The harsh downside of free trade – and the glimmer of hope

Free trade has delivered huge benefits to Asian workers and US consumers. But it has hurt many US workers longer and harder than expected and has roiled American politics. Part 1 of a five-part series.

Two decades ago, this blue-collar city of wide streets and two-story storefronts hummed with commerce. Factories, mostly textile mills, employed a quarter of the workforce and the county unemployment rate had fallen to as low as 4.2 percent by 1997. At a community meeting at the North Lake Country Club, mill owners and bankers sang the praises of the North American Free Trade Agreement (NAFTA), which three years earlier had pushed wide open the doors of trade with Canada and Mexico.

Tom Fitch did not blend in. Amid a sea of suits, the sign-shop owner stood out in his blue jeans and ball cap.

“Here, these guys were saying how their profits had increased, and I stood up and asked them why they couldn’t see what was in front of their faces: This was going to destroy our town,” recalls Mr. Fitch.

He turned out to be more prescient than the bankers. Shelby went on to lose 40 percent of its factory workers between 1999 and 2014. Adjusted for inflation, income for the typical middle-income household dropped 20 percent (nationally, it dropped, too, but at only half that rate), while the poverty rate soared to 29 percent, nearly double the US average. Once China gained preferential access to US markets in 2001, Shelby and surrounding Cleveland County never again saw unemployment fall below 5 percent.

Donald Trump’s repeated attacks on current trade deals match “what I feel in my heart,” says Fitch, whose sign shop still operates in Shelby, though the country club has closed.

Debate over the pros and cons of freer trade has moved from the kitchen table to the political stage. Clearly, it has helped China and much of Asia, lifting hundreds of millions of workers out of poverty, as well as American consumers, who have saved many millions of dollars by buying foreign electronics, cars, and furniture for less than if they were made domestically.

But workers should have benefited, too, by moving to more productive jobs, according to orthodox economic theory. That hasn't happened, not for many lower-income workers in Britain, who voted June 23 to leave the European Union in a broad rejection of globalization, nor for their counterparts in the United States.

More than a decade after opening their doors to Chinese goods, many Americans have endured unemployment or low pay for longer than anyone expected, widening the gap between rich and poor. Except for Mr. Trump on the right and Sen. Bernie Sanders (I) of Vermont on the left, presidential candidates who lambasted recent trade deals, the political establishment by and large has yet to grasp the enormity of the problem.

Only now has the nation begun to show signs of finding an economic equilibrium after the economic shock of China trade.

And only in the towns and cities of states like North Carolina, hardest hit by trade with China (and Mexico before it), do the downside of trade, the worker anger it kindled, and the first glimmers of recovery come into focus.

“The fundamental betrayal goes beyond trade – it’s a sense that we’re working hard and we’re getting screwed by the system,… a sense that, ‘This isn’t the America I grew up in, or the America I expected,’ ” says I.M. “Mac” Destler, a University of Maryland political scientist and author of “American Trade Politics.” “And that’s why trade is more prominent today than it’s been in any presidential campaign since, well, the Great Depression.”

Forty miles due east of hard-knocks Shelby, Dave Crabtree, an architect, is taking a midday stroll along Trade Street in downtown Charlotte, N.C. He recalls his time, not long ago, working in China on a massive real estate development. The deal handsomely rewarded Mr. Crabtree and his firm, beneficiaries of negotiated open markets where American expertise is exported across the world as easily as machine tools and bolts of fabric.

Yet Mr. Crabtree is not completely sold on the current terms of trade. "There’s a lot of squirrely money that moves around,” he says. “You get the sense working in China that America could probably be getting a better deal.”

No longer a trade cheerleader

Charlotte – the South's second-largest city – is certainly booming. Its population has soared more than 50 percent since 2000. Last year, it was rated No. 1 among large cities for growth in businesses, No. 5 in job growth, and No. 16 in terms of low cost of living. It's a finance center, with a polyglot army of careerists young and old, many wearing bank badges and sporting designer suits as they eat street tacos in the shade of their banks.

It's also a foreign trade zone. Nearly 1,000 foreign companies have taken advantage of the zone's tariff reductions to open facilities in the area, including a German specialty chemicals company, a South Korean sheet-metals components plant, and a Chinese yarn-spinning company.

And yet, for all the accolades and growth, Charlotte has not kept pace with average US growth. In 1999, Charlotte’s middle household earned $5,000 more than the US average; by 2014, it was only on par. Poverty, which was two percentage points lower than average in 1999, is now almost two points higher.

“We have to pivot [on trade] – before it’s too late,” says Danny Forsyth, a former manufacturing worker from Richmond, Va., now studying in Charlotte to be a lawyer. “People are tired of losing.”

