Chapter 8: The Labor Dilemma
By William Krist
According to economic theory, unskilled workers in the United States would be injured, either through increased unemployment or reduced wages or both, as international trade is opened up with low wage countries. Thus, it is not surprising that the major industrial trade unions in the United States have been the strongest and most consistent opponents of America’s trade agreements for the past thirty years. To try to offset this injury and to minimize organized labor’s opposition to trade agreements, Congress has included a Trade Adjustment Assistance (TAA) program in trade legislation since the 1962 Trade Expansion Act.
In addition to TAA, the AFL-CIO has successfully demanded that U.S. negotiators seek to include provisions in U.S. trade agreements that commit the parties to the agreement to respect the core standards of the International Labor Organization (ILO). These provisions are now a standard part of the United States’ bilateral and regional free trade agreements (FTAs), but the United States’ trade partners have refused to consider such provisions in the WTO or the Doha Round.
From the end of World War II through the 1960s, the American Federation of Labor (AFL) and Congress of Industrial Organizations (CIO) supported America’s trade agreements program. The AFL and the CIO, which merged in 1955 to become the AFL-CIO, were concerned that communism could spread from the Soviet Union to Western Europe and Japan, and they agreed that trade agreements could help those countries regain their economic footing and strengthen democracy. For example, in 1962 the AFL-CIO supported the Trade Expansion Act, which President John F. Kennedy touted as a “jobs bill”; in his remarks signing this legislation, Kennedy said, “Increased economic activity resulting from increased trade will provide more job opportunities for our workers.”[1]
By the early 1970s, however, U.S. industry was losing competitiveness as Europe and Japan recovered from the wartime devastation, and U.S. industries, such as consumer electronics and machine tools, were being wiped out by foreign competition. The AFL-CIO switched from supporting trade liberalization to seeking protection from foreign competition. (However, the United Auto Workers continued to support open trade in automobiles until the early 1980s, when small, fuel-efficient cars from Japan and Europe began to grab a significant share of the U.S. market.)
In 1971, the AFL-CIO worked with Congress to push the Burke-Hartke Bill, and this “marked the formal conversion of the politically powerful AFL-CIO . . . to a protectionist stance. . . . [This legislation] called for across-the-board import quotas and changes to U.S. international tax laws so sweeping that most foreign direct investment would have become immediately unprofitable for U.S. companies.”[2]
In the face of strong opposition from the White House and industry and threats of retaliation from the United States’ trade partners, the Burke-Hartke Bill failed to pass Congress. Nonetheless, since that time the AFL-CIO has generally opposed new agreements[3]; although it has not been successful in blocking new negotiations, labor’s opposition has slowed down the passage of several trade agreements — most recently and most notably, the United States’ agreement with Colombia—and has had a significant effect in shaping legislation that authorizes new trade negotiations.
For example, in the 2002 Trade Act — U.S. labor unions did play a significant role in shaping the objectives of the nation’s trade agreements. One objective stated in this legislation is “to promote respect for worker rights and the rights of children consistent with core labor standards of the ILO.”[4] Another is to specifically promote universal ratification of ILO Convention 182 for the prohibition of the worst forms of child labor. And a third is a requirement to ensure that the parties to U.S. trade agreements do not weaken the protections of their labor laws as an inducement to trade and investment.
The Economic Theory of Trade and Labor
On the basis of standard economic theory, it is easy to understand why the labor movement opposes new trade agreements that would lead to expanded international trade, particularly with countries with lower wage rates. As discussed in chapter 3, under free trade countries export products where they have a comparative advantage and import products where they have a disadvantage, and their comparative advantage is in products that are produced with the factor of production (e.g., labor, capital, technology) that is in relative abundance for that country.
The United States has a relative abundance of capital and technology and a relative scarcity of unskilled labor. The factor price equalization theorem predicts that under free trade, the price of factors of production would tend to equalize between nations. Joseph Stiglitz describes the situation as follows:
Standard economic theory, which underlies the call for trade liberalization, has a scenario for what should happen with full liberalization — a scenario that its advocates seldom mention. . . . With full global economic integration, the world will become like a single country, and the wages of unskilled workers will be the same everywhere in the world, no matter where they live. Whether in America or in India or in China, unskilled workers of comparable skills performing comparable work will be paid the same. . . . In practice, given the relative size of the populations, the likelihood is that the single wage to which they will converge will be closer to that of China and India than to that of the United States or Europe.[5]
Totally eliminating trade barriers, of course, would not remove all the obstacles to trade. There would still be transportation costs (which, as we have seen, are higher today on average than developed-country tariffs on nonagricultural goods). Additionally, the costs of converting currencies and the general uncertainty and complexity of trade would prevent the full equalization of factor costs.
