Globalization and Labor Standards

Stephen DeAngelis

May 30, 2007

New York Times‘ columnist and economist Paul Krugman recently penned a column about globalization and how it affects jobs and wages in developed countries, specifically the U.S. [“Divided Over Trade,” 14 May 2007]. The focus of his column was the recent trade negotiation authorization struck between the White House and Democratic Congressional leaders. He wrote:

“Nothing divides Democrats like international trade policy. That became clear last week, when the announcement of a deal on trade between Democratic leaders and the Bush administration caused many party activists to accuse the leadership of selling out.”

The angst felt by the Democrats comes from two sources. On the one hand, labor has always been a traditional source of support for the party. With 2008 presidential primary debates already underway, Democrats aren’t eager to upset any voters who helped them regain control of the Congress and may help them regain the White House as well. Many labor leaders believe that globalization generally and trade pacts, like NAFTA specifically, are hurting blue collar workers. On the other hand, the Clinton White House was very pro-trade and served during a time of economic prosperity and budget surpluses. If they want to capitalize on those relatively flush times by reminding voters of budget surpluses, good international relationships, and a strong economy, they can’t very well ignore Clinton’s pro-trade record while doing so. Krugman continues:

“The furor subsided a bit as details about the deal emerged: the Democrats got significant concessions from the Bushies, while effectively giving a go-ahead to only two minor free trade agreements (Peru and Panama). But the Democrats remain sharply divided between those who believe that globalization is driving down the wages of many U.S. workers, and those who believe that making and honoring international trade agreements is an essential part of governing responsibly. What makes this divide so agonizing is that both sides are right.”

Krugman doesn’t write about whether he believes that the U.S. can really resurrect a manufacturing economy (it can’t — and Krugman certainly doesn’t believe it should use protectionist policies to try), and he notes that it is the less educated portion of the labor force that is most affected.

“Fears that low-wage competition is driving down U.S. wages have a real basis in both theory and fact. When we import labor-intensive manufactured goods from the third world instead of making them here, the result is reduced demand for less-educated American workers, which leads in turn to lower wages for these workers. And no, cheap consumer goods at Wal-Mart aren’t adequate compensation. So imports from the third world, although they make the United States as a whole richer, make tens of millions of Americans poorer. How much poorer? In the mid-1990s a number of economists, myself included, crunched the numbers and concluded that the depressing effects of imports on the wages of less-educated Americans were modest, not more than a few percent. But that may have changed. We’re buying a lot more from third-world countries today than we did a dozen years ago, and the largest increases have come in imports from Mexico, where wages are only about 11 percent of the U.S. level, and China, where wages are only 3 percent of the U.S. level. Trade still isn’t the main source of rising economic inequality, but it’s a bigger factor than it was.”

After pointing out this conundrum, Krugman rhetorically asks what can be done to get us out of this situation. He notes that protectionism would produce an even greater tragedy than the one it was supposed to mitigate.

“Should we go back to old-fashioned protectionism? That would have ugly consequences: if America started restricting imports from the third world, other wealthy countries would follow suit, closing off poor nations’ access to world markets. Where would that leave Bangladesh, which is able to survive despite its desperate lack of resources only because it can export clothing and other labor-intensive products? Where would it leave India, where there is, at last, hope of an economic takeoff thanks to surging exports — exports that would be crippled if barriers to trade that have been dismantled over the past half century went back up? And where would it leave Mexico? Whatever you think of Nafta, undoing the agreement could all too easily have disastrous economic and political consequences south of the border. Because of these concerns, even trade skeptics tend to shy away from a return to outright protectionism, and to look for softer measures, which mainly come down to trying to push up foreign wages.”

A couple of weeks ago I noted that the “China Price” is eroding and that wages in China are now rising two or three times faster than in other low-wage Asian economies [Globalization’s Win-Win Game]. If the answer to Krugman’s conundrum is pushing up foreign wages, then we not only have to learn how to do that but how to speed up that trend in developing countries as well. Krugman asserts that trade policies are important, but that they won’t achieve dramatic changes as fast as most American workers would like to see.

“The key element of the new trade deal is its inclusion of ‘labor standards’: countries that sign free trade agreements with the United States will have to allow union organizing, while abolishing child and slave labor. The Bush administration, by the way, opposed labor standards, not because it wanted to keep imports cheap, but because it was afraid that America would end up being forced to improve its own labor policies. So the inclusion of these standards in the deal represents a real victory for workers. Realistically, however, labor standards won’t do all that much for American workers. No matter how free third-world workers are to organize, they’re still going to be paid very little, and trade will continue to place pressure on U.S. wages.”

Standards do matter. That is why Enterra’s Development-in-a-Box™ approach is standards based. Using standards helps speed up processes and helps reduce the gap between developing and developed world. Krugman ends his column calling for pro-labor policies (especially healthcare improvements), but he doesn’t mention education and training programs that help laborers find better paying jobs that are at less risk of being outsourced. This is a complicated subject, but Krugman is correct that protectionist policies are the worst possible place to look for answers.