The gap between the need for technology-savvy workers and the educational achievement of Americans has grown over the past four decades, due to flatlining rates of postsecondary educational attainment. This has hit industries that require highly-skilled technical labor particularly hard.2 Estimates suggest that the United States will face a shortfall of five million workers in 2020, because 65 percent of jobs will require a postsecondary education. This possibility has sent tech giants scrambling for solutions. For example, Google recently made and marketed apps and online tools for schools, intended to help bridge the gap between education and technology. Their work has ten million students in Google Classrooms, typing essays and solving word problems on Google Chromebooks. Despite such efforts to bring students up to speed, America’s children are facing more of a marathon than a sprint.3
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1. There is also a gap between the skills employers value and the major choices of college students, with large deficits of workers in majors such as engineering and computer science. See Kelsey Gee, “Where College Seniors are Falling Short,” Wall Street Journal, April 26, 2017.
2. For examples, see Jeffrey Sparshott, “The US Occupations at Greatest Risk of a Labor Shortage,” Wall Street Journal, April 19, 2016.
3. For a book-length treatment of this issue, see Claudia Goldin and Lawrence F. Katz, The Race between Education and Technology (Cambridge: Harvard University Press, 2009).
In fact, China has seen opposite trends, with increasing income inequality and a falling labor share of income. Similar trends hold for many other developing countries. What can explain this? It is likely that the computer revolution and technological change have increased the demand for those with the most skill, and reduced demand for those with the least skill, across all countries.14 15
Technological change has reduced the share of manufacturing employment in many countries, including several countries that are poorer than the United States. In Mexico, South Africa, and Turkey, the manufacturing share of employment has fallen in recent years; it has also fallen in Germany, Japan, the United Kingdom, Korea, the United States, and for the Group of Twenty (G20) countries on average.
Again, it is difficult to truly disentangle these two sources of labor market disruption, especially as international trade and technological change fuel each other. Globalization allows quicker technological diffusion, and competitive forces encourage labor-saving innovation. Technological change enables globalization by lowering communication costs and creating solutions to the logistical puzzles of global supply chains.
Figure 4.5: Almost Everywhere, the Manufacturing Share of Employment is Falling
Data sources: International Labor Comparisons, US Bureau of Labor Statistics.
Monopoly and Excess Profits in the Global Economy
As Chapter 2 showed, excess profits also play an important role in this story of workers’ woes. When entrepreneurs make risky and ingenious innovations, some get lucky and receive enormous returns. Among large corporations, there is substantial evidence of increased market power and corporate profits.16 The most successful companies receive supersized returns to their investments, often in excess of 20 or 30 percent.17 This has caused a large increase in cash stockpiles by corporations, as more and more of worldwide income takes the form of corporate profits.18 In the United States, over three-fourths of corporate income is excess profits, and corporate profits are higher as a share of national income than they have been at any time in the past half-century.19 20
Evidence indicates that the largest, most profitable companies use less labor per dollar of sales than do more typical firms; these “superstar” firms alone account for most of the falling labor share of income. As it turns out, a typical firm does not use less labor relative to a dollar of sales now than it did decades ago. But typical companies are far less important than they used to be.21
International business will be discussed in Chapter 7, but it is already clear that rising corporate profits bear some responsibility for both the declining labor share of income and rising inequality throughout the world. And, as we saw in Chapter 2, social norms, the declining role of labor unions, changes in tax policy, and other factors may also contribute to troubling labor outcomes.
Nonetheless, if workers are hurting, and international trade is playing a contributing role, some suggest that this is reason enough to put the brakes on globalization. After all, trade agreements are under governments’ control, whereas social norms, technological change, and corporate market structure may be more difficult to change. And trade restrictions are more politically palatable than other remedies. Foreigners are an easy scapegoat; protectionist trade policy can appear patriotic.
Yet, such solutions harm the very workers they purport to help. Stepping back from international trade is both counterproductive and ineffective. Next, we’ll see why, and discuss the path forward.
Five
Trade Politics and Trade Policy
Every person has two major roles they play in the economy: one as a producer and one as a consumer. In our producer role, we typically sell labor to an enterprise that makes a good or service—and it is in this role that international trade is often uncomfortable. Chapter 4 showed that international trade creates a tougher competitive environment; workers with less education are likely to be adversely affected by competition from countries with lower labor costs. If workers have less bargaining power, thanks to companies moving production abroad (or merely threatening to), they may also see restrained wage growth. Chapter 7 will discuss the role of multinational companies in far more detail.
Yet in our role as consumers, international trade is nearly unambiguously good. Reflect for a moment on the items you buy. Your cup of coffee, your fruit in winter, your clothing and shoes, your computer, your appliances, your car, and much else is less expensive because of international trade. Even if you buy domestic versions of these products, they are likely less expensive because they must compete with the foreign options available to consumers. If we were to raise trade barriers by enacting, say, 30 percent tariffs on foreign products, this would make most of the items we purchase more expensive, reducing the purchasing power of our wages.
