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 Editorials | April 2008 
Is Trade the Problem?
 PVNN
 |  | Robert Lawrence of Harvard, who was an adviser to President Bill Clinton, concluded that the increase in wage inequality since the 1990s had little to do with trade. |  | | | |
Americans are angry about trade, and a lot of politicians — especially the two Democratic presidential candidates — are eager to capitalize on it. The country would be far better served by a serious, dare we say fact-based, discussion of what is causing the dislocations in American workers’ lives, how much trade is to blame and what government can do to help.
There is no question that trade can disrupt lives. Just ask the nearly 500 workers who lost their jobs four years ago when Sanmina-SCI closed its plant in Wilmington, Mass., to move its production of circuit boards to Asia. An investigation by the Government Accountability Office found that eight months later only about 175 of Sanmina’s employees had found new jobs, with most of those taking a pay cut.
There is also no question that life for many American workers has gotten tougher since the 1970s. Paychecks have failed to keep pace with productivity as most of the spoils of growth have gone to a tiny elite.
Still, critics’ charges that trade is to blame are misguided. While trade can hurt some workers, most economists believe it plays a modest role compared with other forces in the economy, including advances in technology, the decline of trade unions and mushrooming executive pay. Many Americans benefit from freer trade, whether they are buying cheaper imports or exporting products.
Consider the four million manufacturing jobs lost over the last decade. That number is daunting — and the human pain behind it very real. But in most years the United States generates more jobs than it loses.
Suppose the critics are right and all those workers were displaced by cheap imports and factories moving overseas. Those lost manufacturing jobs — an average of 400,000 a year — amount to less than 3 percent of the 15 million jobs lost each year across the economy. Meanwhile, about 17 million jobs were created annually, which is why the unemployment rate at the end of 2007 was not much different than it was at the end of 1997.
What about pay? Workers who lose their jobs usually have to accept a pay cut to get a new one, studies show. And the lost manufacturing jobs paid substantially more than many of the fast-growing service jobs. Critics say trade drives down all blue-collar wages, making it more difficult for companies that compete with cheap imports to increase pay while the greater competition for remaining jobs can lower wages.
There is a growing inequity in pay. From 1976 to 2006, the average salary of workers in the bottom 90 percent of the income distribution — nearly everybody — rose by only 2.3 percent, to $38,800, tax data show. Among the top 10 percent, average salaries rose 57 percent, to $195,000. While there are still high-paying jobs out there, more and more they are reserved for workers with high levels of education. Between 2000 and 2006, the only workers who saw an increase in take-home pay were those with doctorates or professional degrees.
No matter how hard economists look for trade’s fingerprints on these inequities, they find it plays only a bit part. Josh Bivens of the Economic Policy Institute estimated that rising trade with poor countries increased wage inequality between college and high school graduates by about 7 percent over the past quarter-century — but the wage gap has widened by more than six times that amount over that period. And many economists think Mr. Bivens overstates trade’s impact. Robert Lawrence of Harvard, who was an adviser to President Bill Clinton, concluded that the increase in wage inequality since the 1990s had little to do with trade.
Trade’s critics overstate the threat of “cheap imports” from poor countries. Often these goods are just assembled in poor countries from components made in high-wage countries — including the United States. Moreover, many of the things imported from cheap labor markets have not been made here for a long time, so pose no threat to American goods.
So what is going on?
Economists have other explanations for the stagnation of middle incomes and the mushrooming income gap. Lawrence Katz, a Harvard economist, argues that a big part of the problem is a shortage of educated, skilled workers at a time when demand for them keeps rising. High school graduation rates are flat, and there has been a slowdown in the growth of college graduation rates, partly because of the rising cost of college. This is weighing on wages of less-educated workers while increasing the pay of the most educated.
Outrageous executive pay and excesses in financial markets also play a big part. The richest 1 percent of the population has captured more than half of the nation’s total income growth since 1993.
None of this denies that American workers are hurting. But blaming trade is not the right way to go. What the candidates need to do is respect the voters, and explain the economics and outline policies that will address the true problems.
That means expanding the social safety net to help workers displaced by trade. But a lot more must be done, since the problem far transcends shuttered factories. The government has to invest more in education to help produce better-prepared, better-paid graduates. To help American companies compete, it must invest in better roads and ports and address the country’s health care crisis. And it must move toward more progressive taxation to help redistribute the spoils of growth.
The candidates also need to remind workers of trade’s benefits. Trade gives companies and consumers access to cheap imports and accelerates the spread of new technologies; exporters gain access to foreign markets; foreign competition spurs innovation. According to economists at the Peterson Institute for International Economics, increased trade since World War II has added about 10 percent to American national income.
Blaming Nafta and other trade agreements for American workers’ pain may play well on the campaign stump. But it will not solve the country’s economic problems. It will only make them worse. |
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