More important, under conditions of decreasing costs of production, the prices of the factors of production do not equalize. And many products are produced in industries that experience decreasing costs of production as the volume of production increases; these tend to be high-value added products like automobiles, steel, semiconductors, and aircraft.
However, for industries that experience constant or increasing costs of production, such as textiles and wine, there would be some equalization of the prices of factors of production, which for the United States would mean that the wages of unskilled labor would fall closer to world levels. Economists tend to assume this problem away. As Dominick Salvatore puts it in his economics textbook: “Since . . . international trade causes real wages and the real income of labor to fall in a capital abundant and labor-scarce nation such as the United States, shouldn’t the U.S. government restrict trade? The answer is almost invariably no. The reason is that the loss that trade causes to labor . . . is less than the gain received by owners of capital. With an appropriate redistribution policy of taxes on owners of capital and subsidies to labor, both broad classes of factors of production can benefit from international trade.”[6]
In theory, as jobs and capital are displaced from industries that have a comparative disadvantage, these factors of production will move to new areas where the United States has a comparative advantage. However, there are several problems with this theory. First, there are adjustment costs as labor and capital shift to more efficient uses; for example, workers may have to move to a new state or undergo expensive retraining. More fundamentally, not all workers are the same; some simply do not have the education or ability to move to industries that are hiring, and they join the ranks of the permanently unemployed or take jobs that pay very low wages.
Workers who lose their jobs because of import competition can drive down the wages of unskilled workers throughout the economy. As Daniel Drezner says: “Reduced demand for low-skilled labor in the import competing sectors decreases overall domestic demand for unskilled labor. When demand declines, so do wages. This phenomenon affects low-skilled workers in both tradable and non-tradable sectors. This negative effect has the widest range, in that unskilled workers working in a purely domestic sector still experience a small negative shock from trade expansion.”[7] Josh Bivens at the Economic Policy Institute adds that “waitresses, for example, do not generally lose their jobs due to trade, but their pay suffers as workers displaced from tradable goods industries crowd into their labor market and bid down wages.”[8] To a small extent, workers hurt by trade will at least benefit by cheaper prices; however, this is small consolation to someone out of work and running out of money.
Economic theory also holds that increased international competition can undermine the bargaining power of labor unions. Companies facing increased competition often cannot afford wage increases because they have to cut costs to remain competitive, and they will consequently be more resistant to labor’s demands. Additionally, the company can threaten to move overseas, or the foreign competition may invest in a U.S. state where it can resist unionization.
In a 1996 study of the effects of a threat of closing the plant on the right of workers to organize, Kate Bronfenbrenner, director of labor education research at Cornell University, reported that where “employers can credibly threaten to shut down and/or move their operations in response to union activity, they do so in large numbers; . . . 62 percent in mobile industries such as manufacturing, transportation, and warehouse/distribution . . . In more than 10 percent of the campaigns with threats, the employer directly threatened to move to Mexico if the workers were to organize.”[9]
Trade Adjustment Assistance
In response to pressure from labor unions (particularly David McDonald, the former president of the United Steelworkers Union) and bolstered by economic theory, Congress established the Trade Adjustment Assistance program (TAA) in the 1962 Trade Expansion Act. Under TAA, workers who have lost their jobs due to import competition can receive retraining, financial support for moving to a new job, and extended unemployment insurance; and firms affected by import competition could originally receive loans and loan guarantees, tax relief, and technical assistance.
TAA was little used until its benefits were expanded in the Trade Act of 1974, and since then the program has been modified several times. In 1986, the program to provide loans and loan guarantees for firms was eliminated due to limited effectiveness. In 2002, new benefits were added; and in 2009, the program was expanded so that service firms and workers would be eligible for adjustment assistance and a new community support program was added. Most recently, the TAA program was extended in the trade bill passed in 2015 and will expire in 2021.
However, benefits are somewhat limited. Assistance for firms is aimed at small and mid-size firms, with average support being roughly $60,000, and the company must pay half the costs of adjustment for projects greater than $30,000. Agricultural producers are limited to benefits of $10,000. Workers can receive 130 weeks of income support (156 if they are older), up to 65 percent of the premium for health insurance, and reimbursement of up to $1,250 for relocation expenses.
In 2008, a fairly typical year, 2,146 petitions for adjustment assistance were filed, of which 1,368 were certified, covering an estimated 126,529 workers.[10] A total of 38,000 workers entered training, 405 were assisted in their job search, and 757 benefited from relocation assistance. The year’s total outlays for the TAA program were $259 million.
