Dealing with Disruption

Trade is disruptive. Though its long-run effect on employment is approximately zero, in the short run it can cost jobs and even depopulate towns.61 America’s resilience depends on its ability to adjust, but successful and timely adaptation is generally spontaneous in nature—the work of human action but not human design. Planned adjustment by governments has a much poorer track record.

Context is also important to adjustment efforts. Technological change costs approximately six times more jobs as does trade (though, again, only in the short run).62 Any argument made against trade’s disruptive effects applies even more strongly to technological change, yet no one seriously argues for reversing the dramatic changes the Internet has wrought.

More than 11 million American jobs turn over through hirings, firings, retire- ments, layoffs, and resignations every month,63 and nearly 85 percent of all jobs turn over in the course of a year. Yet America has suffered only four bouts of double-digit unemployment during the past century. Two of them, the Great Depression and the comedown from the 1970s stagflation, were due to monetary mismanagement, not trade.64 The third, the Great Recession, was due to a financial crisis worsened by monetary mismanagement, not trade.65 The fourth was due to COVID-19 lockdowns, not trade.66

Using trade restrictions to slow this churn is a mistake for two reasons: (1) trade is at best a minor contributor to job churn compared to other factors like tech- nology, changing consumer tastes, inflation, and business cycles, and (2) churn is evidence of a healthy economy. Agricultural economies have low job churn and low living standards.

When people see better opportunities, they should be allowed to pursue them. To do otherwise slows economic growth, harms individual dignity, removes humanity from our policies, and can contribute to societal ills like depression, addiction, and isolation.

Trade adjustment could be made easier by regulatory reforms to remove its attendant friction. These include: lLess restrictive zoning and permit rules; lOccupational licensing reform; lAutomatic sunsets for new regulations; and

A presidentially appointed Regulatory Reduction Commission that would examine the Code of Federal Regulations each year and send repeal packages to Congress that include old, obsolete, redundant, and harmful regulations.67

People who need help should be able to get it. Progressive trade policies help only special interests while harming the very people they are supposedly intended to help.

Trade Adjustment Assistance.

Trade adjustment assistance is a popular policy for aiding displaced workers. Though flawed, it is a bargaining tool that can potentially help to get sound trade policy adopted. A conservative Adminis- tration should approach trade adjustment assistance with caution and use it as a last-resort political bargaining tool and not as a first-resort policy. Funding for job training programs and the like will typically find its way to labor union slush funds, left-leaning nonprofits, and other progressive causes that will not necessarily help displaced workers.

A better approach to trade adjustment assistance, if it must be expanded, is direct cash transfers. Not only would this prevent progressive hijacking of pro- grams and their funding, but cash is the most flexible type of aid. It treats people as adults and lets them make their own choices about their next steps. Major life deci- sions should be made by individuals for themselves, not for them in Washington.

Trade adjustment assistance should treat workers who lose their jobs to inter- national trade the same as workers who lose their jobs for any other reason are treated. While that will not likely come to pass in the near future, steps in that direction are possible. Technological change displaces six times as many workers as trade displaces, yet workers displaced by technology get no special treatment. Nor should they. Unemployment remains low because it grows alongside pop- ulation, and real wages continue to rise over time. Trade-displaced workers should be eligible for the same benefits for which anyone else is eligible, no more and no less.

The Administration needs to attack the root of the problem. Temporary fix-it bills are better than nothing, but they leave the rot in place. The President needs to encourage bold liberalization.

Strength comes from openness. In the real world, markets fail. Factories will get contaminated, and health inspectors will not always be as thorough as they should be. The baby formula market is essentially a natural experiment in self-sufficient industrial policy. When something went wrong, that single

Supply Chain Lessons from the Baby Formula Debacle. Protectionism builds weaknesses into supply chains. This was demonstrated vividly by the baby formula shortage, which may have peaked in 2022 but remains an ongoing concern. Domestic baby formula producers benefit from a decades-old tariff that averages 17 percent, which is effectively high enough to shut imports out of the market. As if tariffs were not enough, other requirements also help to keep competition out of the market: ever-evolving labeling requirements and nutritional standards that (conveniently for domestic manufacturers) are always just slightly different from international standards.

