Free Trade Arithmetic for Progressives

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Dean Baker
Truthout, Nov. 23, 2006

With President Bush's trade agenda seemingly dead in the water, it is a good time to do some basic accounting on the neo-liberal trade agenda. After all, we can't figure out where we want to go unless we know where we are.

The first part that we should clearly recognize is that much of this trade agenda has nothing to do with "free trade." A central goal of the neo-liberal trade policy has been to increase patent and copyright protection (as in protectionism) in the developing world. This takes money out of the pockets of poor people in the developing world and hands it to the drug companies, the entertainment industry, and Bill Gates. This protectionism hurts economic growth and redistributes income upward.

While the politics on stronger drug patents in the developing world might be easy, the story can get a bit more complicated with other aspects of the neo-liberal trade agenda. Much of the "free trade" part of the story has been about creating conditions that make it easy to manufacture goods in the developing world and export them to the United States. This has the effect of putting manufacturing workers in direct competition with relatively low-paid workers in the developing world.

Downward Pressure on Wages

When manufacturing workers in the United States have to compete with workers in Mexico and China who earn a dollar an hour, it puts downward pressure on their wages. Because manufacturing traditionally has been a source of relatively high-paying jobs for less-educated workers, the loss of manufacturing jobs and the downward pressure on wages in the sector has the effect of lowering wages for the entire 70 percent of the workforce that lacks a college degree.

It is important to realize that this is not an accidental outcome or a case of reality not following the theory. This is the trade theory. Standard trade theory predicts that deals like the North American Free Trade Agreement (NAFTA) will reduce the real wages of the bulk of the US workforce; the only question is by how much.

If we know the losers from trade, it is also important to know the winners. For the most part, it is not corporations. Profits have risen sharply in the last few years, but this follows a severe profit slump in the last recession. The profit share of national income has just now returned to the levels at the profit peak of the last business cycle in 1997. We don't know how profits will fare over the rest of the current business cycle, but thus far there is no evidence of redistribution from wages to profits over the last nine years, a period in which trade and the trade deficit both soared. Apparently, competition has pushed down prices, so that profit margins have not risen, even as workers get paid less.

Workers Benefit Unequally

While profits have not risen at the expense of wages over the last nine years (profit shares did increase from the 1970s to the 1990s), the wages of high-end workers (doctors, lawyers, economists, and accountants) have increased at the expense of low-end workers. Basically, these workers largely have been protected from international competition by immigration and licensing restrictions. This protectionism has meant that the wages of the most highly educated workers have continued to rise. Highly educated workers have benefited from the fact that the prices of items made by less-educated workers were falling, due to the use of low-paid workers in the developing world.

This point is important, because if we want to reverse the growth in inequality over the past quarter century, then we must be thinking about ways to reverse the gains of highly paid professionals over this period. One obvious way to reverse this upward redistribution is to insist that future trade agreements focus on putting high-end professionals in competition with their counterparts in the developing world. We can structure trade agreements that make it easy for smart kids in Mexico, India, and China to train to U.S. standards and then work as doctors, lawyers, or economists in the United States. (We can compensate the home countries for educating workers, thereby ensuring that there is no problem of "brain drain.")

Such a policy would lead to large gains for most workers, since they would pay less for medical care and other services provided by these highly paid workers. It also would lead to greater efficiency and faster economic growth.

Of course, the American Medical Association, the American Bar Association, and other organizations of professionals are very powerful politically, so it will not be easy to push pacts that promote free trade at the expense of their members. However, the first step is to get our orientation right. We know how to promote trade pacts that lead to greater equality; the only obstacle is the neo-liberal protectionists who control trade policy.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org).