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Trade Policy: Countering the Walmart Effect

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Bipartisanship in Washington is rare these days, but it does occasionally surface. It did this week, when the Senate passed the "Currency Exchange Rate Oversight Reform Act" (S.1619) -- the one sponsored by Democratic Senator Sherrod Brown and co-sponsored by 22 other Senators, including five Republicans. If ever passed by the House -- the Senate vote in favor was 65 to 35, with 16 Republicans in support -- the Act would allow affected American companies and workers to petition the Department of Commerce for countervailing import duties, to offset injury caused to them by the undervalued currency of a trading partner. It would also ease the criteria that the Treasury Department uses when adjudicating such petitions, with plaintiffs no longer obliged to demonstrate that any currency misalignment was the product of deliberate exchange rate manipulation.

The main target of legislation of this kind is, of course, China; and the main currency that is currently under-valued is the Chinese yuan/renminbi. The Chinese stand condemned not simply for their lower labor costs, less stringent environmental controls and cavalier attitude to intellectual property rights. They also stand condemned for deliberately undervaluing their currency, so cheapening still further the price of their products when sold in overseas markets. "China's already eating our lunch," was how Sherrod Brown labeled the practice when briefing his local Ohio constituents. "It was mistake for nations to think that their path to prosperity is paved simply with exports to the United States," was the President's more diplomatic presentation of the same basic argument at the Seoul G-20 summit last November. "Precisely because of China's success," he said, "it is important that they act in a responsible fashion." And well might such responsibility be urged, because even the pro-free trade Petersen Institute currently calculates the Chinese currency to be undervalued by 28.5%. Such an undervaluation helps Chinese goods out-compete American ones in shared export markets. It also helps fuel a trade surplus for China with the United States that has exploded recently: going from a modest $84 billion in 2001 (when China entered the WTO) to a staggering $278 billion in 2010.

Yet at the very time that the Senate was voting on S.1619 and the President was campaigning for The American Jobs Act, his administration was also pressing Congress to pass free trade agreements with South Korea, Colombia and Panama. These are trade deals first negotiated by the Bush Administration and opposed at the time by the then junior Senator from Illinois. Understandably the AFL-CIO, among others, has charged the White House with sending contradictory signals: simultaneously advocating spending programs that will create jobs in America while opening American markets to further competition (and hence job loss) from cheaper labor-based production elsewhere. The advocates of free trade deals always insist that on balance they are job creators. They invariably claim that such deals stimulate more employment in the U.S. export-sector than they lower employment in industries adversely affected by imports. But even those pressing for ever greater free trade are normally obliged to concede that, in parts of the U.S. economy at least, free trade deals of this kind do cost jobs. Indeed that is why the Obama Administration twin-tracked the push for the three trade agreements with the renewal of legislation to compensate workers adversely affected by them. It was this second strand of the Administration's trade policy - compensation through the Trade Adjustment Assistance Program for workers adversely affected by new trade deals - that held up passage of trade legislation for months, with progress blocked by Republican unwillingness to direct tax payer dollars to the aid of the innocent victims of free market economics. But suitably scaled down to overcome that unwillingness, the TAA Program (and the three trade deals) were pushed through the House of Representatives this evening and on to the Senate, just in time to be signed into law before the South Korean President's joint address to Congress on Thursday.

So after a long period of inactivity on the trade front, we are now witnessing a new burst of action - symbolic action on currency manipulation, real action on free trade agreements, and modest action on worker compensation. But as always, the political theater in Washington helps obscure deeper processes and more structurally rooted problems that neither new trade agreements nor even effective currency reform can directly solve. The two deeper processes are those of domestic de-industrialization linked to outsourcing, and the globally-induced erosion of American wages. The deep-rooted problem not yet on the Washington radar is the inappropriateness of free trade as a solution to the current global competitive weakness of the U.S. economy. Re-industrialization, rising wages and fair trade are our contemporary needs. Out-sourcing, engaging in a wage race to the bottom, and opening our domestic markets to all and sundry, most definitely are not. Major figures on both sides of the Washington political divide continue to believe that free trade and market-determined currency rates are the route to American re-industrialization. It is a faith in free markets which is singularly misplaced.

