Common Ground on Trade
Common Ground on Trade

Common Ground on Trade

May 1 st 2001

Family farms are on the auction block, and the machines in the textile factories have come to a permanent halt. The newly unemployed farm and factory workers struggle to find work as tellers in banks, cashiers at the grocery store, or waiters in restaurants. When they finally find one of those jobs, they earn lower wages than they earned five years ago. Adding insult to injury, their new work uniforms have labels which read, "Made in Taiwan."

This scenario has been repeated many times in recent years. The percentage of all U.S. jobs accounted for by the agriculture and manufacturing sectors declined from 13.7 to 2.7 per cent and from 29.1 to 15.7 per cent, respectively, between 1950-1993. During the same period, the percentage of all jobs accounted for by the service sector, where wages are generally lower than those in manufacturing, increased from 10.2 to 26.7.

The trends in income inequality have been equally dramatic. The real wage of U.S. male workers in the top 10 per cent of the wage range rose 15 per cent between 1970-1989, while the real wage of male workers in the bottom 10 per cent of the wage range fell by 25 per cent over the same period. Canadian workers have experienced very similar trends to those of American workers. Given that imports of goods from low-wage countries have increased during this time period, it is easy to conclude that trade is the culprit for the calamity of less-skilled workers in Canada and the U.S.

Still, in the face of this evidence, most economists maintain without flinching that free trade is good for both Canada and the U.S. However, much to the economists' dismay, Canadian and American governments have tried to slow market trends by imposing barriers to imports of agricultural and manufactured goods and by providing heavy subsidies to farmers and selected industries. Furthermore, the possibility of increased government intervention appears to be on the rise. Opponents of globalization have made considerable headway in their attempts to influence politicians in industrialized nations.

Economists lament that their advice falls on deaf ears.

Should Canadians and Americans join the protests against globalization, or should we link arms with economists in support of freer trade? How are we to understand this debate? Are there ethical considerations that might lead us to agree or disagree with the economists? Can we find some common ground?

Most economists claim their method of analysis is morally neutral. In reality, their discipline finds its roots in materialism, which assumes that consuming more is always better. Since more is better, a policy is considered "good" if it results in the biggest possible economic pie, that is, if it maximizes the Gross National Product (GNP). An economic policy is considered "bad" if it is possible to change the policy and increase the GNP. Using this ethical standard, free trade is "good" because in most cases it maximizes the nation's GNP. (See my Autumn 2000 article in Comment).

So much for moral neutrality.

But what about all those displaced farmers and factory workers? Economists recognize that free trade will cause some winners and losers, but because the overall pie is bigger under free trade, it is possible, in principle, for everyone to have a bigger piece. In other words, if those who win under free trade compensate those who lose, either voluntarily or through taxation, then everyone could have more than under a protectionist set of policies. (See my Autumn 2000 article in Comment).

In practice, this compensation rarely happens, implying that some will be hurt permanently from increased trade. Most economists recognize this problem, but their materialistic desire to maximize output enables them to treat the problem as a minor caveat.

Tell that to the fellow who just had to sell the family farm.

Recognizing that modern economic analysis is not morally neutral is an important first step in framing this debate, but it begs the question as to what is the appropriate ethical standard for policy evaluation. Answering this question is beyond the scope of this article. However, it is imperative that all sides in this debate recognize that recent tensions emanate not just from different interpretations of the data, but also from different ethical standards concerning what "good" is.

Given that competing value systems try to influence public policy, it is worth considering whether some common ground might be found to enable people holding to various perspectives to arrive at some consensus. Space does not permit a discussion of the myriad of competing worldviews in the public square, but it is possible to consider what is arguably the most popular alternative viewpoint to that of the mainstream economists.

This alternative viewpoint, which we shall call the "pro-labour perspective," believes that enabling all people to support themselves through their own work is a more important value than increasing total output. (For examples of this perspective, see Daniel Finn, Just Trading: On the Ethics and Economics of International Trade, Abingdon, 1996, and Donald Hay, Economics Today, Eerdmans, 1989). In this view, policies which encourage adequate employment are preferred to those which do not.

How does a policy of free trade measure up according to this criterion? Is it possible to find common ground between those who hold to the pro-labour perspective and those who hold to the economists' perspective?