North Carolina historically has cheered open competition. The South, after all, lured the textile mills from New England and, later, steel mills from the industrial Midwest, with the promise of cheap labor. But those industries moved offshore as globalization took hold and Bangladesh, South Korea, and China offered even cheaper labor.

Thanks to that move, Americans spend less on clothing than they did 30 years ago, adjusting for inflation. But this heavily manufacturing-dependent state has also seen at least 300,000 jobs disappear since the US made China a permanent preferred trading partner in 2001. After decades of promoting open trade, North Carolina’s congressional delegation has turned, by steps, against trade, voting by wide margins against the newest trade deals.

In that way, “North Carolina is a good example of forces shaping labor markets – and the forces are not US-specific, but global,” says University of California, Berkeley, economist Enrico Moretti, author of “The Geography of Jobs.”

Are the benefits of trade all they’re cracked up to be? Not for US workers. The traditional theory that the US economy would adjust quickly to increased competition and offer them new jobs turned out to be wrong.

“Labor-market adjustment to trade shocks is stunningly slow,” write economists David Autor at the Massachusetts Institute of Technology, David Dorn at the University of Zurich, and Gordon Hanson of the University of California, San Diego, in their research paper titled The China Shock. “The ultimate and sizable net gains [from trade] are realized only once workers are able … to move from declining to expanding industries.”

 

Trump, speaking Tuesday to supporters in hard-hit Monessen, Pa., put it more succinctly: "Globalization has made the financial elite who donate to politicians very, very wealthy ... but it's left millions of our workers with nothing but poverty and heartache."

Signs of an adjustment?

But many of the job losses that Trump and Senator Sanders blame on trade are actually caused by other forces, such as automation. For example: Competition from Chinese imports directly destroyed about 560,000 US manufacturing jobs between 1999 and 2011, according to the three economists. Counting indirect effects, the figure rises to 1 million, a total much larger than previous studies had suggested. Even so, the US lost 5.8 million factory jobs during that period, so trade has not been the major culprit.

And there are also signs the US economy is finally making the adjustment to Chinese imports.

“The great China trade experiment may soon be over, if it is not already,” the three economists write in China Shock. “Rapidly rising real wages indicate that the end of cheap labor in China is at hand.”

The US economy is adjusting, partly by changing what it exports. Increasingly, it is exporting expertise – so-called "tradeable services" like engineering, biotech innovation, and financial analytics. These are the kinds of exports that drive North Carolina’s leafy and walkable boom towns. Nearly half the value added by US exporters comes from services, according to estimates.

“Half of the workers in the business service sector in the US are in tradable activities, which in turn employ more people than the entire US manufacturing sector,” says J. Bradford Jensen, a Georgetown University economist.

What’s left of the US manufacturing sector is also healthy. North Carolina remains a manufacturing powerhouse, says Georgetown University business professor Pietra Rivoli, the author of “The Travels of a T-Shirt in a Global Economy.”

The question now is whether other trade deals with low-wage countries, especially the Trans-Pacific Partnership, could create another shock to the system. Trump, the presumed GOP presidential nominee, and Sanders have railed against TPP. As secretary of State, Hillary Clinton supported it. As presidential candidate, she now, apparently, opposes it.

Shelby now offers a different glimpse of the future – not quite a return to the manufacturing heyday of old, but also not a picture of economic devastation.

Along North Carolina Highway 150, which winds through Shelby, Chris Carrigan, a bespectacled sheet-press operator, puts trade imbalances in perspective. Long after the end of the Great Recession, a general ennui lingered as surrounding towns like Dallas, Cherryville, and Lincolnton boarded up parts of their downtowns, he says. The small printing press he works for – greeting cards, brochures, books – found itself going head to head with China’s printers. Its workforce shrank from 15 to seven.

Yet, in that same period, longtime furniture company Bernhardt Inc. reopened a facility with 65 jobs. Shelby and surrounding Cleveland County have seen 1,863 new jobs and capital investments of $1.8 billion, according to the local economic development office. This includes 250 jobs at Clearwater Paper Corp., 189 jobs at auto-parts maker KSM Casting, and 305 jobs at Schletter, the US subsidiary of a German solar-panel manufacturer. Shelby now sports a tapas joint and a craft brewery.

“Up until a year and a half ago, people were still very much panicking about the future,” says Mr. Carrigan. “But it seems like since then, the work has been steadier, and things are picking up.”

Free Trade in America

Part 1: The harsh downside of free trade – and the glimmer of hope
Part 2: The surprising truth about American manufacturing
Part 3: What 'good' free trade looks like
Part 4: Why, this time, free trade has hit American workers so hard
Part 5: What can be done about free trade's 'victims'