De-industrialization is well and truly underway. The Commerce Department released figures in April showing that U. S. multinationals - the companies responsible for 23% of private sector output, 48% of U.S. exports, and the employment of one American worker in five - have spent the last decade reducing their U.S. work force by 2.9 million while increasing employment abroad by 2.4 million. The 1990s practice, of U.S. companies generated two jobs at home for every one created abroad, no longer applies for companies whose sales are ever more dependent on overseas markets. Gone are the days too when advocates of free trade could argue convincingly that only low-skilled employment was moving overseas: that American companies could be relied upon to keep high-skilled work at home and offer expanding employment in new high-tech industries inaccessible to Third World labor. Robert Scott has long argued that trade with China costs America jobs, and costs jobs all the way up the managerial hierarchy. His latest estimates put the numbers at 2.8 million American jobs lost in a decade, most in manufacturing and almost half of those in high-tech industries like computers and electronics. Scott is now no longer alone. More mainstream economists like David Autor, David Dorn and Gordon Hanson have recently reached similar conclusions: namely that, on a conservative estimate, "rising Chinese import competition between 1990 and 2007...explains one-quarter of the contemporaneous aggregate decline in U.S. manufacturing employment." Autor, Dorn and Hanson additionally argue that 'transfer benefit payments for unemployment, disability, retirement and healthcare also rise sharply in exposed labor markets. The deadweight loss of financing these transfers," their data suggests, 'is one to two-thirds as large as U.S. gains from trade with China." The pattern now emerging, they report, is one "with areas where factories were most exposed to Chinese import growth faring worse than areas that were less exposed."

The global race to the bottom is steadily eroding average American wages. There was a time when U.S. manufacturing industry was little exposed to competition from low-income economies: but no longer. "In 1991, low-income countries accounted for just 2.9% of U.S. manufacturing imports. However, largely owing to China's spectacular growth, the situation has changed markedly:" to 5.9% in 2000 and 11.7% in 2007, "with China accounting for 91.5% of this import growth over the period." Many American companies have been core drivers of this exposure, with its consequent negative impact on average American wages: not least among them, Walmart. To meet the low price requirements of major consuming outlets of which Walmart is the largest, more and more American manufacturing firms are currently impelled to outsource their basic production to cheaper labor markets. In the process, American firms remain profitable, but American workers lose out. They lose employment, and they lose wage growth: the first through direct out-sourcing, the second through the fear of it in wage negotiations. Big Box retailers like Walmart essentially act as an export conduit for the Chinese economy, importing vast quantities of Chinese-made goods whose sale here triggers a shift in employment from one side of the Pacific to the other. The result is the Walmart effect: low wages because of foreign competition sustaining a flow of cheap imports bought by workers too poorly paid to buy further up the value-chain. Contrary to the claim that everyone benefits as consumers as imports bring prices down, it would be more accurate to say that free trade and the impoverishment of the average American family are currently going hand-in-hand; and are doing so because of the disproportionately adverse effect on the wages of those same consumers; the wages of those directly affected by competition from cheap imports, the wages of those closest to import-displaced workers in skills, and the wages of the rest of us as general levels of earnings experience the gravitational pull of their diminished pay. It cannot be emphasized too strongly that the limited gains to American consumers brought by cheap imports are more than offset by the adverse impact of those imports on general wage levels.

