Democrats and Republicans remain deeply divided over all aspects of economic
policy, trade policy has become one supposedly bipartisan bright spot with the
President recently signing free trade agreements with South Korea, Panama, and
Colombia. Despite this seeming consensus, the truth is that trade may not be
the panacea many hope—especially for low-income workers. That expanded trade
negatively impacts workers is widely acknowledged, but the size and extent of
losses for low-income workers are much larger than commonly realized.
accurately assess the impact of trade on low- to moderate-income workers, it is
important first to understand the basic economics of globalization.
the example of China and the U.S. Globalization allows each country to
specialize in what they do relatively more efficiently. "Relatively"
is crucial because even if, for example, production costs were lower in China
for both apparel and aircraft production, it still makes more sense for China
to specialize in apparel, as their cost advantage is larger in more
labor-intensive industries. By specializing and then trading, globalization boosts
the consumption possibilities of both countries.
think of this relationship as a “win-win,” but that’s not true for all American
workers. If, for example, apparel production is labor-intensive while aircraft
production is capital-intensive, then importing clothes and exporting planes reduces
demand for U.S. labor while simultaneously increasing demand for capital. As a
result, wages fall and returns on capital rise.
be clear, these losses are not the damage stemming from apparel workers'
unemployment spells as they move between sectors. Rather, the big damage is the
permanent wage-loss resulting from America's new pattern of specialization. This
wage loss does not impact solely those workers directly displaced by trade. It
also affects all workers who have similar education and skills to laid-off
apparel workers. Landscapers, for example, may not be displaced by imports, but
their wages suffer from having to compete with displaced apparel workers.
on my research, these wage losses are rather significant. They amount to about
$1,400 per year for a median wage earner working full-time. This is roughly as
much as the typical middle-income household pays in federal income taxes each
losses this substantial, it’s odd to hear so often that globalization only
trivially affects the incomes of the middle-class. For example, The New York
Times editorial page cited my research findings a couple of years ago, but
then argued that Americans should not worry about wage effects because, they said,
my findings explained only a non-majority fraction of the total rise in inequality
between wages for college- and non-college-educated workers. Yet although trade
cannot account for the entire chasm that has opened between these two groups,
it remains significant.
Worst of all, globalization takes the
largest toll on low- to moderate-income workers. That’s because the vast
majority of these incomes are derived from wages. About 70 percent of the
incomes for the bottom 60 percent of households come from wages. Removing
Social Security payments, which are financed with taxes on wages, boosts this
share to over 80 percent.
the bad news, but there is potential good news, too.
globalization is not just a synonym for trade. “Globalization” includes an
entire set of political decisions and institutions that have governed how the
United States has integrated ever more deeply with the larger global economy.
These decisions and institutions have routinely favored the interests of the
affluent over working class families, both here and abroad. Luckily, this bias
can be changed if we find the political will.
there are ways to take action to help low-income workers in the face of
globalization. One example is the chronic overvaluation of the U.S. dollar. For
the last 15 years, the U.S. has consistently run large trade deficits because
the dollar was priced too high to allow American producers to compete in global
markets. This overvalued dollar has also magnified the impact of trade in
suppressing wages for low- and moderate-wage workers.
primary cause of this overvaluation is the policy of many of our major trading
partners of actively keeping their own currencies from rising against the
dollar. The resulting imbalances are bad for American workers and bad for the
global economy, and there is no reason we need to continue allowing them.
managed and more equal globalization would provide real relief for American workers.
Trade will not disappear, but we can at least improve today’s approach to
globalization in order to provide a helping hand to America’s low-income
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Josh Bivens is an economist at the
Economic Policy Institute.