Defenders of Trade Policy Status Quo Say Black and Latino Workers Not Hurt by U.S. Trade Policies, Despite Data to the Contrary
Last week, we published a report showing past U.S. trade policies have had a disproportionately negative impact on Black and Latino workers. Defenders of the trade status quo are arguing that our focus on trade-related job loss, downward pressure on wages and income inequality was off base.
Their main substantive argument was one made for decades by defenders of the trade policy status quo: Even if some workers lost jobs, we all ended up better off because we had access to less expensive, imported stuff.
Except, that has not been true for most of us for many years. As job offshoring moved up the wage ladder, the losses we suffer in wages now significantly outweigh the savings we get as consumers. Said who? The grandfather of modern trade economics, Nobel laureate Professor Paul Samuelson.
According to standard trade theory, while specific workers who lose their jobs due to imports may suffer, the vast majority of us gain from trade “liberalization” because we can buy cheaper imported goods.
However, as jobs have been offshored from more sectors of the economy and job offshoring has moved into higher wage jobs, this is no longer necessarily true.
Professor Samuelson published a startling 2004 academic paper that mathematically shows how the offshoring of higher-paid jobs to countries like China and India can cause U.S. workers to lose more from reduced wages than they gain from cheaper imported goods. I recommend reading the paper, even if you skip the mathematic formulas through which he proves this point. Because this is the scholar whose groundbreaking work applying the theory of free trade to modern economic realities is the basis of the trade-liberalization-is-a-net-gain-for-all fact so widely accepted. Except, it no longer holds true, and he explains quite clearly why this is the case.
A few years before Professor Samuelson’s paper, the non-partisan Center for Economic and Policy Research (CEPR) applied the actual trade flow, consumer price and employment and wage data to the theorem. They found that when you compared the lower prices of cheaper goods to the income lost from low-wage competition under status quo trade policies, the trade-related wage losses outweigh the gains in cheaper goods for the majority of U.S. workers. The CEPR study found that U.S. workers without college degrees (61% of the workforce) lost an amount equal to about 10% of their wages, even after accounting for the benefits of cheaper goods. That meant a net loss of more than $3,500 per year for a worker earning the then-median annual wage of $35,540.
At the time, CEPR’s findings were widely attacked. And then Professor Samuelson’s paper showed that what they found was not a fluke or some anomalous years of data, but rather the new reality.
Since then, other proponents of trade liberalization have published papers discussing permanent, significant trade-related wage losses for many – for instance David Autor and colleagues with respect to China trade. And there also is broad consensus in the economics field that the wage suppressing feature of trade liberalization is a major contributor to income inequality here. The other critiques of our report on trade-impacts on Black and Latino workers fall into the category of distracting statistical gymnastics and misdirection.
We point out that in the decades since the North American Free Trade Agreement (NAFTA) and China’s entry into the World Trade Organization (WTO), the United States has lost millions of higher-paying manufacturing jobs. We found that Black and Latino workers were disproportionately employed in nine of the ten sectors hardest hit.
The standard counter argument that the U.S. economy created millions of jobs during the same period is irrelevant. Even if overall unemployment remained low because lower-paying service sector jobs were being created, Black and Latino workers disproportionately lost better-paying manufacturing jobs, and as a result they suffered significant wage losses. Trade policy shapes the quality or types of jobs available for people of different education levels, and thus affects wages. Other factors, such as fiscal and monetary policy, generally have a greater influence on the total number of jobs available in an economy.
Or as a National Bureau of Economic Research study puts it more formally: “Offshoring to low wage countries and imports [are] both associated with wage declines for U.S. workers. We present evidence that globalization has led to the reallocation of workers away from high wage manufacturing jobs into other sectors and other occupations, with large declines in wages among workers who switch.”
Speaking about wages, the standard counter argument critics have also raised, that average hourly wages have grown in the past two decades, is the same as saying there has been inflation. What counts is inflation-controlled real median wages – what our earnings can buy and how much the majority of us are making.
Economists now widely name “increased globalization and trade openness” as a key explanation for the unprecedented failure of wages to keep pace with productivity, as noted in Federal Reserve Bank research. Even economists who defend status-quo trade policies attribute much of the wage-productivity disconnect to a form of “labor arbitrage” that allows multinational firms to continually offshore jobs to lower-wage countries.
And finally, critics raised the most recent go-to, if false, argument about automation and technology having caused manufacturing job loss, not trade. If you want to see the data, check out this paper but here’s the gist of it:
First, investment in automation actually slowed during the post-2000 period of mass manufacturing job loss. However, during that period, the U.S. trade deficit exploded. Researchers have found that job displacement from technology is at its lowest level in decades now, even as the automation-not-trade argument has become increasingly popular among defenders of the trade status quo.
Second, data often used to show that automation-caused manufacturing job loss are premised on a basic misinterpretation. The popular view is that, because the value of what is being produced in the U.S. manufacturing sector has grown even as millions of manufacturing jobs were lost, each manufacturing worker is producing more because factories were automated.
Labor economist Susan Houseman at the Upjohn Institute showed that this story is based on the mistaken assumption that productivity growth reflects the rise of automation. In fact, the growth in U.S. manufacturing output comes mainly from just one sector: computers and electronics and has to do with how new iterations of machinery are valued. Overall manufacturing output today is only 8% higher than in the 1990s and remains lower than before the Great Recession.
Bottom line: Even accounting for Americans’ access to cheaper imported goods, the current trade model’s downward pressure on wages outweighs those gains, making most Americans net losers. And sadly, given our nation’s history of structural racism that has permeated the workplace, education, housing and more, our report’s findings may have been foreseeable: While working-class Americans of all races and ethnicities lost from the trade policies enacted by the United States over the past several decades, Black and Latino workers were overrepresented relative to their share of the workforce in industries that were hardest hit, and they lived in parts of the country that were slammed.
Add to that all of the non-trade corporate protectionism that lards up our “trade” agreements and no doubt we need to rethink our trade policies. At issue is what rules of the global economy can deliver for the most people and remedy past wrongs – not whether we should trade or not.
It is important to differentiate between free trade and our current “trade” agreements. Because one of the critiques to our study, by the conservative group National Taxpayers Union, focused on tariff cuts, it’s worth noting that today’s trade pacts are not mainly about cutting tariffs to expand trade.
For instance, most of the chapters of the NAFTA, USMCA or WTO – as well as the now thankfully-defunct Trans-Pacific Partnership (TPP) – actually have nothing to do with traditional trade matters like cutting tariffs, opening quotas, standardizing customs procedures and the like. Instead, these pacts set binding rules to which every signatory country must conform their medicine patents and pricing, financial regulatory, food safety, government procurement and other policies.
Consider the raw protectionism for pharmaceutical companies in these pacts that help pharmaceutical firms avoid generic competition for longer and keep prices high. As we envision the philosophers of free trade - Adam Smith and David Ricardo - rolling in their graves at a high velocity at the prospect of “free trade” agreements mandating that governments provide new rent-seeking opportunities for protected industries, let us contemplate how we got into this mess.
With 500 official U.S. trade advisors representing corporate interests historically given special access to the policy process, while the public, press and largely Congress have been shut out, it should not be surprising that corporate interests thoroughly captured the U.S. trade policy process.
By hijacking the good name of “free trade” and taking advantage of a uniquely non-transparent policymaking process, they transformed trade agreements into delivery mechanisms for an array of retrograde policies – many of which failed when pursued in Congress and state legislatures.
Instead of fighting about whether there was damage, given the data and people’s lived experience verify it, hopefully we can focus forward together on what new approach could deliver for more people in this country and around the world.