The case for free trade is systematically over-stated while the case for fair trade is rarely heard. The picture presented by free trade advocates is invariably one of generalized gains to living standards by the opening of markets to the ever easier entry of overseas-based producers, with competition within and between economies producing a cumulative race to the top - bringing cheaper goods to consumers in developed economies and ever greater employment opportunities to producers in less developed ones. The counter-argument, normally given far less air time, is that in the context of uneven global economic development inherited from both a colonial and a Cold War past, the lowering of tariff barriers and the resulting inflow of cheaply produced goods from previously second/third world economies can only produce a generalized race to the bottom that will ultimately destabilize the entire system and undermine social settlements in high wage economies. Quite properly, free trade was not the governing philosophy in Washington when the 19thcentury U.S. economy struggled to industrialize in the face of UK manufacturing dominance. It only became the governing philosophy there when UK manufacturing dominance had been replaced by our own. Unalloyed free trade no longer automatically addresses the long term development needs of American-based producers in a global economy whose growth points have shifted east and south: away from high-wage economies in Western Europe and North America towards the low wage ones of the former communist bloc and the southern cone. When U.S. capital and U.S. industry were one and the same, trade policy that favored the profit margins of big corporations helped develop the U.S. manufacturing base, including its small- and medium-size sector. But with U.S. capital globally footloose, that overlap of interests no longer applies. If the United States is to reindustrialize its way back to decent middle-class wages again, the propensity of large U.S. corporations and mighty U.S. finance to go offshore will need to be restrained. Free trade between economies of broadly similar wage levels will need to be supplemented by fair trade between economies within which wage levels differ significantly. A blanket commitment to free trade can no longer be the policy stance of progressives committed to the generalized restoration of the American Dream.

Our current trade imbalance with China will not be fixed by currency manipulation alone, because American economic vulnerability is not rooted simply in the relative strength of the dollar. It is rooted in America's changing position in the global economic order. The United States began the post-World War II period as the capitalist system's major exporter and supplier of investment funds, as well as its major military protector. The military role remains and the dollar is still for the moment the global system's major reserve currency; but U.S. export domination has entirely vanished and it is American debt, not American largesse, which now helps to sustain global economic growth. In 2010, we exported (as our second largest source of export earnings in China) $8.5 billion worth of "scrap and second-hand goods" - more than we exported to China in any other category of goods except "agriculture, forestry and fisheries." These days, China sends us manufactured consumer goods, suitably packaged; and we export back the packaging! In the space of a decade, existing policy has allowed the United States to slip into a trading relationship with China in which we send to our single largest export market agricultural produce and scrap/waste, and receive in return manufactured goods and money loans. More policy of the same kind can only intensify this drift towards a third-world style dependency on more successful economies elsewhere.

Now is not the time for more trade deals. Now is the time for less: which is why the advocacy of three new trade deals by the Obama Administration when also pursuing the American Jobs Act is singularly ill-advised. The one with Colombia is opposed by nearly every major American trade union and the Sierra Club: its labor-protection clauses being seen by them as entirely unenforceable in a country in which at least 3000 trade unionists have been murdered in the last 25 years. The agreement with South Korea - an agreement which if passed will be the largest since NAFTA and the first since NAFTA with an already-industrialized economy - puts employment at risk in the US-based textile, electronics and computer industries - to the tune of maybe 159,000 jobs over the first seven years of the agreement. The gross average employment income in South Korea in 2005 was $26,152. The equivalent U.S. figure was $42,028. It hardly requires a degree in rocket science to see that competition between economies with earning imbalances of that scale can only serve to pull American wages down further still.

We are already in a trade war, whether we like it or not. Even the pro-free trade New York Times has recently conceded that "since the financial crisis began in 2008, G-20 countries have imposed 550 measures to restrict or potentially distort trade." If they can, so too can we. Free trade and free currencies are only two of the policy weapons available to us as we struggle to restore American employment and wages, and they are not necessarily two of the best. Because we need policies that bring American jobs home, and bring them home now, we should say "yes" to currency retaliation and to the devaluation of the America dollar; "yes" to the taxing of outsourcing, to the fierce defense of intellectual property rights, and to the policing and implementation of international labor standards; and "yes" to public-private funding of high-tech R&D and to interventionist industrial policy geared to strengthening the U.S. manufacturing base. We should welcome open trading between economies with similar labor rights/costs, and fair trading between economies with dissimilar ones. But to those who would advocate untrammeled free trade with all and sundry, regardless of differences in the internal political and social settlements within which their economies sit, we should say definitely "no." "No," not now; and "no," not ever.

These arguments are developed more fully in
Making the Progressive Case: Towards a Stronger U.S. Economy

First posted, with full academic citations, at
www.davidcoates.net