One of the main criticisms of the TAA program is that it assists firms and workers adversely affected by trade, but not those affected by technology, changes in consumer tastes, or other events. Another major criticism made by opponents of TAA is that the benefits of the program do not appear to justify the costs. Supporters, conversely, argue that TAA reduces opposition to trade liberalization and that it eases the adjustment of resources to industries where the United States has a comparative advantage or where trade does not have a significant impact. In any case, supporters argue that TAA helps companies and workers adversely affected by a government policy (i.e., trade liberalization), while other changes are often the result of natural economic forces.
Evaluations of the TAA program are not definitive. In his review of TAA for firms, J. F. Hornbeck of the U.S. International Trade Commission says: “Anecdotal evidence points to numerous ‘success’ stories, but more sophisticated analysis is needed to estimate the effectiveness of this program approach. It is difficult to isolate the effects of the firm TAA program in determining why a particular firm might succeed in its turnaround effort. Previous studies . . . have suggested that many firms might have been able to do so on their own.”[11]
The WTO and the International Labor Organization
The original GATT 1947 did not address labor issues, other than through a brief nod in the preamble to the importance of promoting full employment, and a very brief note in Article XX that countries may take action to block the import of goods produced by prison labor.[12] The founders of the post–World War II policy architecture probably assumed that labor issues would be addressed in the International Labor Organization (ILO), which was established in 1919, and accordingly would have seen no need for the GATT to get into the labor arena.
The ILO, which today has 183 member countries, is a tripartite organization consisting of representatives of the member governments, employers, and workers. Its objective is to promote and improve working conditions by adopting various “conventions,” each of which addresses different specific labor issues. Today there are 190 such conventions, many of which overlap. The ILO has no enforcement mechanism to ensure compliance, but it does have the power to publicize violations of labor rights.[13]
Eight of the ILO conventions are considered “core,” and these address four key areas:
• freedom of association and the right to collective bargaining (conventions 87 and 98);
• elimination of forced labor (conventions 29 and 105);
• abolition of child labor (conventions 138 and 182); and
• nondiscrimination with respect to employment and occupation (conventions 100 and 111).
The United States joined the ILO in 1934, but has only ratified some of the conventions. As a member, the United States is obligated to respect the principles of the core conventions, but of the eight core conventions, the United States has only ratified two, specifically the ones pertaining to the abolition of forced labor (convention 105) and child labor (convention 182). The United States has not ratified the other conventions because some of their provisions conflict with U.S. laws, such as the National Labor Relations Act and the Landrum-Griffin Act. Even though the United States has not ratified these conventions, its actual practices need to respect the principles of these conventions.
In 1977 the United States dropped out of the ILO because of concerns that the organization had become too politicized and was “appallingly selective” in condemning countries for human rights violations. (For example, the ILO was highly critical of Israel, largely for political reasons, while refusing to condemn some nations that did not respect human rights.) The United States rejoined in 1980 under assurances that the ILO would be less political in the future.
The GATT largely stayed away from labor issues throughout its almost fifty years. However, at the WTO Ministerial Meeting in Seattle in 1999, which was supposed to launch a new round of multilateral trade negotiations, President Clinton called for the formation of a working group to consider the issue of establishing labor standards for international trade, and he said he ultimately would support sanctions against countries that violate labor standards. This came as a surprise to all the negotiators and enormously upset many developing countries.[14]
The secretary of commerce for India, A. V. Ganesan, put the issue this way: “Those who want to link labor standards to the trade rules of the WTO have an ulterior motive . . . The labor organizations of the United States and Europe have complained that the liberalization of trade and investment regimes will lure investment away from wealthy nations to countries where wages are low. But low wages, the result of lower levels of national income, are the primary comparative advantage developing countries have to attract investment and create jobs. This advantage will be destroyed if labor standards are linked to WTO’s rules.”[15] When the Doha Development Round was finally launched in November 2001, the U.S. proposal to include labor standards was dropped from the negotiating mandate in the face of this strong opposition from developing countries.
U.S. Free Trade Agreements
Promoting labor rights was not an element in the United States’ first FTA, the one with Israel, and was only addressed in a very minimal way in the early negotiations for the North America Free Trade Agreement (NAFTA). However, as noted in chapter 2, NAFTA became embroiled in the 1992 presidential race when Bill Clinton pledged to strengthen the protections for workers’ rights. Shortly after he became president, Clinton ordered the negotiations for side agreements on both labor and environment, which then became part of the final NAFTA package.
Under pressure from trade unions, all the United States’ bilateral trade agreements since NAFTA have addressed workers’ rights. The basic approach taken has been to encourage the advancement of workers’ rights within the context of respecting each partner country’s national sovereignty, and to require each partner to enforce its own labor laws. Labor’s basic concern is that the United States’ trade partners might suppress independent unions or allow low-paid child labor in order to gain an unfair advantage in competing with U.S. firms—the so-called race to the bottom.
