The Costs of Free Trade?

The Costs of Free Trade?
There is probably no subject upon which the average economist and the average non-economist disagree more. A recent opinion piece in the Washington Post (December 23, 2006 A21) by Byron Dorgan and Sherrod Brown on "The Costs of Free Trade" provides an illustration of why economists tend to support free trade. Dorgan and Brown argue that because of free trade multinational corporations search the world for the cheap labor and lax regulation. These corporations exploit people, including children, working them for long hours and for little pay. The competition from this low wage labor hurts American workers, driving down their real wages, and driving up our trade deficit because American producers can’t compete. It is easy to show that every element of the argument is wrong.

“The result has been a global race to the bottom as corporations troll the world for the cheapest labor, the fewest health, safety and environmental regulations, and the governments most unfriendly to labor rights.” (Dorgan and Brown)

Multinational corporations do not scour the World for cheap labor. If they did, the majority of foreign direct investment would go to the lowest income countries in the World. It does not. For instance, in 2003, the top three targets for U.S. foreign investment were the United Kingdom, Canada, and the Netherlands. People in the United States invested more in Switzerland than in all of Africa. Most of our imports also come from developed countries. China and Mexico are the only non-developed countries in the list of top ten suppliers of imports to the United States.

“Workers are grossly underpaid, exploited and abused, and they have virtually no rights. Many, including children, work 10, 12, 14 hours a day, six or seven days a week, for only a few dollars a day.” (Dorgan and Brown)

It is of course possible to find example of corporations operating in less developed countries and paying low wages for long hours. What we should not overlook is that people often line up to get these jobs because they are better than the next best alternative. Would these people be better off if we did not buy the products they produce? It would be nice if people in less developed countries had higher incomes, but taking away the jobs created by foreign corporations won’t do the trick.

“It is no coincidence that salaries and wages today are the lowest percentage of gross domestic product since the government began keeping track of this in 1947.” (Dorgan and Brown)

Wages and salaries as a share of national income have fallen, but total compensation of labor has not. Total compensation includes wages and salaries plus employer contributions to pension plans and insurance and employer contributions to government social insurance. Total compensation of labor rose from about 61 percent of national income in 1959 to 66 percent in 1970 and has been between 64 and 66 percent in almost every year since then, including the most recent decade. Raising trade barriers would only low real wages by increasing the costs of goods that people want to buy.

“The results of such trade agreements are skyrocketing trade deficits” (Dorgan and Brown)

It is not true that American firms and American workers can’t compete. While it is true that the United States has been running record trade deficits, exports have also reached all time highs. American firms successfully sell many goods and services abroad. We run trade deficits because we use more goods than we produce, just as China’s trade surplus is the result not of low wages, but of the fact that the Chinese produce more goods and services each year than they use. Our production and exports have increased rapidly but not as rapidly as the amount of goods we are using for consumption and investment.