As already mentioned, the percentage of jobs in the agricultural and manufacturing sectors has declined in the U.S. and Canada in recent decades. Furthermore, the wages of less-skilled workers in these countries have deteriorated while those of higher-skilled workers have increased. During the same time period, imports of goods from low-wage countries have risen. All of this naturally has led many to conclude that trade is hurting less-skilled workers in industrialized countries. Furthermore, there is good theoretical support for this view because economic theory predicts that trade will hurt less-skilled workers and help higher-skilled workers in industrialized countries. (See my Autumn 2000 article in Comment).

Should those of the pro-labour perspective then side with the opponents of globalization and demand that the U.S. and Canada erect barriers to imports of agricultural and manufactured products?

A closer examination reveals that trade is not the main culprit behind these recent labour market trends. A number of studies have demonstrated that even without trade, the percentage of jobs in agriculture and manufacturing would have declined anyway.

There are two primary factors at work. The first is the reality that as incomes rise the percentage of that income spent on agricultural and manufactured goods falls compared to the percentage spent on services. Canadian and American demand for attending movies is simply growing faster than demand for food or clothing. This factor alone has caused a shift in employment patterns: away from agriculture and manufacturing and towards services.

The second factor is that during the post-Second World War era, worker productivity has increased much faster in agriculture and manufacturing than in services. Hence, even if demand patterns had not changed, fewer workers would be needed to produce the desired output in agriculture and manufacturing.

A 1994 study by the Organisation for Economic Cooperation and Development indicates that these two factors are the central causes of the shifting employment patterns, increased trade having only a minuscule impact on employment in Canada and the U.S. Furthermore, although some economists still disagree, most studies suggest trade has contributed little to the decline in wages for low-skill workers. (See Paul Krugman and Maurice Obstfeld, International Economics: Theory and Policy, Addison-Wesley, Fifth Edition, 2000, p. 80.)

While there is little evidence that trade has done much damage to jobs or wages in the U.S. and Canada, there is substantial evidence that barriers to trade in both countries have had very negative impacts on their citizenry. When a country places a tariff or a quota on the imports of some product, the price of that product rises above the world price in that country. Consumers end up paying more for the product than they would in the absence of the tariff.

For example, a household of four in the U.S. pays about $55 per year more for sugar than it would in the absence of U.S. barriers to sugar imports. Similarly, Canadian dairies pay 155 per cent more for their milk than they would if the Canadian government abandoned protection for dairy farmers. Ultimately, much of this price increase is passed on to Canadian consumers of dairy products, many of whom have low income levels.

To make matters worse, imposing tariffs on imports is a very inefficient way to save jobs. For example, the World Bank estimates that in 1984 U.S. barriers to steel imports cost U.S. consumers the equivalent of six steel workers' wages for each steel worker's job saved. In other words, consumers paid a total of $114,000 per steel job saved, the salary for each steel job amounting to only $19,000.

Finally, Canadian and U.S. protection for their agricultural and manufacturing sectors imposes severe costs on the Two-Thirds World. (See my Autumn 2000 article in Comment).

For example, agricultural support prices and export subsidies cause North-American farmers to produce more than they would otherwise, thereby suppressing world agricultural prices. This necessarily lowers the income for the majority of the world's poor, who try to eke out a living by selling their agricultural output.

In summary, trade is not inflicting severe damage on less-skilled Canadian and American workers. However, barriers to trade impose large costs on Canadian and American consumers in the form of higher prices. When those price increases take place on food and clothing products, they inflict particular damage on low-income consumers in those countries. Finally, barriers to trade in Canada and the U.S. cause severe damage to the poorest people on earth, those living in the Two-Thirds World.

With these considerations in view, removing barriers to trade is a more ethical policy from a pro-labour perspective than raising barriers to trade. Free trade enables more people to be able to work and to support themselves through that work. Economists and those of the pro-labour perspective have common ground, even though they are guided by different ethical standards.

All of this having been said, adherents to the pro-labour perspective may still want to oppose a laissez-faire policy with regards to less-skilled workers. Such workers need to be equipped to function in emerging sectors so that they too can support themselves through their own work. Indeed, there is evidence suggesting that intentional educational policies can be effective in reducing the downward trends in wages for less-skilled workers in America and Canada, even with freer trade.

Brian Fikkert
 
Brian Fikkert

Dr. Brian Fikkert is a Professor of Economics and the founder and Executive Director of the Chalmers Center for Economic Development at Covenant College. Dr. Fikkert earned a Ph.D. in economics from Yale University, specializing in international economics and economic development. He has been a consultant to the World Bank and is the author of numerous articles in both academic and popular journals. Prior to coming to Covenant College, he was a professor at the University of Maryland—College Park and a research fellow at the Center for Institutional Reform and the Informal Sector.

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