However, concern with promoting workers’ rights had been an element of U.S. trade policy even before these trade agreements were in force. Under the U.S. Generalized System of Preferences (GSP), one of the considerations made by the U.S. government in granting eligibility to developing countries is whether the country respects internationally recognized worker rights, “including (1) the right of association, (2) the right to organize and bargain collectively, (3) freedom from compulsory labor, (4) a minimum age for the employment of children, and (5) acceptable conditions of work with respect to minimum wages, hours of work and occupational safety and health.”[16] These GSP provisions had produced some results; for example, in 1987 and 1988 the United States successfully pressed Indonesia to introduce a higher minimum wage and to allow some scope for independent labor unions to operate.
The basic approach taken by the United States in negotiating its FTAs built on the GSP and NAFTA provisions, although specific elements have changed in response to domestic political pressures and the demands of the United States’ negotiating partners. For example, the provisions in the U.S. FTAs do not include any reference to minimum wage. Additionally, the dispute settlement provisions have changed from the NAFTA side agreement, which only allowed for the imposition of fines in the event of violations, rather than the trade sanctions that could follow from a commercial dispute. Organized labor objected to the lack of trade sanctions and to the cumbersome nature of the labor dispute settlement mechanism, and it successfully demanded that sanctions be applicable for labor disputes as well as commercial disputes under the FTA dispute settlement mechanism. (It is noteworthy, however, that a number of complaints have been considered under the NAFTA mechanism.
The next U.S. agreement after NAFTA—that with Jordan—consequently included labor provisions in the main body of the agreement, subject to the same dispute settlement mechanism as commercial disputes, and accordingly the AFL-CIO supported congressional approval of this agreement.
The agreements with Chile and Singapore, both of which had adequate labor laws before the negotiations, required the parties to the agreement to enforce their labor laws; with regard to ILO workers’ rights provisions, the parties only committed to “strive” to honor the core rights. These agreements both reverted to a system of possible fines in the event of a violation, rather than trade sanctions, with any revenue from fines to be used to address the underlying labor problem. Only if the party in violation refused to pay the fine could trade sanctions be imposed.
In contrast to Chile and Singapore, Morocco’s labor laws were considered inadequate. Accordingly, before concluding a trade agreement, Morocco agreed to a number of improvements in its labor practices, such as raising the minimum employment age from twelve to fifteen years, reducing the work week from 48 to 44 hours, and guaranteeing the right of association and collective bargaining. Subsequently, Oman, where workers’ rights were also considered inadequate, followed a similar path of improving its labor practices; in 2006, the government issued a decree that allowed for collective bargaining, prohibited the dismissal of workers for union activity, guaranteed the right to strike, and raised the penalties for child labor violations.
The United States’ six partners in the Central American Free Trade Agreement–Dominican Republic (CAFTA-DR) were also considered to have weak protection of worker rights. Accordingly, it was agreed to set up a body to help the CAFTA countries improve their labor practices, particularly with regard to honoring ILO standards. Additionally, the United States committed $60 million to capacity building in the areas of environment and labor. (The Chile and Singapore agreements had also included some technical cooperation projects.)
However, organized labor considered CAFTA-DR to be a step back from the Jordan agreement, because violations are only subject to fines, which are capped at $15 million. Additionally, organized labor believed that the CAFTA-DR rules on workers’ rights are weaker than they are under GSP. Nonetheless, this agreement was the only one except for NAFTA where a labor complaint has been pursued under the dispute settlement mechanism, and that has been a complaint against Guatemala. In 2008 the AFL-CIO and six Guatemala labor unions filed a complaint alleging that Guatemala had failed to allow freedom of association and other violations. The Labor Department conducted an examination of the issue and concluded that Guatemala in fact was not meeting its obligations. The United States requested consultations in July 2010, but consultations did not resolve the issue, and in August 2011 the United States requested the establishment of an arbitral panel, as provided for in the agreement.
Organized labor has been most strongly opposed to the agreements with Colombia and South Korea—Colombia because of its human rights record, and South Korea because of concerns regarding potential job losses. With regard to the Colombia agreement, the AFL-CIO was particularly concerned with what it perceives as a systematic effort to murder union organizers. For example, John Sweeney, the president of the AFL-CIO, wrote in an April 14, 2008, op-ed article in the WashingtonPost that “it’s of little use to include a paper commitment to respect ‘freedom of association’ when workers who organize and speak out for economic freedom—and their families—face an implicit death sentence.”[17]
Proponents of the agreement disagreed and argued that Colombia was just a violent country and that unionists were not targeted. For example, an April 19, 2008, Washington Post editorial stated: “Colombia is, indeed, violent—though homicide has dramatically declined. . . . There were 17,198 murders in 2007. Of the dead, only 39—or 0.226 percent—were even members of trade unions, let alone leaders or activists.” In any case, Colombia took a series of measures to reduce violence, particularly against labor leaders, and in November 2011 Congress finally approved the agreement.