International trade not only reduces the cost of the goods we consume, it also substantially increases the variety of goods we can access. In recent decades, the variety of imported goods has increased threefold. While it is difficult to quantify the value of increased choices for consumers, some scholars suggest that value is substantial.1 This makes intuitive sense when one stops to contemplate the origins of one’s purchases. It is nice to be able to buy flowers year around, and foreign varieties of wine and beer, to say nothing of the vast arrays of international foods, clothing, toys, electronics, and automobiles. International trade provides consumers with a rich abundance of choices.
While it is easy to appreciate the advantages associated with consuming international products, it can still, of course, be tempting to pursue protectionist trade policies to help industries that are hurting. Yet it is important to keep in mind the large costs associated with such policies. Across decades of studies, economists have consistently found that tariffs generate large collateral damage, and the jobs saved in protected industries often come at enormous cost to consumers. A review of thirty-one case studies found that protectionist measures cost consumers as a group, on average, over $500,000 per job saved.2 A recent study of tariffs on Chinese tires (which ran from 2009 to 2012) found a cost to consumers of $900,000 per job saved in tire manufacturing. Unfortunately for American tire workers, less than 5 percent of these added costs to consumers showed up in their paychecks.3 Meanwhile, workers in other industries were hurt as China retaliated; its tariffs on chicken parts harmed the poultry industry, causing exports to China to drop by 90 percent.
Tariffs are also one of the most regressive forms of taxation; there are three reasons why tariffs disproportionately burden those with lower incomes. First,
tariffs do not burden income that is saved, only income that is consumed. Like other consumption taxes, such as many state sales taxes, tariffs therefore fall more heavily on poorer households. Poor and middle-class people often spend nearly all their income on meeting their consumption needs, saving little or nothing. Second, while tariffs could be higher on imported luxury goods, causing them to burden well-off households more heavily, that has never been the pattern in practice. On the contrary, tariffs have tended to be higher on the basic goods that are most widely consumed by poorer households.4 Third, for poor and middle-class consumers, the share of total consumption made up of imported goods is greater than it is for richer consumers. Researchers have found that, across many countries, poorer consumers consume a higher fraction of traded goods relative to non-traded services than do richer consumers, and this pattern is particularly stark for Americans.5 In the United States, tariffs take a bite out of the after-tax incomes of the poorest 20 percent of the population three times larger, in percentage terms, than they take from the top 20 percent.6
Consumers have a lot to gain from international trade, but consumers are often politically disorganized, and they are unlikely to form a vocal constituency in favor of open international trade. Instead, trade liberalization often proceeds based on other considerations. Export-oriented business interests, and globally oriented multinational companies, provide constituencies in favor of an open trading system. And policy-makers also pursue trade agreements toward political ends.
Back When Tariffs Paid for Government
Tariffs have played an important role in our nation’s tax history, and indeed were the primary source of revenue to the US federal government until the early twentieth century. As the last decades of the nineteenth century, often referred to as the “gilded age,” brought alarming increases in inequality, some policy-makers began to worry about the regressive nature of tariffs, which clearly placed greater burdens on working-class people. Rich “robber barons” faced light tax burdens; only a small portion of their income was spent on consumption goods subject to tariffs, and they were not subject to large property taxes. In The Great Tax Wars, Steven Weisman chronicles how the need to fund the government created intense political battles that ultimately led to the enactment of an income tax. In 1913, the Sixteenth Amendment to the US Constitution was ratified, clearing constitutional hurdles to levying taxes on income. The federal income tax was adopted the same year.
Myths about Trade Agreements
One interesting aspect of recent public debates in the United States is the huge emphasis that has been placed on trade agreements—both past agreements like NAFTA and proposed agreements like the Trans-Pacific Partnership (TPP). But many observers do not recognize what these agreements do, and how little these agreements affect US workers.
The United States generally has very low tariffs on almost all products. When a free trade agreement is signed, therefore, it typically involves very little tariff reductions by the United States, given that the tariffs were already low, and much larger tariff reductions by our trading partners. Free trade agreements are required by our international trade treaties (under the WTO or GATT) to move toward completely free trade, rather than lowering barriers partially. Imagine, then, that one country has tariffs that average 1 percent and the other country has tariffs that average 20 percent. A free trade agreement between the two will be inherently asymmetric as both countries remove tariffs.
As the United States has pursued various bilateral and regional trade agreements in recent decades, there was little change in our overall barriers, since we were already quite open to trade. In the case of NAFTA, for example, our tariffs averaged 4 percent while Mexican tariffs averaged 10 percent. Mexico also had a slew of other protectionist measures that were eliminated by the agreement.7 This explains why those advocating for these agreements often celebrate the fact that they create a more “level playing field”; all members import products on the same basis, without barriers to trade. (Sports metaphors are quite common in this area. Let’s move the ball forward and level the playing field before the clock runs down, shall we?)
