How to Recalibrate Trade Adjustment Assistance to Help Workers Hurt by Trade Liberalization

Introduction

Opening to international trade may create both “winners” and “losers” in a given country. This is nothing novel: back in 1941, economists Wolfgang Stolper and Paul Samuelson suggested that if a country opened to trading, the gains from trade may be unevenly shared domestically. A prominent example of this effect in literature is the “China shock”: As a consequence of China’s rise in global manufacturing and its accession to the World Trade Organization, 2 million jobs, mostly occupied by low-skilled factory workers, were found to have been lost between 1999 and 2011 in the United States alone.

To mitigate the negative side effects of trade liberalization for those who stand to lose from it, governments such as the United States and the European Union have set up trade adjustment programs consisting of various targeted labour market policies as well as complementary policies. The most prominent example, the U.S. Trade Adjustment Assistance (TAA) program, was set up by the Kennedy administration in October 1962. It has been updated and extended several times since, most importantly because of its sunset clause, which lets the program end and be reauthorized after a certain period. However, the last reauthorization of the TAA expired on July 1, and the next extension remains blocked in Congress, leaving thousands of workers without access to the TAA’s benefits and re-employment services.

Although the blockage in Congress is not the first in the history of the TAA, it comes at a critical juncture as the program approaches its 60-year anniversary in October and faces growing scrutiny, with its effectiveness increasingly criticized. Returning to the China shock example, researchers have found that the TAA covered only 6% of the government assistance provided to workers who were laid off due to increased Chinese import competition from 1990 to 2007. Figures from the U.S. Department of Labor (DOL) also show that of the 88,001 workers who were eligible to apply for the TAA in 2019, only 32% received its benefits and services, suggesting a gap between the provision of services and need. But does that mean the TAA and targeted trade adjustment programs are ineffective in general?

How Has the TAA Performed?

As a pillar of post-World War II embedded liberalism, the TAA had both economic and political goals. It sought to allow those whose who were worse off from trade liberalization to become swiftly re-employed and compensated for their losses and to “buy off” the political opposition of laid-off workers to increasing openness for trade. Some researchers have therefore referred to the TAA model as trade’s social contract: expanding trade liberalization coupled with a compensation scheme that ensures nobody is worse off from it as a political compromise to retain support for further liberalization.

When looking at the economic objectives and considering only the workers who actually enrolled in the program, the TAA can be considered quite effective.

So how well did the TAA perform in practice? When looking at the economic objectives and considering only the workers who actually enrolled in the program, the TAA can be considered quite effective. DOL data from 2019 show that TAA coverage leads to average re-employment figures of 76.8% and wage replacement percentages of 90.5% for workers 12 months after exiting the program. These figures are quite high compared to other types of active labour market policy programs that, especially in other developed countries, typically do not target only trade-affected workers but are more general and generous, as they are typically embedded in broader, albeit more costly, welfare state systems.

Regarding the political objectives, the TAA appears to be successful as it truly seems to bear an insurance value for workers in a manner affecting their attitudes on trade liberalization. This is shown by previous studies that found fewer calls for trade protectionism in counties with higher numbers of successful TAA petitions. Additionally, research has found a small link between TAA allocation to counties and their congressional representative’s voting behaviour on U.S. free trade agreements. Counties with a higher share of successful TAA petitions also expressed less political discontent with the current administration.

So, given these quite positive findings, why has the TAA fallen into disrepute? The reasons for this can be summarized quite easily: 1) very limited coverage caused by a narrow scope of eligibility as well as a complicated and sometimes lengthy signup process, and 2) a severe lack of funding.

To become eligible, at least three full-time employees from the same company must submit a TAA application as well as other documentation for a number of additional requirements that need to be checked and certified by the DOL. More precisely, according to the latest update to the TAA, applicants must submit proof that they are/were manufacturing workers and that they lost their jobs due to their company’s (or a downstream producer`s) decline in production and/or decrease in sales because of increased imports or outsourcing to a limited number of countries. If this red tape does not deter workers from applying, they then face a waiting process that sometimes lasts several months, during which they receive no support or guarantees from the TAA.

Funding for the TAA is notoriously low.

Secondly, funding for the TAA is notoriously low, meaning the money that participants may get from different components of the program is capped at low levels. Limited funding also means there is little scope to expand the program. A good example of the impact of limited funding are relocation allowances. Different U.S. regulations and policies make relocation between regions and states rather complicated and costly. However, limiting geographical labour mobility hinders labour market flexibility. While the TAA contains a specific policy providing a relocation allowance, this allowance is, in practice, capped at just USD 1,250. The fact that fewer than 1% of TAA participants applied for the relocation allowance suggests that TAA participants perceive it to be of little value and not worth the red tape.

