Why Populists Need to Re-think Trade

The 2006 election opened up American politics, for the first time in decades. It has presented progressives with the opportunity, and the obligation, to define themselves on the big issues. Of these, trade is clearly one of the most potent; alongside the war, it is one of the few questions plainly capable of turning elections in the battleground states.

In a Washington Post essay published late last year, on the eve of the Democrats' ascension to the majority, Senators Byron Dorgan and Sherrod Brown articulated a trade policy that typifies the consensus view of the party's labor-liberal wing. They criticize "free trade," call for strong labor and environmental standards in future trade agreements, and argue for aggressive policies to open foreign markets to American goods. Their critique reflects a genuine anger, and the concerns their piece embodies deserve to be met. Their program is populist, nationalist, muscular, and in tune with the mood of the Democratic base.

But it is not reality-based. As policy, it would not achieve the senators' basic objective -- namely, more jobs at higher wages in the United States. As politics, the danger is not that it will fail but that it might succeed. And then, progressives in power will repeat the pattern that conservatives set in 1981, pushing a program based on high expectations and illusions that ends in confusion, reversals, defeats, and an eventual lapse into incoherence and disrepute.

Because this op-ed reflects so well the prevailing outlook and priorities of many progressives, it is worth, at this late date, some attentive revisiting. Dorgan and Brown open their essay with a reference to "job-killing trade agreements," such as NAFTA and CAFTA. But these, as they quickly argue, are not really the issue. The larger problem is globalization itself:

The new mobility of capital and technology, coupled with the revolution in information technology, makes production of goods possible throughout much of the world. But much of the world at the beginning of the 21st century looks a lot like the United States did 100 years ago: Workers are grossly underpaid, exploited and abused, and they have virtually no rights. Many, including children, work 10, 12, 14 hours a day, six or seven days a week, for only a few dollars a day. The result has been a global race to the bottom as corporations troll the world for the cheapest labor, the fewest health, safety and environmental regulations, and the governments most unfriendly to labor rights.

This grim portrait is basically true to life, as a description of "much of the world." But it is not a description of America's main trading partners. And therefore, it is not of much use in discussing policies related to trade.

Three of our five largest trading partners are Canada, Japan, and the European Union (Germany, France and the UK are all individually in the top ten). All have average wages nearly as high as ours, and higher in some cases. All have stronger unions, higher labor standards, and better job protections, than we do. All have universal health insurance. All have reasonably strong environmental policies. The Dorgan-Brown critique doesn't apply to them.

Mexico is another large partner, with lower wages, vast slums, and severe environmental problems. But U.S. corporations do not "troll the world" before deciding to produce in Mexico. They go there because it's the low-wage country that happens to be right next door. There is nothing any trade policy can do about that; Mexico exists, and isn't going to move.

Of our five largest trading partners, only China qualifies as a place where manufacturing labor is readily available for "a few dollars a day" and whose status as our trading partner appears to depend on that fact. So it is at China -- perhaps alongside minor trading partners such as India and those in the Caribbean Basin -- that the Dorgan-Brown argument is basically aimed.

So let's look closely at China, the target of so much hostility in the trade debates. There are two questions to ask. First, do we have a "China trade problem?" And second, would tough new standards, applied to China, make any difference to the wages, jobs, or well-being of American workers?

Do We Have a China Trade Problem?

Dorgan and Brown define the trade problem as, above all, a problem of wages and working conditions -- of "race-to-the-bottom" competition. So, let's ask: What about labor conditions in China? Are workers there "grossly underpaid, exploited, and abused?" Particularly, is this true in the sectors and industries that export to the United States?

China is a vast country, and it does have many poor people. Conditions in the countryside can be primitive. Many millions migrate to the cities to escape rural poverty. Working conditions in mines and many factories are dirty and dangerous. Pollution is severe. And China has a large prison population, which is obliged to labor.

But none of this -- none of it -- bears directly on the cost of labor in exports. The remote regions do not participate in the export trade. Nor do the farmers. Or the coal miners. Exports of goods made in prisons have been banned, by mutual agreement, since the early 1990s. Chinese exporters are located, mainly, in the major cities and along the coast: Guangdong, Shanghai, Zhejiang, Fuzhou. Much of their work is done in "special export zones" near the major ports, in places like Shenzen (near Hong Kong) and Zhuhai (near Macau). When we speak of working conditions in China, it is conditions there, and not in the countryside or out in the West, that matter.