The debate over NAFTA, both in the past and recently, has often produced more heat than light. NAFTA came into effect in 1994, although the United States had already been part of a free trade agreement with Canada since 1989. At the time, Ross Perot, a 1992 presidential candidate, predicted that NAFTA would generate a “giant sucking sound” as Mexico pulled economic activity out of the United States. Nothing of the sort materialized.
The elimination of tariffs had the greatest impact on the textile, apparel, automotive, and agricultural industries, but the years following the adoption of NAFTA showed minimal change for the US economy as a whole. Between 1994 and 2001, unemployment dropped from 6.9 percent to 4 percent, and 17 million jobs were added. In the years after NAFTA, only 5 percent of annual job turnover could be attributed to trade with Mexico; by contrast, 23 percent of turnover was the product of technological advancement.8 NAFTA also did little to alter the aggregate trade balance, a measure far more responsive to domestic macroeconomic forces. (These are discussed in the next chapter.)
What does the evidence indicate more generally about trade agreements and trade? Surprisingly, many studies find trade agreements to have little effect on trade flows. For instance, controlling for the other variables expected to influence trade (such as the size of the economy and geographic factors), there is no evidence that WTO membership enhances trade.9 Why? Simply put, actions speak louder than words. A country’s decision to sign an agreement is far less important than that country’s overall stance toward trade. Often, when countries like China join the WTO, they sign on to the agreement after years of policy changes that unilaterally opened their countries to trade. By the time they formally join the agreement, that action itself has little effect on their behavior, and thus, on their trade patterns.10 In other words, foreign countries’ domestic policy decisions are likely the dominant factor increasing trade flows in recent decades—on top of the facilitating factors of reduced transportation costs, and even more important, dramatically lower communication costs. Trade agreements play a relatively minor role.
For better or worse, many aspects of trade agreements actually have comparatively little to do with trade. For example, the TPP devoted much attention to intellectual property rights, labor standards, environmental standards, and currency manipulation. Whether these issues belong in trade agreements is an open question. In theory, there is no reason why issues outside trade cannot be included in trade agreements, but in practice, which issues should be included is often controversial.
What Should Trade Agreements Do?
Most agree that trade agreements are meant to liberalize trade among participant countries. There is less agreement about what else they should do. Some provisions of existing agreements have caused a great deal of controversy, including those that protect intellectual property rights. When the interests of highly profitable pharmaceutical companies are pitted against people in poor countries seeking affordable medication, many question if it is right to use a trade agreement to benefit the companies. Even larger controversy focuses on mechanisms for investor-state dispute settlement, which allows companies to sue governments through ad hoc arbitration proceedings; many argue these should be replaced by a reliance on domestic laws. In these two areas, current trade agreements strike many as too broad.
Yet despite these important examples, there are also ways in which broader agreements may make good sense. For example, if countries are concerned about tax or regulatory competition, international agreements offer a means to avoid a “race to the bottom.” Governments could use agreements to commit to higher standards, reducing global companies’ ability to pit governments against each other.
Shunning the Trans-Pacific Partnership
In a New York Times poll back in May 2015, 78 percent of respondents said they knew “not much” or “nothing at all” about the Trans-Pacific Part
nership (TPP). Yet, within a year, the TPP had become a hot topic in the 2016 election season, drawing fire from both ends of the political spectrum. Shortly after taking office, President Trump withdrew the United States from the deal.
The TPP was negotiated by twelve countries along the Pacific Ocean: Japan, Malaysia, Vietnam, Singapore, Brunei, Australia, New Zealand, Canada, Mexico, Chile, Peru, and the United States. Combined, their economies represent 37 percent of global GDP and their populations number over eight hundred million people. The TPP’s goal was to create a free trade area by eliminating tariffs over the course of several years. The agreement also contained provisions regarding digital commerce, intellectual property rights, human rights, and environmental protection. It expanded labor rights, dramatically increasing the number of people covered by enforceable labor standards. And it contained environmental provisions that addressed clean oceans, wildlife trafficking, and logging.1 The inclusion of many of these provisions was a response to criticism of NAFTA; TPP was an opportunity for the United States, Canada, and Mexico to renegotiate the terms of that controversial agreement.2
The TPP also had geopolitical intentions, as it was meant to create a group of partners with sufficiently strong relationships to counter China’s growing regional influence. The US abandonment of the agreement generated ill will; Singapore’s prime Minister stated that many countries would feel “damaged for a long time to come.” In the meantime, China has increased investment in Southeast Asia through its One Belt, One Road infrastructure initiative, and the TPP is going forward without the United States. The remaining eleven countries signed the final agreement in March 2018; it has been relabeled the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).3
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