate. China, however, is experimenting with trade-specific adjustment programs. In July 2017, the Shanghai Pilot Free Trade Zone (FTZ) established a trial program modeled explicitly off of the United States’ TAA.

Australia and Japan fall somewhere between the U.S. approach and the “UI” approach. These governments implement targeted, fixed-term assistance to workers, firms, or industries impacted by individual economic events. The Australian government, for example, administers a program to support workers laid off from its faltering automotive industry. In Japan, since 1998, the government has subsidized vocational training for laid-off workers, albeit at a maximum of $1,000 per worker.

Side-by-side comparisons of adjustment programs, however, can be misleading because of other existing domestic policies. Australia’s social welfare regime, for example, ranks among the world’s most comprehensive. Conversely, in the United States, assistance may appear generous by including, for example, health insurance benefits. However, social welfare coverage in the United States is significantly less comprehensive than in other advanced economies, particularly for healthcare.

What is clear is that these programs, despite being good-faith efforts by governments to help those left behind by trade and globalization, must be re-tooled for the 21st century.

In the United States, adjustment assistance should not just be limited to trade, but also be available to help workers adjust to disruptions resulting from new technologies, innovation, and productivity.

In the Asia-Pacific, policymakers should be vigilant about the impact trade and technological advances may have on their workforces. If governments in the region are to address the needs of current and future workers, and mitigate potential backlashes, they should consider more comprehensive adjustment programs that go beyond trade.

The U.S. model, despite its faults, could be a starting point, particularly if lawmakers allocate sufficient funding and expand its scope to encompass jobs lost to technology. Another example would be “flexicurity,” the model championed by the Nordic European economies, which prioritizes the overall well-being of workers over protecting specific jobs. Germany’s apprenticeship system has also demonstrated encouraging success in the face of a globalizing and automating economy. Policymakers in the Asia-Pacific would do well to consider implementing similar programs.

Effective job retraining and skill development programs could go a long way in helping those left behind in a rapidly-evolving economy, while easing the backlash against trade and globalization.

Wendy Cutler is vice president at the Asia Society Policy Institute and a former negotiator in the Office of the U.S. Trade Representative.