Free Trade

 Free Trade

     While the United States has long imported oil and other raw materials
from the third world, we used to import manufactured goods mainly from
other rich countries like Canada, European nations and Japan.

But recently we crossed an important watershed: we now import more
manufactured goods from the third world than from other advanced
economies. That is, a majority of our industrial trade is now with countries
that are much poorer than we are and that pay their workers much lower

For the world economy as a whole—and especially for poorer nations—–
growing trade between high-wage and low-wage countries is a very good
thing. Above all, it offers backward economies their best hope of moving up
the income ladder.

But for American workers the story is much less positive. In fact, it’s hard
to avoid the conclusion that growing U.S. trade with third world countries
reduces the real wages of many and perhaps most workers in this country.
And that reality makes the politics of trade very difficult.

Let’s talk for a moment about the economics.

Trade between high-wage countries tends to be a modest win for all, or
almost all, concerned. When a free-trade pact made it possible to integrate
the U.S. and Canadian auto industries in 1960s, each country’s industry
concentrated on producing a narrower range of products at larger scale.
The results was an all-round, broadly shared rise in productivity and wages.

By contrast, trade between countries at very different levels of
economic development tends to create large classes of losers as well as

Although the outsourcing of some high-tech jobs to India has made
headlines, on balance, highly educated workers in the Untied States benefit
from higher wages and expanded job opportunities because of trade. For
example, ThinkPad notebook computers are now made by a Chinese
company, Lenovo, but a lot of Lenovo’s research and development is
conducted in North Carolina.

But workers with less formal education either see their jobs shipped
overseas or find their wages driven down by the ripple effect as other
workers with similar qualifications crowd into their industries and look for
employment to replace the jobs they lost to foreign competition. And lower
prices at Wal-Mart aren’t sufficient compensation.

All this is textbook international economics: contrary to what people
sometimes assert, economics theory says that free trade normally makes a
country richer, but it doesn’t say that it’s normally good for everyone. Still,
when the effects of third-world exports on U.S. wages first became an issue
in the 1990s, a number of economists ––myself included––looked at the data
and concluded that any negative effects on U.S. wages were modest.

The trouble now is that these effects may no longer be as modest as they
were, because imports of manufactured goods from the third world have
grown dramatically––from just 2.5 percent of G.D.P. in 1990 to 6 percent in

And the biggest growth in imports has come from countries with very low
wages. The original “newly industrializing economies” exporting
manufactured goods––South Korea, Taiwan, Hong Kong and Singapore––
paid wages the were about 25 percent of U.S. levels in 1990. Since then,
however, the sources of our imports have shifted to Mexico, where wages
are only 11 percent of the U.S. level, and China, where they’re only about 3
percent or 4 percent.

There are some qualifying aspects to this story. For example, many of
those made-in-China goods contain components made in Japan and other
high-wage economies. Still, there’s little doubt that the pressure of
globalization on American wages has increased.

So am I arguing for protectionism? No. Those who think that globalization
is always and everywhere a bad thing are wrong. On the contrary, keeping
world markets relatively open is crucial to the hopes of billions of people.

But I am arguing for an end to the finger-wagging, the accusation either
of not understanding economics or of kowtowing to special interests that
tends to be the editorial response to politicians who express skepticism
about the benefits of free-trade agreements.

It’s often claimed that limits on trade benefit only a small number of
Americans, while hurting the vast majority. That’s still true of things like the
import quota on sugar. But when it comes to manufactured goods, it’s at
least arguable that the reverse is true. The highly educated workers who
clearly benefit from growing trade with third-world economies are a minority,
greatly out-numbered by those who probably lose.

As I said, I’m not a protectionist. For the sake of the world as a whole, I
hope that we respond to the trouble with trade not by shutting trade down,
but by doing things like strengthening the social safety net. But those who
are worried about trade have a point, and deserve some respect.

Paul Krugman, the New York Times 12/28/08


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