It is true that, even in these regions, the dollar cost of hiring workers in China is very low. But the implication almost always drawn from the fact of low dollar wages -- that Chinese workers live lives of abject misery -- is false. For the dollar cost of hiring a worker tells very little about the conditions of life. Wages in urban China are indeed low, but living costs are incredibly low. Food, clothing, basic shelter, and utilities cost very little, with the result that people are largely housed, clothed, and fed. Children are mostly in school. Cars are still rare -- but they are also unnecessary for most people. Small luxuries, on the other hand, are common. (The country has over 400 million cell phones; what does that tell you?)

All in all -- speaking as someone who spent six weeks living there late last year, with two daughters attending the public schools -- living standards in urban and coastal China, the trading region, are higher, not lower, than in "much of the [developing] world." They are far higher, for ordinary urban working people, than in India, which is not a major trading partner for us. This is obvious to anyone walking along the streets.

Moreover, most people in Chinese cities are not manufacturing workers. They are shopkeepers, office workers, construction crews, teachers, and taxi drivers, just like anywhere else. And most of those are better paid than workers in manufacturing. (That does not mean that production jobs are somehow compelled. The special export zones do have gates, and security fences that go all the way around. But the security only checks on people and goods going in. There is no gate at the exit, and no control over anyone seeking to leave. )

Well then, is China's urban prosperity built on its rural poverty? Yes, to a degree. But this is the way of the world. We're no exception: We rape our land, strip-mine our coal, and buy oil from desperately poor countries where life never seems to improve. Should we refuse to import from China because coal is mined there dangerously? Perhaps, but then we shouldn't import oil from Nigeria, either, or from Ecuador. Wisely, Dorgan and Brown don't make that argument. Instead, they focus on the working conditions of those workers who produce, more or less directly, the goods we purchase.

The Problem With Standards

The populist remedy for low-wage competition is to impose standards -- labor standards and environmental standards -- on the companies who employ them. Though Brown and Dorgan are not specific on the point, their emphasis on pay suggests they would favor standards for pay -- not based on U.S. wage levels, surely, but on some relevant measure of abuse and exploitation in the trading partner. As noted, such a policy would have no effect on Canada, Japan, or Europe, and therefore none on half or more of our total trade. But it could hit hard on trade with China, and one has to presume that is the intent. So let's discuss how a wage standard, as a theoretical possibility, might work.

There are several options. First, suppose the standard were based on wages measured in dollars. That would certainly penalize China, where the dollar value of the money wage in manufacturing is low, but where nutrition, health, education, and living standards for urban workers are quite high. It would favor (say) Brazil, where the reverse is actually the case. In other words, it would cut against a country where workers do not, generally, live in slums, and in favor of a country where many of them do.

Well, what about a standard based on relative wages in manufacturing? As noted, wages in manufacturing in China are low, compared to other wages in China. Suppose we insisted that they be raised?

This sounds sensible, but it doesn't account for the social status of the manufacturing job. Americans like to think of manufacturing as a mainstay job for households -- a high-prestige, long-term association for family breadwinners, such as was the case, in postwar history, in our backbone industries of automobiles, oil, aviation and steel. But in a country whose exports tilt to clothing, consumer electronics, and auto parts, things are different. Export-sector manufacturing in China is a place of short-term jobs mainly for young women. It is a tedious, repetitive, low-skill, and low-wage compared to almost everything else (except farming) in China itself. What is relevant for Chinese living standards is not the real wage in manufacturing. It is, rather, the real wage in the society writ large -- including not only the workers in factories (who are, as noted above, relatively few in number) but their families and friends who do something else. That's what determines whether a population is "underpaid, exploited, and abused."

So, let's consider a standard based on average real wages in the trading partner, perhaps measured by such quality-of-life indicators as life expectancy, infant mortality, and literacy. Such a standard would favor China over, say, India or most of sub-Saharan Africa. Should the United States therefore give preferential trade access, in general, to China? Should we exclude, say, textiles from much of Africa, India, and even Haiti, because their living standards and life expectancies are lower? As a strategy for world development, would that make sense? It would, of course, make no difference to American wages, since it would favor trade with the country that already runs the largest surplus with us.

