Globalization: A Win-Win or a Lose-Lose?

Posted February 13, 2012

As 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.


To accurately assess the impact of trade on low- to moderate-income workers, it is important first to understand the basic economics of globalization.


Take 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.


Many 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.


To 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.


Based 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 year.


With 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.

That’s the bad news, but there is potential good news, too.


First, 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.


Second, 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.


The 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. 


Better 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 families.


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Josh Bivens is an economist at the Economic Policy Institute.