The AFL-CIO is opposed to the Trans-Pacific Partnership (TPP) agreement because of its Investor-State Dispute Settlement provisions and because it does not believe the Administration has done an adequate job of enforcing labor rights in existing agreements. Additionally, labor believes that our trade agreements have contributed to our high unemployment levels and income inequality. (Labor issues in the TPP are discussed more fully in Chapter 10.)
The AFL-CIO is taking more of a wait and see attitude with regard to the negotiations with the European Union for the Trans-Atlantic Trade and Investment Partnership, because EU members are all developed countries with generally high labor standards. However, with regard to the portion of the TTIP that will address regulatory barriers, the AFL-CIO emphasizes “instead of harmonizing regulations down to the lowest level, the U.S. and EU should work together to raise occupational safety and health standards and labor rights guarantees for all workers.”[18]
Should Labor Standards Be Included in U.S. FTAs?
The issue of whether or not labor standards should be included in the U.S. FTAs is controversial. For example, the Princeton economist Jagdish Bhagwati argues that “simply proscribing the use of child labor is unlikely to eliminate it; it will only drive poor parents to send their children to work by stealth and often into even worse ‘occupations’ such as prostitution.”[19] Additionally, Bhagwati argues that trade sanctions are the wrong remedy since “trade often accounts for a tiny fraction of the sales of products made with offending processes such as child labor. Only 5 percent of the output of child labor is estimated to enter trade, so trade sanctions are not even an appropriately targeted policy.”[20]
Some in the business community argue that the best approach is to promote economic growth through expanded trade, because expanded economic activity and employment tend to lead to improved labor standards. Furthermore, business and some other opponents are concerned that the United States itself has some practices that could be found in violation of the core ILO provisions.
On the other side, U.S. labor believes that without commitments to respect workers’ rights and end child labor, and requirements that countries will not weaken their labor laws for reasons of competitive advantage, there could be a race to the bottom whereby nations weaken their labor rights to increase their exports and attract foreign investment. The Harvard economist Dani Rodrik adds that “nondiscrimination, freedom of association, collective bargaining, prohibition of forced labor do not ‘cost’ anything; compliance with these ‘core labor rights’ does not harm, and indeed possibly benefits, economic development.”[21]
Provided U.S. negotiators show flexibility and understanding for the realities that many of our developing-country partners face, including labor standards will lessen labor’s opposition to trade agreements and provide some benefit to workers in the United States and to our trade partners.
The Impact of the GATT/WTO on U.S. Labor
As a result of the widespread trade liberalization since World War II, world trade has expanded enormously. What has been the impact of this huge increase in trade on workers in America? To what extent has the increase in trade caused the substantial increase in income inequality that the United States has experienced during the past thirty years? And to what extent has it contributed to unemployment in the United States, which reached more than 9 percent in 2009, 2010, and 2011?
With regard to income inequality, incomes in the United States have grown substantially more unequal over the past forty years, in contrast to the 1947–68 period, during which incomes in the United States had become more equal. Although statisticians have many ways of measuring income inequality, all show a similar pattern of rising inequality in the United States. For example, in 1969 the average income of households in the top 10 percent was 8.93 times that of those in the bottom 10 percent; but by 2009, it was 11.36 times as high, an increase of 27 percent.[22] Another common way to measure income inequality is the Gini Coefficient, which ranks inequality on a scale from 0 to 1, with zero indicating complete equality and one indicating complete inequality (i.e., where one person has all the wealth). In 1969, the Gini Coefficient for the United States was 0.391, but by 2009 it had risen to 0.468, an increase of some 18 percent.
Although income inequality has been increasing in a number of countries, it has increased to a greater extent in the United States than almost all other developed countries. For example, measured by the Gini Coefficient, income inequality rose in Japan from 0.24 in the early 1990s to about 0.39 in 2007. According to Elhanan Helpman, the income gap in the United States “increased by 29 percent, more than in any other country. But it also increased by 27 percent in the U.K., 15 percent in New Zealand, 14 percent in Italy, and 9 percent in Canada.”[23] In fact, income inequality in the United States is even greater than for some developing countries; for example, the Gini Coefficient for Indonesia is just 0.37, while Russia’s is 0.42, according to the World Bank.