Most labor standard advocates avoid the endlessly tricky question of a standard for pay, and emphasize instead the ability to form independent unions. Unquestionably, unions are important. But again, the Chinese case poses a conundrum for this rule. Should we penalize a country which has raised real wages by a factor of four or five over thirty years without independent unions? Should we favor countries (such as Brazil or Argentina) which have powerful independent unions -- and yet have seen falling real wages for two decades? To take another example, Mexico's oligarchs ran a vicious class war for twenty years against their workers, partly to satisfy the New York banks. China's leaders, who had no debts, didn't do that. On that ground, should we favor Mexico's nominally capitalist oligarchs over China's nominally communist bureaucrats? The logic escapes me.

International labor standards -- such as the International Labor Organization core labor standards, adopted in 1997 -- do have an important role. Standards based on universal social principles impose bans on products made with child labor or in prisons, or products made from endangered species. Anti-sweatshop campaigns are an excellent practice. Flagrant abuses in labor practices can be targeted and often ended by such means.

But as a trade strategy, the potential of such universals is minor. The proscribed products are not major items in trade, and they never compete seriously with what American workers do. Children and prisoners are not widely used anywhere to produce advanced consumer goods for export markets, for a simple reason: They aren't up to the job at any price. No one should think that a rigorous ban on such products (handmade carpets come to mind) would make Chinese exports any less cheap than they presently are.

Environmental standards also won't ever become major tools of a trade policy. The first problem is that regulatory differences have little to do with environmental impact in consumer good production (mining and oil are different stories, but we don't buy minerals or oil from China). Firms installing new plant and equipment usually use the latest technologies because that is also the cheapest way to produce; newer technologies also tend to be cleaner. It is therefore quite possible for a foreign firm to cost American jobs while improving environmental quality -- replacing an old and dirtier American factory with a new and cleaner Asian one. (China has lots of very dirty factories, but not generally in the export trades.)

A second problem is, shall we say, a practical one: Such standards could cut sharply against the United States. Just for example, how about genetically-modified organisms -- frankenfoods? This is a major issue in Europe, and surely, it's a proper environmental concern. Or suppose other countries got the idea that CO2 emissions should be the basis of environmental trade standards. The result might be good for the planet, but it would be grim for Boeing. Viewed in the context of global warming, the idea that the United States is a paragon of good environmental management is plainly absurd.

So here's the hard question: Leaving aside whether standards work as advertised, are they good tools for "getting the job done?" Would, in other words, it be a good idea to impede or block Chinese exports to the United States -- whether through labor or environmental standards or some other trick? Should we support Senator Chuck Schumer, in his demand that China either revalue its currency sharply or face a prohibitive tariff on its textiles? In short, is the China trade something that is bad for America and American workers, and that we should be looking to reduce?

Here are three reasons why not:

First, blocking trade with China would not bring a single job back to the United States. It would only cause Japan, or Taiwan, or Korea, or American multinationals to shift their out-sourcing from China to some other low-wage country, such as Vietnam. It may be good development policy to divide up our imports among many countries -- as we did for decades with textiles under the Multi-Fiber agreements. But it isn't a good policy for saving American jobs.

Second, if blocking Chinese exports to the United States really did cut into our imports overall, that would raise prices and lower real wages here, especially for the lowest-wage Americans who rely most on cheap imports to meet their budgets. The higher prices would show up as inflation, prompting higher interest rates from Ben Bernanke's Federal Reserve. Blocking inexpensive imports creates a transfer, in other words, from low-wage Americans working to bankers and investors. Is this what populists want?

Third, there would be retaliation. China is an enormous market, especially for advanced U.S. products such as aircraft. Those sales could, and very likely would, shift to Europe. The losers in that case would be high-paid American workers at firms like Boeing. This is where the U.S. has real competitive strength, which would be needlessly put at risk, and not just temporarily. Once competitive advantage in high technology is lost, it's very hard to get back.

