New Research: Win-Win from "Free Trade" is a Big Lie

By Todd Tucker, Eyes on Trade. Posted October 30, 2007.

Two groundbreaking new papers looking at our failed trade policy's negative impact on American wages and inequality have been written by economist Josh Bivens and quietly released by the Economic Policy Institute (EPI). These papers brilliantly summarize half a century of economics research into the topic, and make fascinating projections of future increases in inequality if current trends continue. The papers expose what has been hidden in plain view: our trade policy is putting substantial downward pressure of all U.S. workers, yet policymakers are trying to push more NAFTA-style trade policy to Peru and beyond despite mounting evidence that it is bad for Americans.

Among the important conclusions of the paper, paraphrased by yours truly:

• The most important negative impact of our trade policy is not the displacement of concentrated groups of workers in manufacturing, but rather the holding down of wages of 70 percent of the population - including those workers whose jobs have not been and/or cannot be offshored. This analysis takes into account the impact of savings from cheaper imported products, and is a NET effect.



• The burden from trade policy-induced inequality now outweighs the burden from income taxes for the average American family. Specifically, the costs from current globalization policies for the median family have risen to $2,135 a year, while income tax costs are by comparison only $1,495. So if you're concerned about high middle class taxes, you should be doubly concerned about our trade policy.



• If current projections by mainstream economists of the number of offshorable service-sector jobs hold over the next 10-20 years, our trade policy could erase almost all of the wage gains made since 1979 for workers without a four-year college degree (70 percent of the workforce). Trade adjustment assistance - now being debated in Congress - would replace less than 0.2% of the potential income loss to domestic workers in this scenario. Yet, this is the only significant policy response to globalization being discussed on Capitol Hill, and it excludes the majority of workers harmed by our trade policy.



• That much of this negative wage impact was already known by the early 1990s (in fact, since the 1940s), when policymakers were debating NAFTA and the WTO. Estimates produced by mainstream economists found that trade could account for 10-40% of the total rise in inequality that occurred in the 1980s and early 1990s. Many who were advocating for more-of-the-same trade policy often pointed out that trade did not account for a majority of the rise in inequality. But as the paper points out, it was still widely considered to be the largest single factor. (The paper notes: "This is true but uncomforting; a significant minority of a very large number is still a large number. To put it another way, if I threw myself into a chasm that was 'only' a fifth as deep as the Grand Canyon, I'd still be dead.") In any case, the impact is shown to be much larger since NAFTA and the WTO went into effect over a decade ago.



• That anytime a pundit or politician invokes the notion that our trade policy is a "win-win" proposal, they are at worst lying or misleading the public, and at best equating the considerable gains going to the top end of the income distribution with a scenario where the gains are widely shared (something that has not happened, and could not happen without massive tax increases on the wealthy and government redistribution of a magnitude that is not being at all discussed by leading presidential candidates of either party).

The main paper from early October can be found here, and a background technical paper from early September can be found here.

This is the first paper to systematically look at the trade/inequality issue in six years, and the first policy paper ever that incorporates post-1993 trade flow and wage data. The most recent systematic effort was by the Peterson Institute of International Economics in a 1997 book "Trade and Income Distribution," based on 1973-1993 data, which was reviewed and amplified by the Center for Economic and Policy Research in a 2001 paper. (If you know of something I'm missing, I'd be glad to know.)

It is unfortunate that this kind of work is not issued on a more frequent basis - especially since our trade deficit has ballooned in particular since Congress okay'd China's WTO accession in 2001. There are perhaps a half dozen stories in major newspapers - and a dozen floor speeches by members of Congress - every week on the issue of globalization and inequality. Most such interventions unfortunately take the view that the winners' circle is larger than the losers' circle when it comes to our trade policy, or in some instances disregard totally the existence of losers.

The insight that trade policy has a differential impact by economic class (often discussed in terms of skill level) for a developed country like the U.S. is not disputed by any serious economist. In fact, Dr. Eric Maskin, who on Monday was awarded the Nobel Prize in economics, has found that globalization policies not only increase inequality in developed, but also developing, nations.

Nonetheless, the truth of this consensus has been hidden in plain view during three decades of failed trade policy, thanks largely to economists affiliated with both parties who choose to not speak about this reality, or in the misguided belief that cheaper goods at Wal-Mart make up for the loss of a good job with rising wages.

This information should be useful as Congress considers expanding NAFTA to additional countries, most immediately through Bush's NAFTA expansion to Peru (H.R. 3688).

              

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