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Globalization and inequality

By Peter Morici
web posted July 30, 2007

Globalization is an ancient process. Since fire and the wheel, people have been finding better ways to make products and transport them more cheaply. Commerce has widened, wealth has increased, and winners and losers have patterned the competitive landscape. How well a nation and its citizens do depends on how skillfully leaders manage the process.

In the 19th century, mechanization and the Erie Canal multiplied the productivity of the Midwestern granary and opened its bounty to East Coast and foreign markets. International commerce drove down the price of bread in Great Britain, diminished its landed aristocracy, and forced workers on country estates to seek factory jobs in the cities, where engineers were making British workers among the most productive in the world.

For a time, aristocrats persuaded Parliament to respond to grain imports with the Corn Laws, but eventually common sense prevailed, and Britain embraced global commerce. England prospered through much of the 19th century, exporting manufactures and importing food and raw materials.

A lesson for our time? Not necessarily.

For free trade to work, nations must be able to export what they make more efficiently than their trading partners. By swapping jobs in importing-competing industries for those in export activities, the United States increases productivity for those workers by about 10 percent. Hence, by exporting some $1.5 trillion annually and using the proceeds to buy imports, trade raises U.S. GDP about $150 billion.

Unfortunately, the United States has not been conducting trade quite that way. Since George Bush took office, annual imports have climbed $834 billion but exports are up only $441 billion. The trade deficit has swelled to $750 billion.

Instead of redeploying displaced autoworkers to computer chip factories, those workers find jobs in restaurants or hotels, where productivity and wages are lower. That reduces GDP by about $250 billion, and wipes out the $150 billion gains from trade noted above.

Despite remarkable improvements in productivity, many American workers face stagnant wages or can’t keep up with inflation. Too many are forced by trade out of jobs offering good pay and benefits.

Export juggernauts, like China and India, maintain undervalued currencies against the dollar and give manufacturers tax rebates and other subsidies that make their exports artificially cheap, and U.S. products artificially expensive in their markets. Further, they exclude competitive American products, for example, by forcing companies like Ford to make cars in China to sell cars in China.

Each year, China’s private sector sells $230 billion more in the United States than its consumers buy from Americans, and China’s government spends more than $300 billion on U.S. securities and stakes in foreign companies. Those purchases push down U.S. mortgage and other interest rates, and U.S. workers, struggling to keep up with rising prices on stagnating incomes, borrow to maintain their standard of living.

What China, India and others do is clearly protectionist, and violates the rules and norms of the World Trade Organization.

Trade and globalization are not the issue; rather, the rules of trade and terms of globalization are the problem. Right now, China, India and others break the rules of trade with impunity, and the U.S. workers are getting a raw deal.

Not every American is hurt. Big stockholders in U.S. multinationals setting up shop in China, and the lawyers, Wall Street financiers and highly educated professionals that help them are doing just fine. They see the debate raging in Congress about how to respond to China as threatening to their aristocratic privilege.

Many Democrats in Congress and Wall Street bankers seeking refuge from a backlash against trade want to make the income taxes more progressive, to put a few extra dollars in workers take home pay, and to offer workers booted by trade cash payments. Those are palliatives and do not address the systemic ills that make most Americans poorer.

Several bills are working through Congress that would permit U.S. businesses and workers harmed by currency manipulation, and other subsidized imports from China and other places, to obtain import tariffs that precisely offset the unfair advantages created by those industrial policies.

Such tariffs are not protectionist. They merely neutralize unfair advantages given to foreign competitors by governments. When the subsidies stopped, so too would the tariffs.

Americans workers can compete on a level playing field, and a good job beats heck out of government largess. ESR

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.


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