China's dominance of the world market for low-wage manufactured exports is a problem. But it is a problem for Malaysia, Thailand, the Philippines, and other low-wage countries. It is not a problem whose solution would help American workers. And wage standards, in any form, are not a solution to competition from China. If they are not a solution to the China problem, and hardly apply to any trade woes we may have with Europe, Canada, and Japan -- what's the point?

Where did the emphasis on standards in trade agreements come from? Of course it's an outgrowth of the NAFTA debate twelve years ago. So it's to NAFTA we should turn now.

Time to End the NAFTA Wars

During the fight over NAFTA, some Democrats insisted on side agreements for labor and the environment as the price of a pro-NAFTA vote. Those agreements, of course, did little. Some observers believe they were always a sham. But those who backed them, back in 1994, invested a lot of political capital in them. Now they argue that the source of their failure was not a weak idea but a lack of zeal in implementing it. This is understandable; unfortunately, it is also the argument conservatives always make when their ideas don't work out.

Certainly, NAFTA was never a pro-worker deal. As Dorgan and Brown correctly say in their December op-ed, the intent was to open Mexico to U.S. finance and insurance as well as farm, pharmaceutical, machinery exports, and to protect the rights of investors. In return, Mexican elites wanted, and got, closer financial cooperation from the U.S. Treasury in times of crisis. Overall, the effect on Mexican factory workers was hard and the effect on Mexican farmers was even harder.

But NAFTA was not a "job-killer" for Americans. It had little effect on American manufacturing jobs and wages, for a basic reason: NAFTA made almost no difference to the tariff treatment of Mexican goods entering the United States. Tariff rates on Mexican exports to the U.S. averaged around three percent, and many goods (under the old maquiladora program) entered duty free. Manufactures trade from Mexico to the United States took off in the wake of the debt crisis, and was already booming before NAFTA.

Did jobs leave the United States to take advantage of cheaper Mexican labor? Of course, some did. Were American workers pressured to cut wages, because of Mexican competition? Of course, some were. But that happened because of Mexico, not because of NAFTA. Mexico would not disappear if NAFTA did. From the standpoint of American workers, NAFTA and its successors are just scapegoats. The fact is, China has since passed Mexico as the prime out-sourcing threat, even though we have no "free trade" agreement with China.

NAFTA will continue to have big effects on farmers. Mexico used to have a strongly protected population of maize farmers; NAFTA put an end to that and opened Mexican markets to U.S. corn. The result was predictable: as the food moved South, the people who used to produce it moved North. If any single point of NAFTA should be reconsidered, it's whether we really want to force Mexico's farm market completely open. But these are migration and farm policy issues, which have nothing to do with the fate of industrial employment in the United States.

As for CAFTA -- the Central American Free Trade Agreement -- that agreement contains numerous predatory provisions, abusing the power of North American monopolies (especially in drugs) to maintain and extend their patent protections in these small and low-income markets. It contains the same disruptive provisions in agriculture: More exports from the United States, more immigrants coming back. CAFTA is, in short, a bad idea. Central Americans only accepted it because otherwise they might have lost the trade access to U.S. markets they presently enjoy. But the manufacturing provisions are trivial, and the same is true of trade deals with Singapore, Bahrain, Jordan, and other actual or proposed FTAs.

In short, populists need to get over the NAFTA fight. We need to move beyond the lines of argument established in that debate, which gave us our preoccupation with the "standards fix" to trade problems. Some of the successor agreements should still be resisted, on grounds directly related to their actual provisions, which are rapacious and predatory. But these have little or nothing to do with the future of employment and wages in the United States.

What About the Trade Deficit?

Part of the larger objective of populists like Brown and Dorgan is to reduce the U.S. trade deficit. As they put it,

The results of such trade agreements are skyrocketing trade deficits more than $800 billion this year alone and downward pressure on income and benefits for American workers. Why? Because these agreements enable countries to ship what their low wage workers produce to the United States while blocking many U.S. products from entering their countries.

On even the most friendly reading, it's hard to make sense of this statement. The big changes wrought by NAFTA were a reduction of Mexican trade barriers, in manufacturing and in agriculture. The United States does have a trade deficit with Mexico, but it's only about a tenth of our total trade deficit. We run bigger deficits with Canada and Japan, which are not low-wage countries. And we run a deficit about four times as big with China, with which (as noted above) we have no free trade agreement.

