Trade Agreements Or Boosting Wages? We Can’t Do Both

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By:  Josh Bivens

In his State of the Union address, President Obama called for actions to boost wages for low and moderate-wage Americans, and also for moving forward on Fast Track trade promotion plus two trade agreements—the Trans-Pacific Partnership (TPP) and the Trans-Atlantic  Trade and Investment Partnership (TTIP).

These two calls are deeply contradictory. To put it plainly, if policymakers—including the President—are really serious about boosting wage growth for low and moderate-wage Americans, then the push to fast-track TPP and TTIP makes no sense.

The steady integration of the United States and generally much-poorer global economy over the past generation is a non-trivial reason why wages for the vast majority of American workers have become de-linked from overall economic growth. This is not a novel economic theory—the most staid textbook models argue precisely that for a country like the United States, expanded trade should be expected to (yes) lift overall national incomes, but should redistribute so much from labor to capital owners, so that wages actually fall. So, it can boost national income even while leaving the incomes of most people in the nation lower than otherwise.

The intuition on how is pretty easy. Take the most caricatured example of how expanded trade works: the United States produces and exports more capital-intensive goods (say airplanes) and imports more labor-intensive goods (say apparel). By focusing on what we’re relatively better at producing (capital-intensive airplanes) and trading this extra output for what our trading partners are relatively better at producing (labor-intensive apparel), we can see national incomes rise in both countries. This specialization in the United States requires shifting resources (i.e., workers and capital) out of apparel production and into airplane production. But each $1 in apparel production lost requires more labor and less capital than the $1 in airplane production gained—causing an excess supply of labor and an excess demand for capital. Capital’s return rises while labor’s wage falls.

Taking standard trade models and plugging in U.S. data yields the conclusion that expanded trade has reduced wages for American workers without a 4-year college degree by enough to lower the annual earnings of full-time, full-year workers by roughly $1,800. And this is an annual loss—it will repeat (or even grow, if trade grows) next year and the year after. Over a lifetime of work, the effect of expanded trade is large indeed.

Other empirical work is consistent with this finding. One recent paper has shown that the decline in national income accruing to workers (instead of capital owners) is more strongly associated with expanded trade than any other influence. Another has found that wages and employment of workers without a 4-year college degree have been depressed by rising imports from our most important low-wage trading partner (China).

To be clear, there are plenty of things keeping wages down for most American workers (though the most commonly cited suspect—technological change—is actually pretty innocent), and expanded trade does not explain the majority of the wage/productivity schism. But it pushes in the wrong direction, and its weight is non-trivial. So why would policymakers who are serious about making wages rise be pushing TPP and TTIP?

Of course, we’re not even sure what TTIP and TPP will contain. And every new trade agreement (particularly those ushered through by a Democratic administration) comes with assurances that the flaws in earlier ones will be substantially corrected. This seems hugely unlikely, but just for fun, we can imagine what a useful trade agreement might look like.

Probably the most important change relative to past agreements would be a binding mechanism to keep countries from managing the value of their currency for competitive gain. The persistent U.S. trade deficit is dragging on output and employment growth and keeping full recovery from the Great Recession from happening more quickly. This deficit is, in turn, nearly entirely driven by the practice of some of our trading partners of purchasing U.S. assets (mostly Treasury bonds) to boost demand for U.S. dollars and hence boost the value of the dollar in international markets. This makes U.S. exports expensive and other nations’ imports cheap. Plenty of proposals exist to stop this currency management, and including them in a trade agreement would actually be quite useful. It’s worth noting that while such a proposal may have seemed heretical a decade ago, even former Treasury Secretary Larry Summers has endorsed it recently.

Another useful issue in a trade agreement would allow countries that have raised the price of emitting carbon in an effort to mitigate global climate change (either through direct carbon pricing, caps on carbon, or regulatory changes) to impose a tariff on imports from countries that do not have any mechanism to increase the price of carbon. Such “border adjustment tariffs” are quite common—and are sometimes actually necessary to insure genuine “free trade” (ie, non-discrimination between domestic and foreign producers).

Why do I have such little faith that any of these (or any other) potentially useful planks will be part of TTIP or TPP? Because every other trade agreement in recent decades has first and foremost put low- and moderate-wage U.S. workers in direct competition with the global labor force while carving out protections for capital-owners and executive managers. Given this history, it is just hard to see how moving aggressively on trade promotion authority, TTP, or TTIP fits in at all with an economic strategy that aims to boost wages for most American workers.

