Fair Wages for Fair Trade

10/10/2012 01:10 pm ET | Updated Dec 10, 2012

The Obama administration is negotiating with eight Pacific Rim countries to form a Trans-Pacific Partnership (TPP) to promote trade and investment. At present, the TPP includes Australia, Brunei, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam, and the President hopes to expand the TPP to include other Pacific rim countries. The TTP may promote some U.S. exports, but if it looks like other free trade agreements, it will be another bad deal for workers and businesses at home and abroad.

It is conventional wisdom that regional free trade agreements like NAFTA and the TPP lift all boats, but there is surprisingly little empirical evidence to support that. The United States has 14 free trade agreements, and though some industries benefited, others lost jobs. Economists disagree about the net gains to employment. One study claims that NAFTA may have added as many as 700,000 U.S. jobs, but another study claims NAFTA cost nearly 1.9 million U.S. jobs. Another concluded that NAFTA had no measurable effect on the number of U.S. jobs. Most economists agree that NAFTA and the other free trade agreements have not added appreciably to our gross domestic product.

The reality is that even though U.S. workers are the most productive in the world, they cannot compete against workers in countries like Malaysia, where average wages are only 10 percent of U.S. wages. Clothing manufactured in Vietnam, where workers on average earn less than two dollars per day, will be a lot cheaper than clothing made in the United States. The same would be true of higher-value products, like smartphones. Domestic manufacturers must either cut wages, lay off workers, or move jobs overseas.

U.S. businesses that provide good wages and working conditions, whether they produce at home or abroad, are also disadvantaged by competition from businesses that are less high-minded. When the government lets businesses cut corners, pay substandard wages, and put workers at risk, then U.S. businesses that observe good labor practices are hurt.
And contrary to the reassurances of some politicians, these free trade agreements are not necessarily improving life for workers overseas either. Yes, they may have more work, but wages and working conditions are often appalling. Workers in some Pacific Rim countries cannot earn enough to support their families. Increased trade has aggravated the disparity of income distribution in countries like China and India, and it has fed organized crime and corruption in places like Mexico and Colombia. As the rich become richer, the cost of living increases, and the social safety net becomes frayed.

Economists would expect that free trade would cause wages to converge, but in fact that has not happened in NAFTA, and unless something changes, it won't happen in the Pacific rim either because foreign workers are often denied fundamental labor rights. Countries like Singapore and Peru are not playing by the same labor rules as us. Wages and working conditions are held down in developing economies by laws that curtail collective bargaining and by fierce import competition from other poor countries. If Vietnam raises wages, it risks losing jobs to Thailand.

When these countries export goods they are also exporting their social problems. Economists call this "social dumping," because it puts importing countries with higher labor standards, like the U.S., at a disadvantage.

If all countries met minimum international standards that ensured workers earned a fair local wage in safe working conditions, we would level the playing field and benefit foreign and domestic workers alike. A universal minimum wage is unworkable, of course. A fair local wage that guarantees that workers can afford at least the basic necessities of life could be set according to the standard of living in each country. Each government would be responsible for determining a fair wage based on the cost of food, shelter, clothing, education, and medical care required in their country. If a government sets the wage rate too low, it could be challenged through the TPP's own dispute settlement process.

But how could we enforce a fair wage in other countries? The TPP could provide that if goods are produced at less than fair wages an importing country could impose a duty against social dumping that would raise the price of the import equal to what the price would have been if a fair wage were paid. A tariff against social dumping would give exporters an incentive to raise wages, protect labor rights, and improve working conditions.

Though setting a social dumping duty sounds complicated, in fact, we routinely make similar calculations about the costs of producing goods overseas when we determine anti-dumping duties. The General Agreement on Tariffs and Trade (GATT) permits importing countries to determine how much a good should cost if it were sold at a fair price. Why not use our existing procedure and include in the calculation how much labor should be paid?

Imposing a social dumping duty would shrink the wage differential between industrialized and developing countries, but it would not eliminate the comparative advantage that a developing economy may enjoy. Developing countries will still have lower wages, and they will have other comparative advantages in skills, production, resources, location, and climate.

The United States would not be imposing its standards on other countries. Guaranteeing a fair local wage would empower developing countries to raise their labor standards. Developing countries like Vietnam today face a stark choice: They can either pay workers low wages or lose export markets to other developing countries. But if we require all exporting counties to meet the same basic standards, then all exporting countries will have the opportunity and the incentive to improve the lives of their people.

By improving the conditions and livelihood of foreign workers the TPP can create new markets and stimulate world economic growth. The TPP offers the administration a chance to create a model for other regional trade agreements that balances trade liberalization and fair labor standards. We can also create a level playing field that allows U.S. companies to pursue profits without compromising labor conditions. The United States should seize this opportunity to reassert global economic and moral leadership.