LONDON – Free trade is an American mantra. The Obama administration’s commitment to winning “fast-track” status for its cherished Trans-Pacific Partnership trade agreement is part of that tradition. But growing evidence shows that granting full trading privileges to low-income countries on the make is usually costly to the United States.
The U.S. has been in lengthy negotiations with 11 nations around the Pacific Rim, including Australia,Chile, Japan, Singapore and Malaysia. After years of talks, the partners now seem close to an agreement.
That is one reason for the unusual congressional alliance of left-wing Democrats like Sen. Elizabeth Warren, a Massachusetts Democrat, with tea party Republicans like North Carolina Rep. Walter Jones lined up against the trade initiative. Policy-wonk tea party fellow travelers, including Wisconsin Republican Rep. Paul Ryan and Texas Republican Sen. Ted Cruz, support the deal — as do many mainstream economists.
Economists cite the great advantage of free trade as a basic doctrine of classical economics. If trading partners concentrate on what they do best, the argument goes, both partners end up better off.
The U.S. debunked that theory in the 19th century. It sold commodities like iron and cotton to Europe while building high tariff walls to protect its own “infant industries.” By the 1890s, the U.S. had surpassed Britain in most advanced industries. It was an easy target, because London was dogmatically committed to pure free trade.
Recent research helps distinguish between trade and offshoring patterns that have the mutual benefits — and those that don’t. When the trade or offshoring partner is another high-income country, U.S. wages tend to increase. But when its with low-income countries, U.S. wages decline, particularly for unskilled or medium-skilled workers.
These wage effects are not just in manufacturing, but in the same job categories of other industries. Manufacturing generally has higher pay scales than services. Yet as increased imports and offshoring put pressure on manufacturing jobs, there is a domino effect as displaced workers move into lower-paid services. Wages shrink across the board.
To read the full article, please click here.