Does Free Trade Cause a Race to the Bottom? Yes and No.

Ian Fletcher

Activist Post

The notorious “race to the bottom,” in which free trade causes the lowest standard in the entire world for wages, working conditions, or environmental protection to become the global norm, is a slippery half-truth that needs to be carefully untangled. Is there a problem? Yes. Is America rapidly headed for this lowest common denominator?  No.

The good news is that it is highly unlikely that free trade will ever literally cause the world’s lowest standard for wages, worker rights, or environmental protection to become the world standard. While there are indeed pressures in that direction, there are also considerable countervailing pressures. 

If these countervailing pressures did not exist, South Korea would still be poorer than Zambia, as it was as recently as 1970. And if a small and relatively powerless nation like South Korea can buck this tide, then America certainly can—if we play our cards correctly, which we have not been doing.
This is the real scandal: not that America has been caught in a hopeless situation, but that we have failed to cope with a situation we should have been able to manage reasonably well. There are now a dozen European countries with higher factory wages than our own.

Free trade certainly generates downward pressure on wages for most Americans. But it is vanishingly unlikely ever to reduce American wages to present Chinese levels, which is what something like “the bottom” would really mean. 

Among other things, 70 percent of America’s economy is in industries (from restaurants to government) that are not internationally trade. So the vast majority of our economy has no direct exposure to international trade at all. 

Since average wages are determined by average productivity and nothing low-wage foreigners do can reduce productivity in the nontraded parts of our economy, there is no plausible way the entire American economy can be dragged down through trade alone.

The economic mechanism implied by the idea of a race to the bottom is real, but not infinitely powerful. Wages don’t automatically hit bottom simply because one country has lower wages. That country also has to be a sufficiently successful competitor to push countries with higher wages out of the industry in question. So if countries with higher wages have a productivity advantage, a quality advantage, or some other factor balancing the cost of their higher wages, the lower wage won’t win out. 

The industrial sectors in which a race to the bottom really does occur are generally low-value sectors where most of the cost of production is un-skilled or semiskilled labor. These are intrinsically low-wage industries that are of little value to American workers, simply because they don’t pay the kind of wages it takes to live in a developed country. 

The far bigger problem is America’s eroding global position in high skill, high-wage industries—a race we are losing largely to other developed nations.

It is definitely a mistake to reduce all of America’s trade problems to cheap foreign labor. Cheap labor would indeed explain our problems with China, India, and the rest of the developing world, but it cannot explain our huge deficits with other high-wage countries such as Japan ($57.7 billion in 2010) and the EU ($79.3 billion). If trade were merely about cheap labor, Bangladesh and Burundi would dominate the world economy.

The harm done to the American economy by free trade is very real.  But don’t confuse that with the idea that we’re going to wake up to Chinese living standards any time in the foreseeable future.

Ian Fletcher is Senior Economist of the Coalition for a Prosperous America, a nationwide grass-roots organization dedicated to fixing America’s trade policies and comprising representatives from business, agriculture, and labor. He was previously Research Fellow at the U.S. Business and Industry Council, a Washington think tank founded in 1933 and before that, an economist in private practice serving mainly hedge funds and private equity firms. Educated at Columbia University and the University of Chicago, he lives in San Francisco. He is the author of Free Trade Doesn’t Work: What Should Replace It and Why.

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