Economists are not sure of the exact causes of this increase in inequality among American households, but, as we have seen, economic theory would indicate that increased world trade could be a partial explanation. According to the law of comparative advantage, the United States would tend to export those products that are produced with the factors that it has in relative abundance, which are capital and technology, and import products made by the factors of relative scarcity, such as unskilled labor, which would mean that U.S. wages for unskilled labor would fall. And that is exactly what has happened since 1970.
There are many other factors that may be causing the increase in income inequality, and it is impossible to identify the exact role of expanded trade. Some of the factors commonly mentioned by economists include increasing automation, particularly of low-skilled jobs; the declining clout of labor unions; the shift from manufacturing to services since the 1980s; changes in business practices, such as the increased use of temporary workers; and sociological changes such as higher divorce rates.
Estimates of the impact of expanded trade on income inequality vary widely, with some analysts arguing that it has been a major factor. At the other extreme, Bhagwati argues that “trade has actually helped the workers, not just harmed them insignificantly, by moderating the decline that was instead caused by technical change that economized on the use of unskilled labor.”[24]
However, the consensus among economists seems to be that expanded trade accounts for some of the rising income inequality in the United States, although it is not the major cause. As J. F. Hornbeck notes, “The USITC, in summarizing the vast literature on the observed rising U.S. income gap between more-skilled and less-skilled workers, suggests that while estimates varied, trade in general has contributed to no more than 10–20% of the wage gap.”[25]
With regard to the static impact of trade on employment in the United States, exports create both production and jobs while imports tend to displace production and employment, as noted in chapter 3. The United States switched from a trade surplus to deficit in 1971, and its trade deficit as a percentage of its gross domestic product has increased enormously since then, rising to more than 5 percent between 2004 and 2007, before declining due to the U.S. recession, which curbed import demand even more than recession in other countries reduced demand for our exports. Logically, this trade imbalance would seem to be a cause of our high unemployment.
However, unemployment has many causes. Increases in productivity have played a major role, as companies today can produce more with fewer workers. Additionally, the business cycle is a major determinant of the employment level. In fact, changes in the business cycle have a far more significant impact on unemployment year to year than does the impact of the U.S. trade balance.
America’s economy naturally has a great deal of “churn”; as some companies and industries grow and others decline, employees may find themselves unemployed or may decide to switch into another company or even a different career. International trade, of course, can accelerate the level of churn through the creative destruction it causes. This churn can cause substantial pain, because many employees in industries that suddenly cannot compete because of foreign competition do not have skills that are readily usable in other industries, and thus they may face permanent unemployment or need to accept a job with lower pay. Till von Wachter, an economist at Colombia University, estimates that workers who lose a stable job often suffer a 20 percent earnings loss for fifteen years or more.[26]
Not surprisingly, estimates of the impact of trade on unemployment in the United States vary substantially, although most would agree that there is some impact. For example, the pro-trade economist Robert Lawrence estimates for the 2000 to 2005 period, when the U.S. trade deficit rose from 3.8 percent of gross domestic product to 5.7 percent, “that 1.3 million jobs in manufacturing were lost due to trade. So, about 1 million workers were displaced in a labor force of over 140 million.”[27]
However, the actual impact of the United States’ structural trade deficit may be greater than this. First off, as we saw in chapter 6, developing countries that have grown the fastest have all pursued the objective of achieving a large structural trade surplus; there is no reason to believe that the large U.S. structural trade deficit would not have the opposite impact of depressing U.S. economic growth and employment. Second, as we saw in chapter 3, a structural deficit in goods and services trade would mean that the country is importing some products where it would actually have a comparative advantage given more balanced trade. For industries that benefit from economies of scale, this may mean that the industry never gets back to producing those goods and services. The United States, of course, has had a structural deficit in goods and services trade since 1971.
The Impact of U.S. FTAs on U.S. Labor
Organized labor strongly opposed NAFTA, even with the labor side agreement, fearing that many U.S. firms would move their production to Mexico to take advantage of cheap labor (Ross Perot’s “giant sucking sound”). Even today, there is no solid consensus on the impact of NAFTA on U.S. labor, although Ross Perot’s fears of a massive job loss clearly did not occur.
Other than NAFTA, most U.S. FTAs are with countries that are too small to have a significant impact on the U.S. economy or on U.S. labor. In addition, the United States already granted most of the imports from its developing-country partners—such as from the CAFTA countries, Peru, Colombia, and Panama—duty-free access under the U.S. preference programs before the FTA, and accordingly U.S. imports are not expected to increase to a significant extent. On the contrary, these agreements may have a slightly positive impact on U.S. labor; many of these countries have fairly high most-favored-nation tariffs, and U.S. exporters will now gain duty-free access to these markets as a result of the FTA, which will expand the demand for labor in U.S. exporting industries.
