The NewStandard ceased publishing on April 27, 2007.

Progressives See Bad Policy in Growing Trade Gap

by Michelle Chen

In the debate over what the trade deficit really means, progressives are challenging popular assumptions that the trade gap simply shows free markets at work, pointing to pro-corporate policies aimed at exploiting cheap labor.

Feb. 16, 2007 – The US trade deficit has ballooned once again to record levels. While some see the trade gap as a natural economic phenomenon, public-interest groups and progressive economists say it represents an unsustainable trade agenda that harms workers across the globe.

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The Department of Commerce reported this week that in 2006, the US trade deficit – the gap between what the country imported and what it exported – reached about $764 billion. That was $47 billion more than the previous year’s deficit.

Labor groups and human-rights advocates say the deficit is just one symptom of unfair "free trade" policies, which give US-based companies economic incentives and political clout to find ever-cheaper ways of producing goods overseas. The current trade deficit, they argue, reflects an economy in which inexpensive imports flow into the country replacing US-made products; the workers who used to make them are effectively displaced in favor of cheaper labor abroad.

"The trade policy has been designed to facilitate the movement of production offshore," said Larry Weiss, executive director of the labor and human-rights coalition Citizens Trade Campaign. The underlying aim, he continued, is "to provide large US corporations with… semi-slave labor."

Yet some analysts say US trade policy is unrelated to either the deficit or the negative impacts of minimally regulated trade. The pro-free-trade think tank Peterson Institute for International Economics argues the deficit shows that US-made products may be less competitive in the global market, yet it also reflects changes in currency values and other broad economic trends – as opposed to flawed trade policies.

Critics of "free trade" policies say companies have incentives to send production to countries where they can pay lower wages, in turn eroding jobs in affected sectors.

Daniel Griswold, director of the Center for Trade Policy Studies at the conservative-libertarian think tank Cato Institute, told The NewStandard, "There’s no cause-and-effect between America’s growing engagement in the global economy and the perception that people are not as well off as they should be."

Griswold argued the deficit is actually due to economic changes tied to relatively low domestic savings rates, which influence the value of the dollar and encourage the import of cheaper foreign-made products.

But Robert Scott, a senior economist with the progressive Economic Policy Institute (EPI), said that analysis ignores the stark logic of current trade policies. Companies have incentives to send production to countries where they can pay lower wages, he contended, which in turn erodes jobs in the affected sectors. Current trade policies, he told TNS, promote deficits and destabilize economies and living standards in the United States and overseas. Scott speculated that the savings lag, which Griswold said was a cause of the deficit, is in fact partially the result of trade-related economic disruption.

EPI’s analysis of the North American Free Trade Agreement’s (NAFTA) labor and economic impacts found that the United States’s total trade deficit with the two other participating countries, Canada and Mexico, soared by $107.3 billion from 1993 to 2004, a nearly seven-fold increase. During this period, EPI discovered that trade shifts under NAFTA accounted for the loss of over one million US jobs in manufacturing and other sectors.

Public-interest groups and progressive economists say it represents an unsustainable trade agenda that harms workers across the globe.

EPI’s research also undercut politicians’ arguments that the deal would spawn higher-paying US jobs: the one million jobs displaced under NAFTA were shuttled toward lower-paying positions in other sectors, and the cumulative loss in wages totaled $7.6 billion in 2004 alone.

NAFTA failed to deliver for the United States’ "trading partners" as well, according to the study. In Canada, over a 15-year period starting in 1989 when the country began moving toward a free-trade relationship with the US, the economy saw a rise in exports, but little of the anticipated gains in employment. Meanwhile, income inequality grew.

In Mexico, instead of the stable growth originally promised, the NAFTA era brought severe job losses for farmers and widespread volatility throughout the employment market.

Scott said the pro-business ideology driving NAFTA extends to the penetration of other foreign markets, like China, under the World Trade Organization (WTO), a body that governs international trade. Scott pointed out that both NAFTA and the WTO have empowered corporations to trump labor and environmental laws that supposedly present unfair "barriers" to trade.

"The rules that were written in these agreements were designed to protect investors," he said. "All of these are about expanding the powers of multinationals and shrinking governments."

Public-interest and labor groups are pressing Congress to reorient trade policies by imposing stronger regulations on corporations and measures to shield sensitive sectors from job displacement.

In the immediate term, "fair-trade" supporters want lawmakers to block pending free-trade agreements, including a proposed deal with South Korea opposed by unions and other groups in both South Korea and the United States.

Todd Tucker, director of research with Public Citizen’s Global Trade Watch program, said that "a necessary first step" toward trade-policy reform would be a repeal of the president’s "fast track" authority. Currently, the executive branch may negotiate trade agreements without congressional input. The president then submits the proposed deal for an up-or-down congressional vote, barring lawmakers from amending the agreement.

Aside from a policy overhaul, some progressive economists want to see changes to federal or international monetary policies to protect US workers. Foreign governments have faced criticism for keeping their export prices artificially low by distorting currency exchange rates.

While critics have used the deficit as a touchstone in the debate over current trade policy, some warn the trade gap itself is unsustainable, as the US economy draws capital from other countries to offset growing imports – mainly by selling assets like bonds and stocks. Since the growing deficit is propped up by foreign investors, many analysts say a sudden shift in global financial markets could trigger a financial crisis.

Dean Baker, co-director of the progressive Center for Economic and Policy Research, said the expanding trade deficit will weigh especially heavily on future generations, who will inherit not just the fiscal burden, but also the limitations of a workforce eroded by pro-business trade policies.

"You’ve thrown away a lot of skills, a lot of both human and physical capital, by letting these factories shut down," he said. "So, we’re creating a pretty hard landing."

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The NewStandard ceased publishing on April 27, 2007.

Michelle Chen is a staff journalist.

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