The Chinese certainly "ship what their low-wage workers produce" -- they are not (as some claim) big players in truly advanced-technology products. But the Chinese do not block the import of U.S. products to China. (On the contrary, there are a few, such as high-speed computers, that China would like to buy but that the Pentagon will not permit us to sell.)

China's trade surplus with us has two explanations, both of them quite simple. The first is that China buys food and fuel from other countries, notably Canada, Australia, and the Middle East. It buys machinery from Japan and Korea. It runs a surplus with us, not usually to support a large surplus overall, but mainly and usually to pay for these imports.

The second is that China's surplus with us is partly a statistical mirage. When China exports a television, say, to the United States, the entire value of that television is booked as an export from China. But China may have previously imported the components, a large share of the value, from Korea, Taiwan or Japan. In that case, value-added per unit in China is quite small, and China has an import to count against much of its export value; much of the total value actually originated somewhere else. But the U.S. statisticians, and U.S. politicians, never see that.

China's overall trade surplus, which has been growing sharply lately, is also partly a mirage. Transfer pricing often is used by companies to move value out of a country where taxes are high or financial crisis is a risk. In China's case, though, there is a universal expectation that the currency will rise, and the reverse phenomenon is at work. Anomalies and mismatches in the accounts (differences between the exports China books and those other countries record as receiving from China) strongly indicate that capital is moving into China to take advantage of a coming revaluation. That looks like trade in some accounts -- but it's not.

So, what about the overall U.S. trade deficit -- now running, as Dorgan and Brown state, at a staggering $800 billion per year? Many economists believe this figure is unsustainable per se. I respect their view, and they could be right. But they also could be wrong. And the reason they could be wrong has, once again, much to do with the policy of China.

Once upon a time, every country in the world had to run, over time, a balanced balance of trade. That was in the days before international credit, and especially under the gold standard, when foreign accounts had to be settled in precious metal. If you ran a deficit for too long, gold (and therefore money) would drain away. Eventually, either prices would fall, or you'd find that you couldn't pay your bills. Under the old Bretton Woods system, even the United States faced this problem in an indirect way, and economists frequently fretted about the "gold outflow."

In the 1970s, Bretton Woods collapsed. But it collapsed to our benefit, for now most countries protect themselves against the resulting instability by holding financial reserves consisting mainly of U.S. Treasury bonds. This has created a unique, splendid position for us. It means that we can import much more than we export; actually, it means that we must import more than we export. We cover the difference routinely with nothing more than a note and a promise to pay interest, down the road. The extent we can do this is determined, entirely and exactly, by the willingness of other countries to hold the bonds.

As a result, the United States has been running trade deficits almost continuously since 1974. And every year, as the world economy grows, they grow larger. That's because other countries, for reasons of their own, have wanted to anchor their financial portfolios in U.S. Treasury bonds. Those bonds are costly to hold. They represent a real use of resources that could otherwise be put to buying imports and helping developing economies to grow. But the decision to hold them is the decision of other countries, not ours. There is just about nothing that we can do about it. And there isn't much we should want to do about it, either. In short, our trade deficit is what it is, not because of our material weakness, but because of our financial strength.

Is the system risky? Yes, it is. Could our bond holders, notably China, panic? Could they act to cut us off for political reasons, such as a crisis over Taiwan? Or even Iran? Yes, they could. Could our currency collapse? Yes, those things are possible. The system, hugely favorable to us though it is, is fragile and dangerous.

But those are financial risks. They have nothing to do with trade agreements. No trade policy aimed at any one country or at the trade deficit itself is going to reduce the financial risks. A policy aimed at hurting China could, on the other hand, increase them. Buying euros and dumping dollars is an easy Chinese reply to a decision, on our part, to squeeze their exports to us.

In short, one may not like the acute state of mutual dependence that currently exists between the United States and China. But it's too late: the condition exists. In the world economy, the Middle East will produce oil, because that's where it is. The Chinese will produce labor-intensive consumer goods, because they have the labor, and know how to use it. We will produce bonds, so long as everyone else is willing to take them. The question before us is not whether this situation can be cured, but how best to cope with it -- and how to be prepared if, unfortunately, it should collapse.