Josh Bivens joined the Economic Policy Institute in 2002. He is the author of Everybody Wins Except for Most of Us: What Economics Teaches About Globalization and has published numerous articles in both academic and popular venues, including USA TodayThe GuardianThe American ProspectChallenge Magazine, and Worth. He is a frequent commentator on economic issues for a variety of media outlets, including NPR, CNN, CNBC, Reuters and the BBC.

Comments

  1. helen sabin says:

    This seems to be the rule for Obama – hurt the US! Here are 27 reasons why it is important to NOT vote DEM in 2016:
    The following are 27 facts that show how the middle class has fared under 6 years of Barack Obama…

    #1 American families in the middle 20 percent of the income scale now earn less money than they did on the day when Barack Obama first entered the White House.

    #2 American families in the middle 20 percent of the income scale have a lower net worth than they did on the day when Barack Obama first entered the White House.

    #3 According to a Washington Post article published just a few days ago, more than 50 percent of the children in U.S. public schools now come from low income homes. This is the first time that this has happened in at least 50 years.

    #4 According to a Census Bureau report that was recently released, 65 percent of all children in the United States are living in a home that receives some form of aid from the federal government.

    #5 In 2008, the total number of business closures exceeded the total number of businesses being created for the first time ever, and that has continued to happen every single year since then.

    #6 In 2008, 53 percent of all Americans considered themselves to be “middle class”. But by 2014, only 44 percent of all Americans still considered themselves to be “middle class”.

    #7 In 2008, 25 percent of all Americans in the 18 to 29-year-old age bracket considered themselves to be “lower class”. But in 2014, an astounding 49 percent of all Americans in that age range considered themselves to be “lower class”.

    #8 Traditionally, owning a home has been one of the key indicators that you belong to the middle class. So what does the fact that the rate of homeownership in America has been falling for seven years in a row say about the Obama years?

    #9 According to a survey that was conducted last year, 52 percent of all Americans cannot even afford the house that they are living in right now.

    #10 After accounting for inflation, median household income in the United States is 8 percent lower than it was when the last recession started in 2007.

    #11 According to one recent survey, 62 percent of all Americans are currently living paycheck to paycheck.

    #12 At this point, one out of every three adults in the United States has an unpaid debt that is “in collections“.

    #13 When Barack Obama first set foot in the Oval Office, 60.6 percent of all working age Americans had a job. Today, that number is sitting at only 59.2 percent…

    Employment Population Ratio 2015

    #14 While Barack Obama has been in the White House, the average duration of unemployment in the United States has risen from 19.8 weeks to 32.8 weeks.

    #15 It is hard to believe, but an astounding 53 percent of all American workers make less than $30,000 a year.

    #16 At the end of Barack Obama’s first year in office, our yearly trade deficit with China was 226 billion dollars. Last year, it was more than 314 billion dollars.

    #17 When Barack Obama was first elected, the U.S. debt to GDP ratio was under 70 percent. Today, it is over 101 percent.

    #18 The U.S. national debt is on pace to approximately double during the eight years of the Obama administration. In other words, under Barack Obama the U.S. government will accumulate about as much debt as it did under all of the other presidents in U.S. history combined.

    #19 According to the New York Times, the “typical American household” is now worth 36 percent less than it was worth a decade ago.

    #20 The poverty rate in the United States has been at 15 percent or above for 3 consecutive years. This is the first time that has happened since 1965.

    #21 From 2009 through 2013, the U.S. government spent a whopping 3.7 trillion dollars on welfare programs.

    #22 While Barack Obama has been in the White House, the number of Americans on food stamps has gone from 32 million to 46 million.

    #23 Ten years ago, the number of women in the U.S. that had full-time jobs outnumbered the number of women in the U.S. on food stamps by more than a 2 to 1 margin. But now the number of women in the U.S. on food stamps actually exceedsthe number of women that have full-time jobs.

    #24 One recent survey discovered that about 22 percent of all Americans have had to turn to a church food panty for assistance.

    #25 An astounding 45 percent of all African-American children in the United States live in areas of “concentrated poverty”.

    #26 40.9 percent of all children in the United States that are living with only one parent are living in poverty.

    #27 According to a report that was released late last year by the National Center on Family Homelessness, the number of homeless children in the United States has reached a new all-time record high of 2.5 million.

    Unfortunately, this is just the beginning. IF Obama bows even further down to the climate change or global warming nonsense as he has done for the past 6 years, the US Middle Class will get hit harder.

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