Krugman Torn On Trade

May 14, 2007

Divided Over Trade

By PAUL KRUGMAN

Nothing divides Democrats like international trade policy. That became clear last week, when the announcement of a deal on trade between Democratic leaders and the Bush administration caused many party activists to accuse the leadership of selling out.

The furor subsided a bit as details about the deal emerged: the Democrats got significant concessions from the Bushies, while effectively giving a go-ahead to only two minor free trade agreements (Peru and Panama). But the Democrats remain sharply divided between those who believe that globalization is driving down the wages of many U.S. workers, and those who believe that making and honoring international trade agreements is an essential part of governing responsibly.

What makes this divide so agonizing is that both sides are right.

Fears that low-wage competition is driving down U.S. wages have a real basis in both theory and fact. When we import labor-intensive manufactured goods from the third world instead of making them here, the result is reduced demand for less-educated American workers, which leads in turn to lower wages for these workers. And no, cheap consumer goods at Wal-Mart aren’t adequate compensation.

So imports from the third world, although they make the United States as a whole richer, make tens of millions of Americans poorer. How much poorer? In the mid-1990s a number of economists, myself included, crunched the numbers and concluded that the depressing effects of imports on the wages of less-educated Americans were modest, not more than a few percent.

But that may have changed. We’re buying a lot more from third-world countries today than we did a dozen years ago, and the largest increases have come in imports from Mexico, where wages are only about 11 percent of the U.S. level, and China, where wages are only 3 percent of the U.S. level. Trade still isn’t the main source of rising economic inequality, but it’s a bigger factor than it was.

So there is a dark side to globalization. The question, however, is what to do about it.

Should we go back to old-fashioned protectionism? That would have ugly consequences: if America started restricting imports from the third world, other wealthy countries would follow suit, closing off poor nations’ access to world markets.

Where would that leave Bangladesh, which is able to survive despite its desperate lack of resources only because it can export clothing and other labor-intensive products? Where would it leave India, where there is, at last, hope of an economic takeoff thanks to surging exports — exports that would be crippled if barriers to trade that have been dismantled over the past half century went back up?

And where would it leave Mexico? Whatever you think of Nafta, undoing the agreement could all too easily have disastrous economic and political consequences south of the border.

Because of these concerns, even trade skeptics tend to shy away from a return to outright protectionism, and to look for softer measures, which mainly come down to trying to push up foreign wages. The key element of the new trade deal is its inclusion of “labor standards”: countries that sign free trade agreements with the United States will have to allow union organizing, while abolishing child and slave labor.

The Bush administration, by the way, opposed labor standards, not because it wanted to keep imports cheap, but because it was afraid that America would end up being forced to improve its own labor policies. So the inclusion of these standards in the deal represents a real victory for workers.

Realistically, however, labor standards won’t do all that much for American workers. No matter how free third-world workers are to organize, they’re still going to be paid very little, and trade will continue to place pressure on U.S. wages.

So what’s the answer? I don’t think there is one, as long as the discussion is restricted to trade policy: all-out protectionism isn’t acceptable, and labor standards in trade agreements will help only a little.

By all means, let’s have strong labor standards in our pending trade agreements, and let’s approach proposals for new agreements with an appropriate degree of skepticism. But if Democrats really want to help American workers, they’ll have to do it with a pro-labor policy that relies on better tools than trade policy. Universal health care, paid for by taxing the economy’s winners, would be a good place to start.

Copyright 2007 The New York Times Company