As a result, before the formula shortage in 2022, approx- imately 98 percent of the country’s baby formula was produced domestically. With foreign competition out of the way, other government policies helped to concentrate almost the entire domestic formula industry into four firms. Roughly 40 percent of baby formula purchases are made by state-level food assistance pro- grams, which typically do not let families choose their own formula brands. Instead they must buy from a single producer, which guarantees producers large market shares in states where they win contracts. This situation gives incumbent pro- ducers a cozy existence but puts consumers at risk. Like all protectionist policies, the benefits are concentrated in the hands of a few producers while the costs and risks are widely distributed.

With so many eggs in so few baskets, whenever something goes wrong—which is inevitable even when nobody is at fault—families find themselves scrambling. That happened early in 2022 when contamination entered a Michigan facility that makes about 40 percent of America’s baby formula. Trade protectionism all but eliminated other options for many parents, who suddenly found empty shelves and sky-high prices for an essential item that many of them were already struggling to afford—while families in other countries were unaffected. In response, Congress passed the Formula Act68 in the summer of 2022. The act eased formula tariffs and loosened never-needed labeling requirements and other import restrictions, but it was temporary. It expired at the end of 2022, leaving families still vulnerable to the cascading consequences that ensue if one thing goes wrong at only one plant.

The baby formula debacle has two lessons for the next Administration.

failure point crashed the whole system. It should not be that way, and the next President can change it.

Part of the problem is that the supply chain analogy itself causes sloppy thinking. In a chain, a link is connected only to the link ahead of it and the link behind it and not to any other links. Real-world supply chains are more like networks in which each point connects directly to countless others and is rarely more than six degrees of separation from nearly anywhere on Earth. Because market failures happen all the time, it is important to have as many connections as possible. Americans need access to more ways to adapt and reroute around failure points, especially for essential products like baby formula.

Trade protectionism makes us more vulnerable, but free trade makes our fam- ilies and communities more resilient. Loosening restrictions similar to the ones that stunt the baby formula market would make it easier to navigate future crises while preventing the progressive and rent-seeking power grabs that come with every crisis, whether it is as isolated as a baby formula shortage or as expansive as a pandemic.

Mutual Recognition. A simple way to reduce friction in supply networks is mutual recognition of other industrialized countries’ regulatory standards. This can be done either in a larger trade agreement or independently. For baby for- mula, this would mean allowing in brands that meet European Union standards even if they do not meet Food and Drug Administration (FDA) labeling require- ments. Infants’ nutritional needs do not change across borders. If a formula is deemed healthy for European babies, then it is also healthy for American babies. The reverse is equally true.

Mutual recognition could help to open new markets for American producers in countless industries and give American consumers access to countless new prod- ucts on more competitive terms. For example, U.S. regulations require washing machine power cords to be at least six feet long, while the U.K. requires them to be at least two meters.69 The difference (about six inches) affects neither safety nor performance, but it does keep American-made washing machines out of an import- ant foreign market. A mutual recognition policy would circumvent the problem.

Given the recent interest in increased antitrust enforcement, conservatives should embrace policies like mutual recognition that have the double benefit of increasing market competition while decreasing government’s regulatory footprint. The U.S. should enact mutual recognition agreements for a wide variety goods with the United Kingdom, European Union, Japan, South Korea, Australia, and other governments with high standards comparable to our own. This would have especially large benefits for pharmaceuticals, because America’s FDA drug approval process is both slower and more expensive than those of other countries with- out being any safer. Americans would gain access to more and lower-cost medical treatments, and American pharmaceutical companies could defray development costs and innovate faster by gaining access to more markets, all while cutting prices.