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The pain of globalisation

For years Americans have been told that they all benefit from trade with poorer countries - yet many now find they are worse off.

By Jared Bernstein and Josh Bivens

11/09/07 "Guardian" -- - Last February, before the flurry of news stories about unsafe imports, a New York Times/CBS poll [PDF] found that 51% of respondents agreed the US had "lost more than it gained from globalisation." Further, while trade is not supposed to create political problems for Republicans, a recent Wall Street Journal poll of Republican supporters found that that 59% agreed that "foreign trade has been bad for the US".

These results are clearly alarming to many in the elite policymaking class, for whom protectionism seems to be the first-order threat to the American economy.

These poll results, however, should not surprise anyone who understands the economics of trade. Chapter one of the trade textbook was essentially written by David Ricardo, and it does indeed teach that trade, on the basis of comparative advantage, typically boosts a nation's average income. This genuinely powerful insight explains why, even if we're more productive than a potential trading partner, or they're able to produce with much lower wage costs, trade will raise national income in both countries.

Sadly, both for American workers and the quality of the trade debate, the textbook has other chapters. One of them explains the Stolper-Samuelson Theorem (SST), which points out that when the US exports insurance services and aircraft while importing apparel and electronics, we are implicitly selling capital - physical and human - for labour. This exchange bids up capital's price (profits and high-end salaries) and bids down wages for the broad working and middle-class, leading to rising inequality and downward wage pressure for many Americans.

Note that this is not just a story about laid-off factory workers, who obviously suffer the toughest losses. Rather, all workers in the US economy who resemble import-displaced workers in terms of education, skills, and credentials are affected. Landscapers won't lose their jobs to imports, but their wages are lowered through competition with those import-displaced factory workers.

The SST applies most forcefully to trade between the US and its poorest trading partners. As long as this sort of trade was a trivial part of the US economy, the SST remained comfortably theoretical. Since 1979 however, however, imports from less developed economies have become a significant feature of the US economy, rising fivefold (roughly) from 1% to 5% of US gross domestic product. Further, given that half of this increase has essentially happened since the mid-1990s with the rise of China as an export powerhouse and given the increasing tradeability of service-sector jobs that were once insulated from foreign trade (the famous offshoring phenomenon), there is little reason to think that this trend will stop anytime soon.

In the early 1990s a flurry of studies, driven by the Nafta debate over US trade with Mexico, examined the links between trade, wages, and inequality. Updating a standard method from that earlier debate with 2006 data shows that trade has increased wages for those with a 4-year university degree by around three per cent and lowered wages for all other workers by about four per cent.

Consider a household of two median wages earners working a combined 3,600 hours per year (the average for married couples). A four per cent wage cut for this household would cost the couple $1,800 in annual pay. And this loss is net of any gains from trade: it fully accounts for the lower priced imports and new opportunities in export industries.

The best antidotes to trade's pulling apart of incomes are grounded in solidarity: social insurance and enhanced bargaining power. Universal healthcare and pensions, for example, would provide the economic security today's jobs increasingly lack. Globalisation has also sapped workers' ability to bargaining for their fair share of growth, underscoring the need to reform labour laws and meet the growing desire of Americans to join unions.

Internationally, we should make access to the US market contingent only on respect for workers' basic rights, and not on adherence to the corporate-friendly policy straitjacket that is today's trade agreements. This swap would actually make access to US markets cheaper for the world's poor countries, an eminently worthy goal.

Lastly, we - and "we" here refers to the economic elites in both parties playing guard-dog for the trade status quo - need to stop denying the breadth and reach of economic pain caused by America's integration with a much poorer global economy. The polls are telling us something pretty ironic: the people have read ahead of us in the trade textbook. We'd better catch up.

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