Full Employment and Fair Wages are Good for Trade

The populist objective is to raise American wages, create American jobs, and increase the fairness and security of our economic system. In that sense, I am, and have always been, a populist’s populist. The best way to achieve these things, let me suggest, is to do them -- directly. Nothing in our trading system prevents this. In fact, our privileged financial position ought to make it comparatively easy.

Seen in this light, the Chinese willingness to supply us with cheap goods is a magnificent gift. It means we can truly have full employment without inflation.

Let me put the point even more starkly. It was imports, it was globalization -- and not the Federal Reserve -- that cured America's inflation problem in the early 1980s. That was painful, but the adjustment has been made. The war on inflation, which the Fed continues to pretend to fight, is actually over, and it has been over for several decades.

Why not take advantage, as we did in the late 1990s, when we drove the unemployment rate below four percent for three years, while wages rose? Nothing bad happened. And certainly nothing on the trade front is stopping us from doing it again.

Indeed, rather than being spooked by the supposed effect of trade on wages, let's consider how that relationship works when you take it the other way around. What is the effect of wages on trade? Suppose that instead of building a trade policy to help with wages, we built a wages policy to help with trade. Does that sound far-fetched? It isn't. If you did that, you would have what economists call the Scandinavian Model.

The Scandinavian countries are egalitarian. They have universal unions, high minimum wages, and a strong welfare state. But they also are highly open. They practice free trade. Business there is free to import, export, and outsource. Business there is free to hire and fire. And yet the Scandinavians enjoy, most of the time, the lowest unemployment rates in Europe.

The secret is in the wages. If you are a business in Sweden or Norway, there is one thing you are not free to do. You are not free to cut your wages. You are not free to compete by going after cut-rate workers, either native or immigrant. You are not free to undercut the union rate. Successful businesses must, therefore, find other ways to compete. They do it by keeping productivity high. This means that advanced industries thrive in Scandinavia, while backward ones die out. (And that progressive businessmen prosper, while reactionaries fade away.) As a result, the economies stay competitive. The tax and welfare systems then make sure that everyone has enough to live on.

We are not Sweden or Norway -- we are much larger and will always be much more diverse -- but the economic principles are exactly the same. And we have, in fact, applied them in the past. As Dorgan and Brown correctly state in their essay, this is how the American middle class got built in the first place. It was done through unions, laws, regulations and, yes, standards. But the standards weren't imposed on other people. They were imposed at home, where they can be enforced -- and the rest of the world adjusted to what we did here. The problem, in short, is not foreigners and trade. The big problem is simply that unions, laws, regulations, and standards have been undercut by conservative policymakers, right here at home.

In certain industries, with advanced technologies and strong unions (think aircraft, or telecommunications), high wages persist. Yet those sectors remain competitive. This is how the model works -- high wages mean that business has no alternative but to stay on its competitive toes. We can, if we choose, spread that model more widely. How? Let's start with a higher minimum wage, a union-friendly workplace, universal health care, and stricter corporate governance. Let’s pass the Employee Free Choice Act. And let's have enough new credit and research support to create the new industries that the future -- especially the environmental demands of a changing planet -- will require.

Will we lose some jobs to trade? Sure. But unlike the Scandinavians, we don't have to balance our current account. Given the dollar's global position, we can improve our living standards, our productivity, and our competitive position -- and still run a substantial trade deficit. For now.

This is a reality-based populism. Our goal should be shared prosperity through egalitarian growth, based on our own efforts and imagination. Let's therefore stop scapegoating the Mexicans and the Chinese, and accept that they must have their role, which they will largely determine by their own actions, in the world in which we all live. Let's also stop talking obsessively about trade agreements with tiny countries that don't really matter much.

Let's concentrate, instead, on getting things right for workers right here. Let's raise wages, create jobs, support unions, deliver services -- and especially, let's cut the inequalities in our structure of pay.

If we do that, one still can't guarantee that our trade position will come out all right in the end. But based on the economics and the politics, it's probably our best shot.


See Jeff Faux's "Breaking the Consensus (Finally)," and an exchange between Galbraith and Faux on globalization and progressive priorities: "Trade War."

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