However, both Australia and South Korea are large enough economically to potentially have an impact on the U.S. economy and workers, although both countries are on the other side of the world and the impact of these agreements will be far less than would be the case for Mexico, which is about the same size economically but right next door. The Australian agreement is unlikely to have an impact on U.S. labor because Australia’s comparative advantage is in agriculture and the United States will retain important trade barriers to potential Australian agricultural exports. However, the South Korean agreement is a different story.
South Korea has a globally competitive auto industry and currently exports 470,000 vehicles to the United States, compared with the less than 6,000 that the U.S. exports to South Korea. This imbalance is due to the relative openness of the U.S. market, which has minimal tariff and nontariff barriers (except for a 25 percent tariff on light trucks[28]), compared with the South Korean market, which is largely closed due to an array of nontariff barriers, including arbitrary standards, special taxes, ever-changing and nontransparent regulations, and a system of large business conglomerates (the chaebols) that have an anticompetitive effect.
Under the FTA, South Korea would immediately eliminate its 8 percent tariff on cars and a 10 percent tariff on pickup trucks. The United States would immediately eliminate its 2.5 percent tariff on most autos and auto parts and phase out its 25 percent tariff on light trucks over a ten-year period. In the short run, this would give Korean car makers an immediate savings from the tariff reductions, which will be about forty times larger than the savings for U.S. car makers due to the huge volume of South Korean exports to the United States compared with the small volume of U.S. exports to South Korea.
The AFL-CIO, the United Auto Workers, and Ford Motor Company strongly opposed the original agreement negotiated in June 2007. They argued that the agreement did not contain sufficiently strong mechanisms to prevent South Korea from simply adopting new nontariff barriers to continue to block imports of autos from the United States. This opposition forced the administration to negotiate some additional changes in 2010 that make it more likely the U.S. auto industry and workers will not be put at a competitive disadvantage. As a result of these changes, Ford dropped its opposition to the agreement, although both the AFL-CIO and the United Auto Workers continued to oppose approval. Nonetheless, in October 2011 Congress approved the agreement.
In the long run, the impact of the South Korean FTA will depend on whether South Korea really opens its auto market to U.S. competition, and if not, if the administration takes strong counteractions.
Conclusion: The Double Whammy
Economic theory predicts that unskilled workers in the United States will be worse from trade liberalization under conditions of balanced trade between the United States and its trade partners. As a partial offset to these expected losses to labor, Congress has included TAA provisions in trade legislation; these provisions expand unemployment benefits, and they provide some funding for retraining and community assistance. However, these programs are only partially successful and do not fully offset the losses to labor.
Additionally, economic theory holds that a structural trade deficit means that a country is importing some products and not exporting other products where it otherwise would have a comparative advantage. This loss of production, of course, also represents a real loss to workers. The U.S. trade deficit equaled some $560 billion in 2012; if the United States closed this gap through expanded exports, some 2.8 million jobs would have been created, as described in chapter 4.
Thus labor faces a double whammy—first, from the losses from liberalized trade that would be expected under economic theory; and second, from the U.S. structural trade deficit, which is not anticipated under standard trade theory. Accordingly, it is no surprise that labor in the United States is a vocal and strong opponent of many of the nation’s trade agreements.
The dilemma for policymakers is that trade liberalization done correctly benefits the economy broadly, although it hurts unskilled workers to some extent. To ensure that U.S. trade agreements better address labors’ concerns, several steps should be taken. First, when negotiating trade agreements, the United States needs to do all it can to ensure that the agreement does not unduly affect American workers. For example, the agreement with South Korea as initially negotiated did not adequately ensure that the U.S. auto industry would not be injured by increased imports without offsetting export sales to South Korea.
Second, the United States needs better policies to help unemployed workers find new jobs. To some extent, this can be accomplished by strengthening TAA. However, it is probably preferable to adopt policies and programs that would help all unemployed workers gain new employment. And third and finally, the United States needs to deal with its structural trade deficit and the neomercantilist policies of some of its trade partners. These issues are addressed in the next chapter.
[1] President John F. Kennedy, October 11, 1962, “Remarks Upon Signing the Trade Expansion Act.”
[2] Stephen D. Cohen, Robert A. Blecker, and Peter D. Whitney, Fundamentals of U.S. Foreign Trade Policy: Economics, Politics, Laws, and Issues (Boulder, Colo.: Westview Press, 2003), 39.
[3] The AFL-CIO supported the Jordan agreement in 2000, and took a neutral position on the Peru agreement, because they were pleased with the progress on the labor and environment front but had concerns on ISDS and IPR, among other things.
