In recent weeks, the news coverage about the Trans-Pacific Partnership has revolved around President Obama’s struggle to win fast-track authority from Congress. The broader question, however, should be this: If and when it’s finalized and approved, how will the free trade pact affect income inequality in the United States?
The Economics 101 version is that free trade is an unalloyed positive, an economic sorting mechanism that lets each country focus on what it does best, thereby maximizing total economic output across member nations. But the view from 10,000 feet obscures dramatic differences in the economic topography.
It’s obviously difficult to predict with any exactitude the effects of an agreement that remains more concept than detail. According to a Congressional Research Service synopsis of the various projections, one study concluded the pact could decrease the median wage by 0.6 percent. A second analysis predicts an overall economic gain for the United States, but says manufacturing will take a hit. That impact, however, will be more than offset by gains in the US services sector, which includes banking and insurance.
That projection underscores this reality: Free trade agreements have different consequences for different parts of the economy. If one’s economic perch requires a college degree or is in a cutting-edge industry or with an enterprise that enjoys strong export potential, the likely impact will be positive. That person’s firm may well find new business opportunities, while he or she will benefit from less expensive foreign goods. But workers in industries vulnerable to foreign competition may find their jobs at risk. In that case, the prospect of cheaper consumer goods obviously doesn’t seem like an attractive trade-off.
Free trade theory addresses those disparate effects by noting that there will be more winners than losers — and that the winners can compensate the losers for the harm they suffer. That way, everyone is still better off.
Hmmm. Although that could happen, it doesn’t generally occur in any substantial or sustained way. Yes, the federal government offers some retraining, relocation, and job-search help for workers displaced by trade. Younger workers in retraining can also qualify for a temporary stipend. Some workers over 50 who take a job at lower wages are eligible for income support capped at $10,000.
That’s better than nothing, certainly, but if you face the prospect of being out of work for an extended period or of taking a job that pays much less, it will seem like pretty thin gruel.
In a vibrant economy, dislocated workers may find ample opportunities. But in sluggish times, trade-displaced workers will swell the pool of the unemployed, putting downward pressure on wages.
Clever policy makers could find ways to distribute free trade gains in a more equitable way to those who bear the brunt of free trade. But it’s hard to imagine that happening in today’s Washington. Alternatively, recognizing that free trade heightens economic inequality, the government could spend on policies and programs that promote higher wages and economic mobility. We could, for example, dramatically reduce the cost of a college education.
But at a time when there’s no national agreement on a strategy to combat economic inequality, skeptics can’t be blamed for fearing the benefits of the TPP will redound mostly to the better-off, while the ill effects will be felt principally by those on the lower rungs of the economic ladder.
Regardless of whether Obama wins fast-track authority, that’s a discussion the country needs to have. It’s a debate far more complex than the usual easy assurances about the value of free trade.