For a long time, mainstream economists were convinced that free trade and globalisation would benefit everyone. Recently, populist parties and leaders have increasingly been gaining political power in a number of countries, drawing significant voter support from people feeling left behind by globalisation. Trump’s ‘Make America Great Again’ campaign and his promise to keep manufacturing jobs in the US was part of his electoral success, securing the votes of these very people.
In the wake of the populist movements’ rise to power, the global political and economic elites annually venturing to Davos have put income and wealth inequality – alongside climate change – at the top of the agenda for this year’s gathering. This year the topics of global inequality and trade policies – as well as digitalisation – are also high on the agenda for the G20 meeting in Hamburg, Germany. A network of think tanks (T20) will deliver research-based policy recommendations to the G20 to address these challenges. It would therefore appear that mainstream economists and politicians are now realising that globalisation has not paid off for everyone. Nevertheless, this trend is by no means new. Data from the US labour market provided by the Economic Policy Institute shows that during the period from 1979 to 2013, inflation-adjusted wages of low-wage workers decreased by all of 5%. At the same time, the wages of high-wage labour saw a 41% increase, and the top 1% of earners even witnessed a 138% rise in their incomes. Similar developments are taking place in other advanced economies, as for example in Germany, where according to the Institute of Social and Economic Research, inflation-adjusted incomes of the bottom 50% fell slightly between 1991 and 2010.
How is this connected to Trump’s protectionist policy approach?
At the beginning of this year, the president-elect, by way of ‘Twitter diplomacy’, urged Ford not to shift a production facility to Mexico with the threat that re-imported cars would face a 35% border tax. Consequently, Ford’s CEO changed his offshore plans, investing $700 million in the expansion of a production facility in Michigan instead, and thus creating 700 new manufacturing jobs. The other big US automaker, GM – after being called on by Trump not to move jobs outside the US – renounced its offshore plans and opted to invest $1 billion in its existing facilities in the US, creating some 1,500 jobs. This is of course good news for the workers at these factories and for their communities as a whole.
On the other hand, as shown above, the income of the lower echelons of society has stagnated during the last three decades. And whereas these people have been benefitting from cheap imported goods, when Trump implements high tariffs, imported goods will likely become less affordable. Likewise, American producers could raise prices, faced with less foreign competition in the domestic market. Finally, American businesses might be negatively affected by retaliatory measures on American export products and eventually by higher prices for imported goods that serve as inputs for American manufacturing.
Furthermore, researchers have pointed out that the offshoring of production facilities only accounts for a minor portion of job losses. A far bigger share in certain sectors can be traced back to increasing automation. Although there is still no unanimous opinion among researchers about whether automation will entail an overall loss of employment opportunities or not, what is obvious is that routine tasks common in low-paid and some middle-wage occupations will probably lose out.
How should those left behind by globalisation and automation be compensated?
To address this issue, it is crucial to increase investment in high-quality education, beginning with early-education and continuing with the retraining of workers and lifelong learning, so that people are well-equipped for the requirements of the future labour market. Better educated workers would be able to move to more advanced occupations that face lower risks from automation. Nevertheless, since it is widely acknowledged that (especially older) laid off workers – in spite of retraining – face difficulties finding new jobs, other measures should be put in place as well.
What is clear is that technological advancements can be put to use for the common good of society. Therefore, a second solution lies in a concept which can be labelled ‘fair automation’. Essentially, this means that it is not only big corporations and established players that should reap the lion’s share of productivity gains from automation. Rather, it should be ensured that these gains are distributed to society as a whole. Political measures which might be helpful in this regard – but that need more thorough analysis – include: an unconditional basic income; taxes on robot labour; and measures to ensure that employees receive a fair share of company profits (e.g., by becoming shareholders).
In summary, a protectionist policy will create and retain some manufacturing jobs in the short-term, but further automation may threaten these jobs as time goes on. Putting high tariffs on imported products could lead to a painful decrease in buying power for the low-income portion of society. Therefore, the wiser choice seems to be to prepare people for the future labour market and to promote the concept of ‘fair automation’ among decision-makers.
An Expert Comment on the implications of automation for the labour market will soon be published in the Dialogue of Civilizations Research Institute’s newly launched E-library. It will critically assess policy recommendations developed by decision-makers, and elaborate on the concept of ‘fair automation’.