[4] The 2002 Trade Act is available at https://www.congress.gov/107/plaws/publ210/PLAW-107publ210.pdf.
[5] Joseph E. Stiglitz, Making Globalization Work (New York: W. W. Norton, 2006), 271.
[6] Dominick Salvatore, International Economics, 11th ed. (Hoboken, N.J.: John Wiley & Sons, 2013), 127.
[7] Daniel W. Drezner, U.S. Trade Strategy: Free Versus Fair. Critical Policy Choices Series (New York: Council on Foreign Relations, 2006), 76.
[8] Josh Bivens, “Marketing the Gains from Trade,” Economic Policy Institute, June 2007, http://www.epi.org/publication/ib233.
[9] Kate Bronfenbrenner, “Final Report: The Effects of Plant Closing or Threat of Plant Closing on the Right of Workers to Organize,” Digital Commons@ILR: Cornell University ILR School, 2, http://digitalcommons.ilr.cornell.edu/intl/1/.
[10] In 1980, when TAA was at its peak, some half a million workers received assistance.
[11] J. F. Hornbeck, Trade Adjustment Assistance for Firms: Economic, Program, and Policy Issues (Washington, D.C.: Congressional Research Service, 2011), 6–7.
[12] The Preamble of the 1947 GATT states: “Recognizing that their relations in the field of trade and economic endeavor should be conducted with a view to raising standards of living, ensuring full employment . . .”
[13] For a listing of the ILO conventions and other information on the ILO, see http://www.ilo.org/global/lang--en/index.htm.
[14] I was at the Seattle Ministerial meeting and vividly remember a businessman from India who was so upset he was visibly shaking; he said something to the effect that “our children work not because we want them to; they work because they have to survive.”
[15] A. V. Ganesan, a former commerce secretary of India and a nongovernmental delegate to the Seattle Ministerial.
[16] Office of the U.S. Trade Representative, fact sheet, https://ustr.gov/issue-areas/trade-development/preference-programs/generalized-system-preference-gsp
[17] Available at, http://www.washingtonpost.com/wp-dyn/content/article/2008/04/13/AR2008041301856.html
[18] This is from AFL-CIO, “What Would a Free Trade Agreement with the EU Look Like?” http://www.aflcio.org/Blog/Global-Action/What-Would-a-Free-Trade-Agreement-with-the-EU-Look-Like.
[19] Jagdish Bhagwati, In Defense of Globalization, Council on Foreign Relations Report (New York: Oxford University Press, 2004), 71.
[20] Ibid., 249.
[21] Dani Rodrik, One Economics—Many Recipes: Globalization, Institutions, and Economic Growth (Princeton, N.J.: Princeton University Press, 2007), 229.
[22] Census Bureau data on income inequality in the United States are available at www.census.gov/hhes/www/income/data/historical/inequality. In addition, see the excellent paper from the World Bank, “Measuring Inequality,” http://web.worldbank.org/WBSITE/EXTERNAL/TOPICS/EXTPOVERTY/EXTPA/0,,contentMDK:20238991~menuPK:435055~pagePK:148956~piPK:216618~theSitePK:430367,00.html.
[23] Elhanan Helpman, The Mystery of Economic Growth (Cambridge, Mass.: Belknap Press of Harvard University Press, 2004), 95–96.
[24] Bhagwati, In Defense, 122–23.
[25] J. F. Hornbeck, NAFTA at Ten: Lessons from Recent Studies (Washington, D.C.: Congressional Research Service, 2004), 5.
[26] Till von Wachter, “Challenges for the U.S. Economic Recovery,” Testimony before the Senate Budget Committee, February 3, 2011, http://www.econ.ucla.edu/tvwachter/testimony/Von_Wachter_Testimony_Before_Senate_Budget_Committee_2011.pdf.
[27] Robert Z. Lawrence, Blue Collar Blues: Is Trade to Blame for Rising US Income Inequality? (Washington, D.C.: Peterson Institute for International Economics, 2008), 42.
[28] The United States imposed a 25 percent tariff on light truck imports in 1963 in retaliation for a tariff increase by the European Community on U.S. chicken exports, in a trade dispute dubbed “the chicken war.” This 25 percent tariff still stands.
Chapter Updates
Chapter 1: U.S. Trade Policy in Crisis
Chapter 2: America's Trade Agreements
Chapter 3: Trade Agreements and Economic Theory
Chapter 4: Trade Agreements and U.S. Commercial Interests
Chapter 5: Foreign Policy: The Other Driver
Chapter 6: Economic Development: A Missed Opportunity
Chapter 7: Uneasy Neighbors: Trade and the Environment
For more information or questions contact William Krist at william.krist@wilsoncenter.org