The results of these flaws are quite drastic, as labour market economist Kevin Kolben notes:

• These failures spur critics of the TAA and labour-adjustment policies to argue that the benefits simply do not outweigh the costs and also spur trade skeptics to argue that protectionism might just be a better solution than risking the shift to a new job that might not pay as well in the end or that might result in a worker being somewhere that the worker does not want to be.

This is quite an important finding, as protectionism costs have been found to be much higher than TAA costs. This is because, among other factors, both U.S. consumers and U.S. trade partners bear the costs of protectionism.

How to Improve Trade Adjustment Assistance?

What can be done to rethink and improve the TAA while it remains blocked in Congress? To answer this question, it makes sense to compare the TAA to the European Globalisation Adjustment Fund (EGAF), the European Union’s counterpart to the TAA. The EGAF was haunted by the same flaws in its design as the TAA: low coverage caused by a narrow scope of eligibility for trade-affected workers, problems in the processing of requests, and limited funding. The EGAF was overhauled in 2021 in the course of its latest renewal amid findings that identified limitations to its effectiveness. Most importantly, the application procedure was altered to improve and accelerate the processing and allocation of funds (for example, by reducing red tape), and the scope was significantly broadened by including non-trade-related “unexpected major restructuring events” such as digitization and automation, the transition to the low-carbon economy, and more. These factors had been hard to disentangle from trade-only factors, even though they are often closely linked and usually affect the same socio-economic groups of workers. Lastly, the funding was increased considerably. Although there are no studies or statistics yet on the effectiveness of the 2021 EGAF reform, the outcomes are expected to improve substantially because the reform captured the major criticisms about the EGAF, which remain unresolved for the TAA.

While the TAA may have some inherent flaws, these could be resolved or improved if there were sufficient political will.

This comparison shows that while the TAA may have some inherent flaws, these could be resolved or improved if there were sufficient political will. Some members of Congress have called for expanding the TAA. However, as long as trade losers in the United States perceive protectionism (favoured by the Republications) as a substitute for the TAA (favoured by the Democrats), the program’s scope and format are unlikely to change unless it becomes a bipartisan issue. History shows that the TAA can be bipartisan—for example, when the Bush administration, together with free trade proponents in Congress, bought off opposition to renewing Trade Promotion Authority almost 20 years ago by increasing the size of TAA and providing wage insurance for older workers displaced by trade.

The TAA and targeted trade adjustment programs generally are worth the attention of policy-makers, academics, and the public. Creating a specific policy on trade-affected workers sends a clear, formal, and credible commitment to trade losers that they have not been forgotten by the political elite. As import competition is expected to grow over the long run, especially in the services sector, there is also value in looking more closely at those who might lose from trade liberalization. Because trade liberalization is a bit more “predictable” than other forms of economic change, such as the 2008 financial crisis, and because further economic opening and tariff concessions are subject to government planning, there are opportunities for policy-makers explicitly related to trade liberalization. Some scholars, for example, have suggested including trade adjustment provisions in preferential trade arrangements that a country negotiates as an ex ante credible commitment. The main argument supporting this is that domestic adjustment policies can be seen as a means of insurance for trading partners against “involuntary defection” on the tariff concessions offered by the other party through a preferential trade arrangement and could, as such, be portrayed as “safeguards” in sections regulating the conditions or the usage of trade remedies.

The TAA and targeted trade adjustment programs generally are worth the attention of policy-makers, academics, and the public.

Even if such suggestions might be a bit too ambitious, as they mainly aim at a domestic audience for which other forms of credible commitments on the unilateral level are more feasible, they hint at the right direction, as more attention must be paid to the domestic impact on potential losers that comes with the enactment of new trade agreements with other economies. One way might be including possible labour market scenarios into ex ante specific impact assessments before entering negotiations or new trade agreements. This would allow the identification of possible labour market frictions and impacts on trade losers before they become a reality. This might even provide sufficient time to set up preemptive measures instead of relying on more costly ex post policies that only enter into force in a delayed manner—that is, when the damage is already done. As shown by the example of China’s World Trade Organization accession, which caused concentrated harms to some import-competing industries that in turn led to increased political polarization, thinking of those who might lose from trade liberalization more proactively and ahead of time could truly have been a game changer.

Andreas Oeschger is a junior policy analyst in sustainable trade at IISD. This article is partly based on his thesis, Revisiting Trade Adjustment Programmes: The Effectiveness of General and Targeted Approaches (Geneva Graduate Institute, 2022).