The 2006 Congressional elections were a turning point for U.S. trade policy. One issue that helped Democrats retake the Congress was a renewed sense of distrust among the electorate of our government's trade policy, which is commonly mislabeled as free trade. President Bush has lost his fast track authority to negotiate new trade agreements without Congress being able to amend them. A number of trade agreements that have been negotiated are now less likely to pass Congress - including agreements with South Korea and Colombia.
And the current round of negotiations in the World Trade Organization (WTO), after nearly six years, has stalled.
The conventional wisdom, which dominates the major media, is that this turn away from free trade and toward protectionism is tragic and dangerous for Americans. But is it? First, let us dispense with the marketing term free trade, which is completely deceptive. The WTO, for example, has lowered some barriers to trade but increased others - such as protectionism for the patent monopolies held by pharmaceutical companies. It is not even clear, in a strictly economic calculation, that American consumers have gained more from the WTO's lowering of other trade barriers than they have lost from the higher price of goods due to its protectionism.
This is the proper way to look at changes in trade policy: who gains and who loses. This is also the prediction of standard economic theory: nations can gain from opening to trade, but within countries some gain and others lose. But the free-traders always use averages, e.g. the average household has gained $10,000 from free trade . . . . Now if a hedge fund manager makes an extra billion dollars, it can raise the average income in his town or suburb quite a bit. But it doesn't do much for others in the area; and in fact it is likely to be at the rest of the public's expense.
Real wages - adjusted for inflation -- for the more than 100 million people that make up most of our labor force were just ten percent higher in 2006 than they were in 1973. This is a revolutionary upward redistribution of income, vastly different from the prior 25 years, when real wages increased by 74 percent. How much of this redistribution is due to trade, or more broadly, the globalization that includes the movement of production to countries with low wages, repressed labor, and weak environmental regulation?
It turns out that even if only a small part of this wage stagnation is due to globalization, it is more than enough to cancel the gains that the vast majority of Americans have gotten from cheaper imports. In other words, the last three decades of foreign commercial policy have been a net loss for the vast majority of Americans.
Of course if your job is protected from international competition - CEOs, lawyers, doctors, journalists, economists - then lowering other people's wages gives you a bigger piece of the economic pie. No wonder the chattering classes denounce protectionism for everyone but themselves.
Looking forward, the World Bank estimates that the gains to the U.S. economy from a successful round of WTO negotiations at between $2.7 and $6.8 billion a year - about one to three weeks' spending on the Iraq war. And we are supposed to be worried if this round collapses?
The conventional wisdom is that there are huge gains from trade, but since benefits are not so visible and are dispersed among many consumers, protectionists who might lose jobs prevail against the public interest. The reality is the opposite: the losses are dispersed among the majority of workers through lower wages. The gains are concentrated among the big corporations who own our Congress and lobby for free trade.